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1 A Stochastic Frontier Analysis of the Human Capital

2 Effects on the Manufacturing Industries’ Technical
3 Efficiency in the United States
4
5 This study seeks to establish substantive empirical evidence on the role of
6 college and non-college labour in productivity through technical efficiency
7 in the manufacturing sector in the U.S. economy. This investigation fits a
8 Cobb-Douglas stochastic frontier function with inefficiency effects to a set of
9 panel data for 13 manufacturing industries over the period from 1998 to
10 2013, using the econometric software Nlogit5. The contribution of this paper
11 lies in the application of the stochastic frontier analysis following the
12 approach of Caudill, Ford, and Gropper (1995), by estimating and testing
13 stochastic frontier production functions, assuming the presence of
14 heteroscedasticity in the one-sided error term (inefficiency), which provides
15 robust estimates of the technical efficiency measures. This paper also
16 contributes to the literature in the sense that it follows the Hadri (1999)
17 approach and its extension for panel data, Hadri, Guermat, and Whittaker
18 (2003), assuming the existence of heteroscedasticity in both error terms (the
19 one-sided inefficiency term and the two-sided symmetric random noise). The
20 rationale for the double heteroscedasticity estimation is that it results in
21 more accurate measures of the effects of the technical efficiency
22 determinants. Therefore, it adds another layer of confidence in the economic
23 analysis of the impact of human capital components on the manufacturing
24 sector efficiency and by extension, its productivity. The stochastic frontier
25 results show the effects of highly educated workers and low educated
26 workers – proxied by college and noncollege labour – on technical
27 inefficiency. This is where the maximum likelihood estimates suggest that the
28 increase in the percentage of the hours worked by college workers tends to
29 contribute positively to technological efficiency in the U.S. manufacturing
30 industries. While on the minus side, it can be noted that the rise in the share
31 of the hours worked by noncollege persons seems to have negative impact on
32 efficiency in these industries.
33
34 Keywords: human capital, efficiency, stochastic frontier analysis, double
35 heteroscedasticity.
36
37
38 Literature Review
39
40 The contemporary literature of efficiency analysis began with (Farrell,
41 1957) who was enormously influenced by the ideas of measuring “technical
42 efficiency” posited in (Koopmans, 1951), and the “coefficient of resources
43 utilization” by (Debreu, 1951), (Nguyen, 2010). This is where according to
44 (Koopmans, 1951), a producer is said to be technically efficient if, and only if,
45 the goal of producing more of at least one output without the need for
46 producing less of another output, or using more inputs, is achieved. The
47 concept of “technical efficiency TE” refers to the ability to maximise output
48 from a given vector of inputs, or put it the other way around, it is the firm’s

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1 ability to minimise input utilisation in the production function of a given vector

2 of outputs, (Coelli et al., 2005), (Arazmuradov, Martini and Scotti, 2014).
3 Producer’s efficiency (technical, allocative) principally concerns the
4 comparison between the optimum (maximum production possibilities,
5 behavioural targets of producers; optimum cost, profit, revenue) and the
6 observed levels of the producer’s outputs and inputs. In other words, the
7 comparison involves the ratio of the observed to the maximum potential output
8 attainable given the available input. Conversely, it includes the ratio of the
9 minimum potential to the observed level of input needed to produce the given
10 output or a combination of the two.
11 There are two constituents of economic efficiency, technical and allocative
12 efficiency. According to Koopmans (1951), technical efficiency can be
13 observed as; a production unit that is technically efficient if an increase in any
14 output necessitates a reduction in at least one other output, or an increase in at
15 least one input, and if a reduction in any input involves an increase in at least in
16 one other input or a reduction in at least one output, (Koopmans, 1951).
17 By way of contrast, (Debreu, 1951) and (Farrell, 1957) introduced a
18 different view on how to define technical efficiency, which was designated
19 with the term “the Debreu-Farrell Measure”; this is “one minus the maximum
20 equiproportionate reduction in all inputs that still allows the production of a
21 given output, a value of one indicates technical efficiency whereas a score less
22 than the unity indicates the severity of technical inefficiency”. On the other
23 hand, allocative efficiency or price efficiency refers to the production unit’s
24 ability to combine the inputs and outputs in the optimal shares in the light of
25 prevailing market prices.
26 From a technical point of view, the composite error term consists of a
27 noise v, and an inefficiency term u. Where the former v is intended to capture
28 the statistical noise, or what is known as the exogenous random shocks which
29 are beyond the production unit’s grasp. Whereas the latter u is the reflection of
30 the inefficiency presence and assumed to be 𝑢 ≥ 0. To estimate the firms’
31 technical efficiency, distributional assumptions for both v and u are specified.
32 According to (Meeusen and van Den Broeck, 1977) and (Aigner, Lovell and
33 Schmidt, 1977), 𝑣 is intended to be normally distributed and with a zero mean
34 and 𝜎𝑣2 variance.
35 The difference though is that (Meeusen and van Den Broeck, 1977)
36 assume that u is exponentially distributed. Whereas, (Aigner, Lovell and
37 Schmidt, 1977) suggest u to be both, with an exponential and half-normal
38 distribution. With these distributional assumptions, a maximum likelihood
39 method can be utilised to estimate all the parameters of the model. The
40 literature on regional growth draws on the endogenous growth theory when
41 examining the effects of human capital on economic growth, (Ang, Madsen
42 and Islam, 2011). The integration between human capital and physical capital
43 through the reciprocal relationship that links them together, by means of
44 externalities related to human capital investment, is believed to be the core of
45 the positive impact of human capital on economic growth, (Sanromá and
46 Ramos, 2007).

