An Econometric Analysis of Production Function: The Case Study of Palestinian Industry

Discussion Committee: 
Dr. Basim Makhool
Nasr Abdallah Qasim Abd- Alhkaleq
The main objective of this study was to estimate the production function of the Palestinian industry. The empirical results have been utilized to estimate production elastic ties, and elasticity of substitution. In addition, the study sought to calculate marginal productivity and the production technology and find out, whether the Palestinian industry was labor intensive or capital intensive. To these ends, the research used two methods for data analysis: descriptive and qualitative. The descriptive analysis was based on calculation of economic indicators United Nations Industrial Development Organization in 2000. The qualitative analysis estimated production function by using the analysis of regression crosssuction data, collected published by Palestinian Central Bureau of Statistics (PCBS) have been collected. The empirical results showed that the technology applied by Palestinian industry was labor intensive. The share of labor cost of total production accounted for 72%, while the cost of capital amounts to 28% of total output. Furthermore, production elasticity, with the respect to labor, was found to be highly greater than production elasticity with respect to capital. However, the marginal productivity of labor and capital was found to be 7.2 and 0.4 respectively. This implies that employing additional labor (head) will increase output by $7,200. On the other hand, output will increase only by $400 if capital increases by $1,000. This result suggests that cost of capital in Palestinian industry was very high. The performance of large firms was found to be similar to the total firms. The marginal productivity, with respect to labor for large and total firms, was about $7,290 and $7,200 respectively. Also, marginal productivity of capital, for large and total firms was $500 and $400 respectively. The marginal substitution average in the Palestinian industry was about 17.96. this mean that increasing labor elements (factor) by one unit will require a sacrifice of some 17.96 units of capital. Pertaining to large firms, they were found to be generally labor intensive. The contribution of labor element to production in their firms was 71%, whereas the share of capital was 29%. The marginal product of the labor element in large firm was about 7.29 while that of capital was 0.50, thus reflecting low efficiency of capital employed in large firms in the Palestinian Territories, on the other hand, and the important role played by labor element in production and manufacturing process, on the other hand, the average of marginal substitution of labor element was 14.5. Based on the empirical results the following recommendations have been drawn: 1- Job creation in the Palestinian Territories could be achieved through establishing labor- intensive firms. 2- Labor productivity should be upgraded and rehabilitated to operate with capital efficiently. 3- Research and development should be enhanced to improve the performance of the Palestinian industrial sector. 4- The performance of the infrastructure should be developed and maintained. 5- Other measures should be applied to create appropriate environment required to activate the role of the industrial sector in the Palestinian economy.estine
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