Globalization, Outsourcing and Labour Development in ASEAN by Thangavelu Shandre;Chongvilaivan Aekapol;

Author:Thangavelu, Shandre;Chongvilaivan, Aekapol;
Language: eng
Format: epub
ISBN: 1211742
Publisher: Taylor & Francis Group

As is well known, a well-defined cost function satisfies the linear homogeneity property, and therefore the following additional parameter restrictions must be imposed:

(5.4)

and

(5.5)

where j = K, Y, M, S and T.

The most attractive feature of the translog cost function (5.3) rests with the property that the derivation of factor demand functions pertains to simple mathematical manipulation. To see this more clearly, we logarithmically differentiate the translog cost function (5.3) with respect to lnwk, where k = H and L. Using Sheppard's Lemma, it is straightforward to show that the differentiation produces the cost shares of factor k (Sk), a conventional proxy of the relative demand for factor k. That is,

(5.6)

Therefore, we can derive the relative demands for skilled and unskilled labour by differentiating the translog cost function (5.3) with respect to lnwH and lnwL, respectively. They can be expressed as follows:

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