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1 The reviewed literature suggests that higher levels of education are

2 assumed to lead to higher levels of innovation, and therefore, higher growth
3 rates, (Lucas, 1988),(Romer, 1990a), (Gregory, Romer and Weil, 1992),
4 (Hansen and Knowles, 1998), (Vandenbussche, Aghion and Meghir, 2006);
5 this is in spite of the (Bils and Klenow, 2000) argument on the reverse
6 causality between education and growth, where they state that the richer and
7 faster growing countries find it easier than less developed countries to increase
8 their spending on education because they have better institutions to improve
9 the quality of the education system output, (Aghion et al., 2009).
10 Some recent studies on human capital provide compelling evidence that
11 primary and secondary levels of schooling tend to play a crucial role in
12 promoting growth throughout developing countries, (Krueger and Lindahl,
13 2001), while on the other hand, higher education plays a more decisive role in
14 more developed economies, (Petrakis and Stamatakis, 2002). Other studies
15 showed ample evidence at best, on the positive impact of human capital in
16 boosting growth, where with using a regional dataset, it was found that primary
17 education, in Spain for instance, is positively associated with higher growth in
18 poorer regions, whereas secondary levels of education seemed to be more
19 significant in strengthening and supporting growth in more affluent areas, (Di
20 Liberto, 2007).
21 Several theoretical frameworks, including the neo-classical models and
22 endogenous growth models, have integrated human capital as a pivotal
23 determinant of long-term growth and economic success, (Maudos, Pastor and
24 Serrano, 2003). Human capital can also foster technical change via stimulating
25 both innovation and imitation, which in turn acts as a stimulus to the economic
26 growth rate, which is named as the rate effect of human capital, (Benhabib and
27 Spiegel, 1994).
28 In addition, considerable attention has been paid to examine the
29 relationship between human capital and efficiency across the years, and
30 sizeable empirical research has established a positive quantifiable impact of
31 human capital on efficiency, productivity and therefore growth, (Dimelis and
32 Papaioannou, 2014). Some of them argued that human capital can provoke
33 productivity growth through the spillovers of technology absorption and
34 diffusion, (Nelson and Phelps, 1966).
35 Others suggested that by the means of intensifying domestic technical
36 innovations, productivity can be spurred on (Romer, 1990a) & (Romer, 1990b),
37 (Aghion, Howitt and García-Peñalosa, 1998). By way of contrast, some
38 empirical evidence, resulting from examining the interaction between human
39 capital and productivity, has shown some ambiguity that has emanated from
40 the divergent and contrastive outcomes of the human capital effect on
41 productivity (Wei and Hao, 2011). (Pritchett, 2001) contended that, during the
42 last four decades starting from 1960s leading up to the 2000s, educational
43 attainment has grown at a rapid pace, especially throughout developing
44 countries, and yet, he argued that on average, education did not contribute
45 markedly to growth based on Solow’s standard augmented model.

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1 The proposed rationalisation for the differences in the impact of education

2 on growth across countries includes: (i) the significant skills underutilisation in
3 some countries is caused by improper institutional environment, and by
4 devoting the available skills in the wrong economic activities. (ii) The
5 variations of the marginal returns of education are due to changes in the growth
6 rates of demand for educated labour caused by different structural shifts, and
7 by the policies in some countries, which are exposed to various technical
8 developments derived externally. (iii) The distinct approaches and strategies
9 followed in transferring knowledge have widely varied across countries, which
10 gave rise to variant and diverse impacts on growth throughout nations,
11 (Pritchett, 2001).
12 (Huffman, 2001) also suggested a major research gap in the human capital
13 relevant literature, and he referred to the puzzle of why schooling does not
14 demonstrate a straight and all-inclusive effect in the agricultural products, and
15 he points out that the workers’ level of education does not contribute to
16 productivity growth in this sector. Furthermore, the misinterpretation of the
17 impacts, when using school attainment as a proxy of education, ignores the
18 changes in the general achievements of school graduates over time,
19 representing another major impediment in assessing the realistic contribution
20 of human capital, (Huffman, 2001).
21 Cörvers (1997) distinguished between two factors of human capital:
22 intermediate and highly skilled workers and their effects on labour
23 productivity. The estimates indicated the positive impacts of both factors on
24 productivity, and just the highly-skilled labour alone is proved to be the
25 statistically significant component of human capital that positively affects
26 productivity, (Corvers, 1997).
27 The economic performance of a producer is normally described using two
28 terms: efficient or productive. Productivity mainly refers to the ratio of a
29 producer’s output to the same producer’s input. Given the fact that producers,
30 in the more likely event, would use several inputs to generate many outputs;
31 therefore, productivity calculations would require the aggregation of these
32 outputs and inputs in a valid economic manner, so that productivity stays the
33 same, as being the ratio of the output to the input, (Lovell, 1993).
34 The literature contains various definitions of what human capital exactly
35 means, and it is commonly defined as “ knowledge, skills, competencies, and
36 attributes embodied in individuals which facilitate the creation of personal,
37 social, and economic well-being” (Healy and Côté, 2001). The theme of the
38 human capital role in enhancing the prospects of economic growth is a long-
39 standing one, and despite the strong empirical proof of this crucial role, the
40 controversy remains over the exact weight of human capital in economic
41 development. In the early 1960s, the attention paid to the quality of labour has
42 increased significantly, and the focus was principally on the education and
43 training that the labour force receives. This stage can be seen as the onset that
44 crystalised the concept of human capital, (Healy and Côté, 2001).
45

