New Measures of Factor Productivity in Australia: A Sato Approach

Abstract

This paper derives new results of the elasticity of substitution between capital and labour and factor productivity in Australia since the mid-1960s using a Sato production function specification. This specification has unique properties that enable estimation of capital-labour substitution elasticity and changing marginal productivities through time. These estimates reveal that the substitution elasticity and labour productivity rose significantly and remained elevated during a major economic reform period throughout the 1980s and 1990s. A novel contribution of the paper is the depiction of production isoquants to convey how combining labour and capital to produce real GDP has changed over recent decades.