Capital and Technology Investments as Determinants of Labor Productivity: A Panel Data Analysis of OECD Countries.

Abstract :

This study investigates the effects of capital and technology investments on labor productivity for selected OECD countries between 2000 and 2021 using panel data analysis. Two separate panel equations were tested in the study. The first model was constructed to measure the impact of capital and technology investments on labor productivity. In the second model, capital and technology investments were squared and the results are reported. Data were included in the analysis in full logarithmic form to capture diminishing marginal returns. The study first investigated cross-sectional dependence and then conducted a unit root test. Homogeneity and cointegration analyses were then conducted. Finally, the Common Correlated Effects (CCE) estimator (Pesaran, 2006) was used to estimate the coefficient. Results show that a 1% increase in capital investment increases labor productivity by approximately 0.17%, and a 1% increase in technology investment increases it by 0.02%. When capital and technology investments are squared and scaled, marginal returns decrease by nearly 50%, supporting the hypothesis of diminishing returns. The study is limited to 15 OECD countries with available consistent data and does not include sectoral decompositions. The findings suggest that increasing investment amounts alone is insufficient for sustainable growth in OECD countries, emphasizing the need for complementary human capital and institutional capacity.