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1 Over the period between 1960 and 2000, noteworthy and compelling
2 evidence had come to light indicating the significance of investment in
3 education in increasing growth and productivity. More precisely, some have
4 suggested that the third level of education, after primary, and secondary
5 education, is more important for growth specifically in the OECD countries
6 from 1960 to 1990, (Gemmell, 1996). Other studies, argued that human capital
7 can provide indirect channels to appreciate and elevate the rate of growth
8 through its positive effect on physical capital, which is based on the
9 competences embodied in individuals via education, which helps in employing
10 physical capital in a more efficient manner, (Barro, 1989), (BARRO, 1991),
11 and (Benhabib and Spiegel, 1994).
12 In the economic literature there can be four distinct effects of human
13 capital on labour productivity: worker’s, allocative, diffusion, and research,
14 (Cörvers, 1994) and (Corvers, 1997). Welch (1970) points out that the
15 productive value of education stems from two different episodes: the “worker’s
16 effect” or “own productivity”, which refers to the worker’s ability to be more
17 efficient in using the resources available on account of receiving more
18 education. This effect represents the marginal product of education. The
19 outcome of this is that these efficient workers are assumed to produce more
20 physical output and switch the production possibility curve outward. Hence,
21 the higher the proportion of intermediate or highly skilled workers, as opposed
22 to low-skilled workers, in the whole combination of labour, the higher the
23 efficiency and productivity levels. The second phenomenon is called the
24 “allocative effect”, which implies the worker’s ability to acquire and decrypt
25 information about other production inputs’ costs and features, which in turn
26 would change the use of specific inputs and consider the use of new inputs that
27 would not be used before, as well as developing alternative uses of them, that is
28 if a certain change in the worker’s education has not occurred, (Welch, 1970).
29 The third impact is known as the “diffusion effect”, which incorporates the
30 adaptability of a better-educated worker to absorb and assimilate technological
31 advancements and generate new production approaches in a faster manner,
32 (Nelson and Phelps, 1966); thereby, higher education levels facilitate the
33 dispersion of technology, and provide a worker with the quality of being able
34 to successfully opt for the more remunerative inventions that are to be quickly
35 adopted, accommodated and employed, (Bartel and Lichtenberg, 1987).
36 Empirical evidence confirms that a well-educated and highly-trained
37 labour force is fundamental in attracting and adapting technology investment;
38 whereby, it leads to more technical change, and therefore, long-term economic
39 growth, (Bresnahan, Brynjolfsson and Hitt, 1999). (Bassanini and Scarpetta,
40 2001) also examined the impact of human capital on growth and observed a
41 significant positive role of human capital across a selected group of OECD
42 countries.
43 The fourth impact is believed to be “the research effect”, which involves
44 the crucial role of higher education, as an essential and vital factor in research,
45 and the development of complex activities, which in turn entails intermediate
46 and highly skilled workers to reach higher levels of technological knowledge in

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1 order to be able to increase the growth levels of productivity, (Englander and

2 Gurney, 1994).
3 With reference to some of the literature on production functions
4 identification, incorporating human capital as an explicit input has been
5 regarded as a contentious issue, (Miller and Upadhyay, 2000). The advocates
6 of integrating human capital as a direct input argue that their approach
7 generated better estimates, (Gregory, Romer and Weil, 1992). However, others
8 contend and present human capital as an insignificant contributor when
9 explaining the change in output directly; in fact, its impact can be traced and
10 discovered in total factor productivity, (Islam, 1995). Benhabib and Spiegel
11 (1994) included human capital into their estimations of a growth rate
12 production function, and found it insignificant, and its coefficients rather
13 negative, which led them to think of its role in growth from an interaction
14 perspective, by which it (human capital) can influence growth through its
15 impact on TFP, and not via direct inclusion in the production function,
16 (Benhabib and Spiegel, 1994), (Miller and Upadhyay, 2000).
17 With respect to the effect of human capital on technical inefficiency, some
18 studies implemented SFA, (Kneller and Stevens, 2006), and they found out that
19 technical inefficiency was negatively linked to the levels of human capital in 9
20 industries across 12 OECD countries over the years 1973-1991.
21 Other empirical studies, (Maudos, Pastor and Serrano, 2003) applied SFA
22 and Data Envelopment Analysis DEA to quantify the relationship between
23 human capital and growth in the OECD organisation during the period 1965-
24 1990. The findings supported the positive impact of human capital on growth
25 through the improvements in labour productivity and by a technical shift,
26 (Dimelis and Papaioannou, 2014).
27
28
29 Methodology: Stochastic Frontier Analysis
30
31 In 1977 and in two independent papers, a stochastic frontier function for
32 Cobb-Douglas case was specified and introduced by (Aigner, Lovell and
33 Schmidt, 1977) and (Meeusen and van Den Broeck, 1977). This specification
34 assumes that inefficiency represents a component of the error term in the
35 orthodox production function (Maudos, Pastor and Serrano, 2003). Thus, the
36 error term contains inefficiency effect along with other factors effects which
37 are uncontrollable by the production unit such as natural disasters, strikes,
38 sickness, and so forth.
39 The core idea is that all production units are expected to perform either
40 below or exactly on the frontier line, this is where none of the production units
41 is expected to perform at any level above the frontier, simply because they do
42 have the capacity to do so, due to several factors, including technological
43 limitations.
44 The most widely used frontier analysis is the output-oriented stochastic
45 frontier approach, where the basic idea involves the existence of an unobserved
46 best-practice production frontier corresponding to the set of maximum

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1 attainable output levels for a given combination of inputs. However, most of

2 the time actual production comes about below the best-practice of production
3 frontier because of technical inefficiency.
𝑻𝒉𝒆 𝒐𝒃𝒔𝒆𝒓𝒗𝒆𝒅 𝒐𝒖𝒕𝒑𝒖𝒕 𝒀𝑨
Technical efficiency is 𝑻𝑬 = 𝑻𝒉𝒆 𝒑𝒐𝒕𝒆𝒏𝒕𝒊𝒂𝒍 𝒎𝒂𝒙𝒊𝒎𝒖𝒎 𝒐𝒖𝒕𝒑𝒖𝒕 = 𝒀𝑴

Where 𝟎 ≤ 𝑻𝑬𝒊𝒕 ≤ 𝟏

Therefore
∴ 𝒀𝑨 = 𝒀𝑴 . 𝑻𝑬 = 𝒇(𝒙; 𝜷). 𝑻𝑬

The observed output is 𝒀𝑨 = 𝒇(𝒙; 𝜷). 𝒆𝒙𝒑(𝒗) . 𝒆𝒙𝒑(−𝒖)

Where

𝑣 ≤ 0 “noise” error term, (normal distribution).

𝑢 ≥ 0 “inefficiency error term”, (half-normal distribution).

and

𝑓(𝑥; 𝛽) → 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑖𝑠𝑡𝑖𝑐 𝑘𝑒𝑟𝑛𝑒𝑙

𝑒𝑥𝑝(𝑣) → 𝑡ℎ𝑒 𝑒𝑓𝑓𝑒𝑐𝑡 𝑜𝑓 𝑒𝑥𝑜𝑔𝑒𝑛𝑜𝑢𝑠 𝑠ℎ𝑜𝑐𝑘𝑠 𝑜𝑛 𝑜𝑢𝑡𝑝𝑢𝑡
𝑒𝑥𝑝(−𝑢) → 𝑖𝑛𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦
𝑓(𝑥; 𝛽). 𝑒𝑥𝑝(𝑣) → 𝑠𝑡𝑜𝑐ℎ𝑎𝑠𝑡𝑖𝑐 𝑓𝑟𝑜𝑛𝑡𝑖𝑒𝑟

The basic idea of deterministic frontier and stochastic frontier can be illustrated
as follows:

OLS: 𝑞𝑖 = 𝛽0 + 𝛽1 𝑥𝑖 + 𝑣𝑖
Deterministic: 𝑞𝑖 = 𝛽0 + 𝛽1 𝑥𝑖 − 𝑢𝑖
SFA: 𝑞𝑖 = 𝛽0 + 𝛽1 𝑥𝑖 + 𝑣𝑖 − 𝑢𝑖

Where:

𝒒𝒊 = 𝒆𝒙𝒑(𝜷𝟎 + 𝜷𝟏 𝒍𝒏 𝒙𝒊 ) × 𝒆𝒙𝒑(𝒗𝒊 ) × 𝒆𝒙𝒑(−𝒖𝒊 ) Equation (1)

= Deterministic Component × Noise × Inefficiency

1 The distance by which a firm lies below its production frontier is the
2 measure of its inefficiency. However, (Farrell, 1957) proposed a decomposition
3 of economic efficiency into technical efficiency and allocative efficiency
4 where the former is meant to measure the firm’s ability to reach the maximum
5 level of output given a vector of inputs, whereas the latter refers to the firm’s
6 ability to use the inputs available with optimal shares given their market prices.
7 That is to say:

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1 Economic Efficiency = Technical Efficiency + Allocative Efficiency

2
3 Measuring technical efficiency can be achieved through two frontier
4 methods. The first approach is named as the Data Envelopment Analysis
5 (DEA) which is a non-parametric method, while the other is referred to as the
6 Stochastic Frontier Analysis (SFA) which is regarded as a fully parameterized
7 model, and both are categorized as frontier approaches, yet no excogitated
8 formulation has been introduced to merge these two in one single analytical
9 framework.
10 The rationale of these techniques is that efficiency of production is
11 determined by the distance between the actual production and the best practice
12 production frontier (Dimelis and Papaioannou, 2014). Technically speaking,
13 the two-component error term are the symmetric term (𝑉𝑖𝑡 ) which
14 demonstrates the noise, and the asymmetric term (𝑈𝑖𝑡 ) that explains technical
15 inefficiency.
16 In addition, the SFA provides a technique where panel data can be applied
17 and encompasses other external environmental factors which could affect
18 technical inefficiency related to the decision making unit (Arazmuradov,
19 Martini and Scotti, 2014). Another advantage of SFA is that it considers the
20 effect of the random shocks on GDP.
21 However, the downside of this approach is that it requires an exact
22 functional form (which is not given much of attention) of production function
23 and the distribution assumption on the error term (Greene, 2008).
24 Following (Aigner, Lovell and Schmidt, 1977) approach and (Meeusen
25 and van Den Broeck, 1977) methodology, in particular the (Battese and Coelli,
26 1995) specification, technical inefficiency can be estimated from the stochastic
27 frontier and simultaneously interpreted by a group of a firm’s specific
28 characteristic variables. The benefit of this methodology is that it escapes the
29 problem of inconsistency which results from applying the two-stage method
30 when investigating determinants of inefficiency (Diaz and Sánchez, 2008).
31 Thus, growth in productivity will be mainly attributed to technical change
32 or in other words, TFP growth is interpreted as the movement of the frontier
33 function (Maudos, Pastor and Serrano, 2000). Still, the estimates would be
34 regarded as biased owing to the presence of technical inefficiency.
35 On top of that, and despite the nonoccurrence of technical inefficiency, the
36 estimates of the accounting growth of TFP would be affected by the allocative
37 inefficiency which causes them to be biased again, and therefore it will affect
38 the measurement of human capital impact on growth. On the other hand, non-
39 parametric approaches (e.g. Data Envelopment Analysis DEA) do not impose
40 any restrictions on production function. However, they are not flawless,
41 because they cannot segregate the inefficiency effects from the white noise
42 (Dimelis and Papaioannou, 2014).
43 To avoid the prejudice problem, and considering the existence of
44 inefficiency, the frontier techniques are more efficient tools to use. One of the
45 pros of SFA is that it allows for the estimation of firm-specific inefficiency
46 according to the methodology proposed by (Jondrow et al., 1982) based on the

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1 conditional expected value of ui given ei (Hadri, Guermat and Whittaker,

2 2003).
3 The general form of Cobb Douglas stochastic frontier production function
4 can be observed as follows:
5
6
7 𝒀𝒊𝒕 = 𝜷́𝒙𝒊𝒕 + 𝑬𝒊𝒕 Equation (2)
8 𝑬𝒊𝒕 = 𝑽𝒊𝒕 − 𝑼𝒊𝒕 Equation (3)
9
10 Where, 𝑌𝑖𝑡 denotes the appropriate function (logarithm) of the production
11 for the ith sample firm, (𝑖 = 1, 2, … … . N) in the tth time period (𝑡 =
12 1, 2, … … . . T) 𝑥𝑖𝑡 , represents the (1 × 𝑘) vectors of appropriate function of the
13 explanatory variables associated with the ith sample firm in the 𝐭th period (the
14 first element would generally be one) 𝛽́ , represents the (𝑘 × 1) vector of the
15 coefficients for the associated independent variables in the production function
16 which need to be estimated.
17 The term (𝑉𝑖𝑡 − 𝑈𝑖𝑡 ) is the composed error term. 𝑉𝑖𝑡 , represents the
18 random variables which are assumed to be independently, identically and
19 normally distributed with zero mean and constant variance. 𝑁(0, 𝜎𝑣2 ), and it is
20 independent of the 𝑈𝑖𝑡 .
21 𝑈𝑖𝑡 , represents non-negative random variable that are assumed to be
22 identically, independently and normally distributed with zero mean 𝑁(𝑚𝑖𝑡 , 𝜎𝑢2 )
23 and it is used to capture technical inefficiency.
24 According to (Coelli et al., 2005) the above Cobb-Douglas stochastic
25 frontier function can also take the following form:
26 𝒀𝒊 = 𝒆𝒙𝒑( 𝜷𝟎 + 𝜷𝟏 𝒍𝒏 𝒙𝒊 ) × 𝒆𝒙𝒑(𝒗𝒊 ) × 𝒆𝒙𝒑(𝒖𝒊 ) Equation (4)
27
28 Where,
29 𝑒𝑥𝑝( 𝛽0 + 𝛽1 𝑙𝑛 𝑥𝑖 ) = deterministic component
30 𝑒𝑥𝑝(𝑣𝑖 ) = noise
31 𝑒𝑥𝑝(𝑢𝑖 ) = inefficiency
32 and according to (Kokkinou, 2009) the forenamed function can be rewritten as:
33
34 𝒚𝒊 = Ϝ( 𝒙𝒊 𝜷) × 𝒆𝒙𝒑(𝒗𝒊 − 𝒖𝒊 ), 𝒖𝒊 ≥ 𝟎 Equation (5)
35 Where
36
37 𝑢𝑖 denotes for the shortfall of output from the frontier as previously defined.
38 Since vi is the random statistical noise, a symmetric distribution is usually
39 assumed for vi. In the same time, ui which represents technical inefficiency
40 term is assumed to be one-sided, it is also non-negative for the production
41 frontier, and non-positive for the cost frontier. In most of the cases of
42 production frontier, the distribution of [ei = (vi - ui)] will be skewed, keeping in
43 mind that the composed error (ei) will (vi + ui) in the case of cost frontier
44 With respect to technical efficiency of a given firm (𝑖), 𝑇𝐸𝑖 , it can be
45 defined as the ratio of its mean production (in original units), given its realized
46 firm effect, to the corresponding mean production if the firm effect was

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1 zero(Battese and Coelli, 1988). In that, it measures the difference in the

2 observed output of the firm relative to the output produced by a fully efficient
3 firm using the same amount of inputs.
4 The value of 𝑇𝐸𝑖𝑡 can be defined and estimated through the following
5 form
6
𝑬(𝒀∗ |𝑼 ,𝒙 ,𝒕=𝟏,𝟐,….)
𝒊 𝒊𝒕
7 𝑻𝑬𝒊 = 𝑬(𝒀∗ 𝒊𝒕|𝑼 =𝟎,𝒙 Equation (6)
𝒊𝒕 𝒊 𝒊𝒕 ,𝒕=𝟏,𝟐,….)
8
𝒚𝒊𝒕 𝒆𝒙𝒑(𝒙𝒊𝒕 𝜷́+𝒗𝒊𝒕 −𝒖𝒊𝒕 )
9 𝑻𝑬𝒊𝒕 = 𝒆𝒙𝒑(𝒙 ́ = = 𝒆𝒙 𝒑(−𝒖𝒊𝒕 ) Equation (7)
𝒊𝒕 𝜷+𝒗𝒊𝒕 ) 𝒆𝒙𝒑(𝒙𝒊𝒕 𝜷́+𝒗𝒊𝒕 )
10
11 The value 𝑇𝐸𝑖𝑡 is necessarily expected to be between one and zero.
12 Thereby, the closer the observed point is to the frontier, the higher is the
13 technical efficiency of a firm. If, for instance, a firm’s technical efficiency is
14 0.75, then it implies that the firm realizes, on average 75% of the production
15 possible for a fully efficient firm having comparable input values (Battese and
16 Coelli, 1988).
17 The analysis of production function in the stochastic frontier framework
18 concerns two steps. The first step requires the use of the maximum likelihood
19 to estimate the frontier model. In the second, measures of inefficiency or
20 efficiency are constructed using the estimated frontier model.
21 Following CFG (1995), a multiplicative heteroscedasticity is assumed in
22 the one-sided error term ui only. However, it is argued by (Hadri, 1999) that in
23 the cross sectional data, the two-sided symmetric error term can also be
24 affected by size-related heteroscedasticity. Ignoring this assumption is likely to
25 lead to a misspecified maximum likelihood function due to heteroscedasticity
26 being not integrated in the estimation which yields inconsistent estimated
27 parameters, (White, 1982).
28 To integrate heteroscedasticity in the symmetric noise term vi, at the same
29 time with the one-sided inefficiency term ui, the model HUV (Heteroscedasticity
30 in u and v) is specified where we now have a vector of non-stochastic
31 regressors related to the firm size characteristics to be included in the vi side
32 along with a vector of unknown parameters to be estimated. Also, the values of
𝜎
33 both 𝜎𝑖2 and 𝜆𝑖 will be determined as 𝜎𝑖2 = 𝜎𝑣𝑖 2 2
+ 𝜎𝑢𝑖 and 𝜆𝑖 = 𝜎𝑢𝑖 . where
𝑣𝑖
34 each of 𝜎𝑣𝑖 and 𝜎𝑢𝑖 comprise a set of explanatory variables that affect both vi
35 and ui respectively.
36 The SFA methodology enables the assessment of different variables’
37 effects on efficiency and the extent of their importance in performance. In this
38 field, unlike other areas, the model’s parameters estimation is not the ultimate
39 intent per se. Instead, estimating and analysing the industries’ inefficiencies are
40 objectives of greater interest (Greene, 1990). Therefore, the rationale for
41 choosing the SFA is that estimating average production functions by
42 conventional regression methods rather than frontiers hinges upon the
43 assumption that all units of production are efficient, which means that if this

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 2021-4124-AJBE – 22 FEB 2021

1 assumption does not hold, the parameters estimated would be affected, and
2 consequently the importance of human capital as well.
3 Moreover, estimating TFP through the growth accounting approach
4 (Solow’s approach) implies all individuals are efficient, therefore, any
5 estimated growth in TFP would be interpreted as a shift of the frontier function
6 (technical change), but in the existence of technical or allocative inefficiency,
7 the estimated TFP would be biased, and accordingly, the assessment of human
8 capital contribution in efficiency will lack accuracy (Maudos, Pastor and
9 Serrano, 2003). Thus the use of SFA is necessary to take into account any
10 possible presence of inefficiency and to avoid the bias resulting from the
11 estimation by conventional methods (Färe, Grosskopf and Norris, 1997),
12 (Taskin and Zaim, 1997).
13
14 Heteroscedasticity in the Stochastic Frontier Production Functions
15
16 As noted in (Caudill, Ford and Gropper, 1995) that the measures of
17 inefficiency are based on the residuals derived from the stochastic frontier
18 estimation and they noticed that these residuals tend to be sensitive to errors of
19 specification and to a higher degree in the stochastic frontier models. They
20 argue that this problem of sensitivity will affect the accuracy of the inefficiency
21 measures. To tackle this issue, they proposed that researchers might need to
22 test for heteroscedasticity presence, and if present, they can correct for
23 heteroscedasticity in the one-sided error term (inefficiency), (Zhang, 2012).
24 Furthermore, (Hadri, 1999) suggested that the two-sided error term might
25 also suffer from heteroscedasticity, and if that was to be ignored, then the
26 maximum likelihood estimates will be inconsistent and inaccurate. Therefore,
27 he advises to test for heteroscedasticity in both error terms, and if present, the
28 appropriate corrective procedures must be applied on both terms to obtain the
29 correct and robust estimators, (Hadri, Guermat and Whittaker, 2003).
30 In the panel data models, and when v is heteroscedastic, the estimates of
31 the parameters in the frontier function and those of technical inefficiency
32 function are consistent under both the time-invariant fixed-effects and the
33 random-effects methods. Whereas, in both the maximum likelihood approach,
34 the estimates consistency is preserved only if the time trend observed (𝑻) in the
35 panel is relatively large in comparison with individuals (𝑵).
36 In the time-varying panel data models, and when v is heteroscedastic, with
37 the correction of (Kumbhakar, 1990), (Cornwell, Schmidt and Sickles, 1990),
38 and (Lee and Schmidt, 1993) methods, the imprecision in the estimates can be
39 solved and the MLE can be considered even if the (N) is large (Zhang, 2012).
40 According to (Hadri, 1999; Caudill and Ford, 1993; Caudill, Ford and Gropper,
41 1995) a term of multiplicative heteroscedasticity is incorporated into the one-
42 sided error term with the variance 𝜎𝑢2 = exp(𝛾 ′ 𝑍𝑖𝑡 ).
43
44

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1 Panel Industry-Level Data

2
3 It is scarcely needed to underscore the advantages of panel data over other
4 types of data. However, besides its benefits for being more informative and
5 more dynamic, with less collinearity between variables. The panel data allows
6 researchers to control for heterogeneity of individuals or entities in a proper
7 way both via the estimating methodology and by the specifications of the
8 model.
9 In addition, if one has panel data, they can avoid three major problems in
10 the stochastic frontier estimation, including; (a) the variance of the technical
11 inefficiency distribution conditional on the whole error term does not disappear
12 as the sample size increases. (b) the segregation of the technical inefficiency
13 from the statistical noise and the estimation of the model need particular
14 assumptions about the technical inefficiency and statistical noise distributions,
15 but it is not obvious yet how robust the results of the estimation to these
16 assumptions. (c) it may be inaccurate to assume that inefficiency is
17 independent of its explanatory variables if the firm/industry knows the level of
18 its inefficiency.
19 A 16–year panel data for a 13–industry cluster was extracted from the
20 BEA (The Bureau of Economic Analysis) on Value-Added Output, College
21 Labour Inputs, Non-college Labour Inputs, IT Capital, R&D Capital, Software
22 Capital, Energy, Materials, Services Inputs, Labour Inputs, Gross Output, and
23 Other Capital Inputs.
24 It is noteworthy to state that the gross output concept differs from the
25 sectoral output concept used by the BLS in its industry-level TFP statistics.
26 The sectoral output methodology elides intermediate production and purchases
27 which come from within the industry (intra-industry transactions) from either
28 outputs or inputs (Schreyer, 2001).
29 The 3-digit 13 industries along with their NAICS codes are as follows:
30
31 1) Machinery (333), 2) Computer and Electronic Products (334), 3) Food
32 and Beverage and Tobacco Products (311, 312), 4) Textile Mills and Textile
33 Product Mills (313, 314), 5) Apparel and Leather and Applied Products (315,
34 316), 6) Paper Products (322), 7) Chemical Products (325), 8) Wood Products
35 (321), 9) Primary Metals (331), 10) Electrical Equipment, Appliances, and
36 Components (335), 11) Fabricated metal products (332), 12) Petroleum and
37 coal products (324) , 13) Plastics and rubber products (326).
38 The data is observed annually and measured as indexes of each of the real
39 sectoral output (value-added output) as a dependent variable, and capital
40 services, labour hours and a measure of intermediate inputs including energy,
41 materials, and purchased services as independent variables, knowing that all
42 variables are converted into logarithm values. The lack of accessible sources
43 that provide firm-level data on the U.S. manufacturing sector is the main
44 problem the researcher faced when collecting the U.S. dataset.
45 As regards labour composition, the contribution of labour to output growth
46 is decomposed into demographic characteristics which account for the

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1 contribution of the college-educated workers and those workers who did not
2 attend college. The benefit of this adjustment is to allow for the contribution of
3 labour to reflect the changes in the workers’ skills level composition and the
4 number of hours worked in each industry over the years.
5
6 Variables for the stochastic frontier production functions
7
8 The variables included in the frontier production function in shorthand are
9 as follows:
10 Ln VA = Value-Added output. It is the aggregate value-added growth
11 which is the sum of share-weighted value-added growth by industry. Value-
12 added output represents compensations of employees, taxes on production and
13 imports, fewer subsidies, and gross operating surplus. It does not include
14 intermediate inputs.
15 Ln K = Capital services: are the services derived from the physical assets
16 stock and intellectual property assets. In other words, capital services reflect
17 the flow of productive services provided by an asset that is employed in
18 production. The value of capital services is the number of services provided by
19 an asset (multiplied by) the price of those services.
20 Assets such as:
21
22 1- Fixed business equipment and structures.
23 2- Inventories, lands.
24
25 Ln L = Labour inputs which are denoted by hours at work by age,
26 education, and gender group are weighted by each group’s share of the total
27 wage bill. Labour hours represent the annual hours worked by all persons
28 employed in an industry.
29 Labour inputs by industry in the industry-level production accounts
30 published jointly by the Bureau of Economic Analysis BEA and Bureau of
31 Labor Statistics BLS are measured as Tornqvist quantity indexes of hours
32 worked classified by gender, age group, and education group. The education
33 group include grade school, less than high school degree, high school degree,
34 some college, college degree, and more than a college degree.
35 The dollar value of this work is labour compensation. The implicit price of
36 labour input is the labour compensation divided by the quantity index. The
37 labour compensation includes the payroll + any supplemental payments. The
38 payroll includes salaries, wages, bonuses, commissions, dismissal pay,
39 vacation and sick leave pay...etc.
40 Labour compensation is the cost to the employer of securing the labour
41 services, and the unit labour costs describe the relationship between the
42 compensation per hour and real output per hour (labour productivity). To
43 estimate college and non-college labour, the BEA and BLS form Tornqvist
44 indexes for hours worked for college and non-college workers by industry.
45 Ln IM = Intermediate inputs: consist of the goods and services – including
46 energy, raw materials, semi-finished goods, and services that are purchased

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 2021-4124-AJBE – 22 FEB 2021

1 from all sources – that are used in the production process to produce other
2 goods or services rather than for final consumption.
3 They represent a large share of production costs, and it is found that the
4 substitution among inputs (intermediate inputs included) has its impact on the
5 changes in productivity.
6 Ln E= Energy inputs: the amount of fuel, electricity, and other forms of
7 energy used to produce output.
8 Ln M= Material inputs: the number of commodities, in the form of
9 intermediate materials, used to produce output, also known as materials inputs.
10 Ln S = Purchased Service inputs: the amount of outside contract work used to
11 produce output.
12 The determinants of efficiency included in the inefficiency model are in
13 shorthand as follows:
14 Ln ICTK = ICT capital stock: information or data that has intrinsic value
15 which can be shared and leveraged within and between organisations.
16 The information technology capital assets consist of communications
17 equipment, mainframe computers, personal computers, direct access storage
18 devices, printers, terminals, tape drives, storage devices, and integrated
19 systems.
20 Ln RDK = R&D capital stock.
21 Ln College = College labour input. It includes workers with a bachelor’s
22 degree and above.
23 Ln Noncollege = Non-College labour inputs. It represents the remainder of
24 workers after bachelor’s degree holders and above is subtracted from the total.
25 Ln Other K = represents other capital which includes about 90 types of
26 other capital equipment and structures, inventories, and land according to the
27 BEA/BLS integrated industry-level production accounts reports where office
28 and accounting, machinery, photocopying and related equipment, medical
29 equipment, electromedical instruments, and nonmedical instruments are
30 redefined by the BEA measures and included in other capital assets.
31
32
33 Econometric Results and Economic Analysis
34
35 Table (1) shows the output of the stochastic frontier production function
36 results and inefficiency models obtained from the Nlogit5 Econometric
37 software, following the CFG 1995 approach assuming the presence of
38 heteroscedasticity in the one-sided inefficiency term in models (1, 2, and 3),
39 and following the Hadri 1999 and Hadri, Guermat, and Whittaker 2003
40 approach and its extension for panel data, which includes the double
41 heteroscedasticity assumption in model (4).
42
43

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 2021-4124-AJBE – 22 FEB 2021

1 Table 1. Maximum likelihood estimates in the U.S. manufacturing industries

2 during the period (1998-2013) Cobb-Douglas stochastic frontier production
3 functions
Cobb-Douglas Model 1 Model 2 Model 3 Model 4
stochastic frontier Two- input Two- input Three- input Three- input
production and time- and time- and time- and time-
function: invariant varying varying varying
dependent variable stochastic stochastic stochastic stochastic
Ln VA= (ln Value frontier frontier frontier frontier
Added Output) production production production production
function function function function
(correction (correction (correction (correction
for for for for
heteroscedast heteroscedast heteroscedast heteroscedast
icity in u icity in u icity in u icity in both u
only) only) only) and v)
Parameter Parameter Parameter Parameter
(robust SE) (robust SE) (robust SE) (robust SE)
Constant -.554 (.544) -.711 (.562) -.488 (.603) -.825**
(.334)
Ln K input .678*** .607*** .615*** .536***
(.114) (.158) (.164) (.070)
Ln L input .470*** .562*** .456*** .505***
(.084) (.110) (.154) (.104)
Time input - .004 (.003) 0.052 (.068) .118** (.054)
Ln IM = Ln - - .003 (.003) .007***
Intermediate Inputs (.003)
Inefficiency
function
Constant -6.304 -8.228 -5.469 30.167
(16.399) (17.050) (17.977) (61.581)
Ln_College_Labou -6.821** -5.873** -6.807** -12.700*
r (2.755) (2.956) (3.160) (7.185)
Ln_Non_College_L 5.864*** 5.770*** 5.119*** -13.76
abour (2.011) (2.031) (2.175) (9.237)
Ln_ICT_Capital -2.596* -2.153 -2.558 -
(1.425) (1.750) (1.806) 18.303***(6.
811)
Ln_R&D_Capital 1.555 (1.020) 1.746 (1.080) 1.793 (1.094) 1.716 (6.179)
Ln_Software_Capit -.609 (1.026) -.970 (1.196) -.741 (1.213) -
al
Ln_Materials -3.346** -3.191** -2.463 -1.814
(1.547) (1.546) (1.908) (4.684)
Ln_Purchased_Ser -.077 (.501) .172 (.639) .081 (.652) 4.955 (4.264)
vices
Ln_Other_Capital 6.604 (4.042) 5.468 (4.442) 5.926 (4.648) 31.095**
(15.689)
Log-likelihood 137.445 138.406 139.085 167.362
function
Parameters in

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variance of v
(symmetrical term)
Constant - - - -12.44
(9.779)
Ln RD Capital - - - 3.903***
(.936)
Ln Other Capital - - - -3.499
(2.239)
Ln Non- - - - 1.289 (1.113)
College_Labour
γ .928 .917 .915 .774
σ= .270 .259 .259 .25415
Sqr[(s^2(u)+s^2(v)]
N. obs. [K] 208 [13] 208 [14] 208 [15] 208[17]
Deg.freedom for 9 9 9 8
inefficiency model
Deg.freedom for 8 8 8 7
heteroscedasticity
LR test results
1- H0 = Cobb-
Douglas Accept H0 at Accept H0 at Accept H0 at Accept H0 at
stochastic 95% 99% 99% 99%
frontier
production
function
2- H1 =
Translog
stochastic
frontier
production
function
1 Notes; 1- See table (1) for the definitions of variables. 2 - * Significant at 90% level of
2 significance.
3 3 - ** significant at 95% level of significance.4- *** significant at 99% level of significance.
4 5- Figures in parentheses are robust standard errors.

As can be seen, the estimated parameters of the frontier production

function are represented in this table by labour inputs (L) and capital services
inputs (K). In the lower section of the table, there are the estimated parameters
of the technical inefficiency function which has been estimated
contemporaneously using the college and noncollege labour indexes, the ICT,
R&D capital, and Software capital indexes as principal explanatory variables in
technical inefficiency changes. Inefficiency is modelled as dependent on the
ICT capital, R&D capital, software capital, and the level of human capital in
industry j at time t.
Regarding the effects of human capital – proxied by college and
noncollege labour – on technical inefficiency, the maximum likelihood
estimates suggest that the increase in the percentage of the hours worked by
college workers tends to contribute positively to technological efficiency in the

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U.S. manufacturing industries. While on the minus side, it can be noted that the
rise in the share of the hours worked by noncollege persons seems to have a
negative impact on efficiency in these industries. Human capital is included in
the model as efficiency determinant due to the role that it could play indirectly
through efficiency by its impact on the absorptive capacity.
From the reported results of the generalised likelihood ratio test in table
(2), in model (1) it can be concluded that the null hypothesis was accepted at
95% level of confidence with a preference to the Cobb Douglas functional
form to represent this panel data. According to the latter, it would seem to be
possible to distinguish the significant and positive effects of two inputs labour
(L), and capital (K) on output in the fitted frontier production function. From
the literature point of view, this appears to be reasonable and consistent with
the conclusions reached in previous studies with similar weights of labour and
capital coefficients where the value of output and inputs were deflated by the
appropriate price indexes.
The information and communication technology capital ICT shares appear
to be of significant impact and contributed positively to minifying technical
inefficiency in the U.S. From an economic perspective, it should be also
marked that economies that are largely endowed with a high proportion of
skilled labour of the total labour force would bear the high cost of skilled
labour because of the wage bills. These economies are more able to find the
optimal level of technology to enhance the level of efficiency to their labour
and capital by employing more sophisticated technology. Whereas those
countries with high percentages of their find easier to deploy less advanced
technologies and the level of capital accumulation will be lower. However, the
optimal combination of technology and capital is largely determined by the
endowment of human capital.
In table (1) the value of the variance parameter (γ) which lies between 0
and 1 is equal to .928 in model (1). It, therefore, confirms the presence of
stochastic technical inefficiency and that it indicates to its relevance to
obtaining the adequate representation of the data. The same analysis applies to
the gamma parameter (γ) in models, (2, 3, and 4).
From this, if gamma = 0, then the technical efficient capacity utilisation
TECU value is expected to score 1 (σ2u = 0), meaning that the deviations from
the frontier can neither be ascribed to the presence of technical inefficiency nor
to capacity underutilisation, and if gamma = 1, where the value of TECU = 0,
(σ2v = 0), it will indicate that deviations from the frontier can be attributed to
technical inefficiency and capacity underutilisation, (Pascoe et al., 2003). In
case gamma is larger than 0 and less than 1, then deviations can be explained
by both technical efficient capacity utilisation and the random component,
(Battese and Corra, 1977).
In addition, the production function inefficiency is calculated by the error
term using the composite error term of the stochastic frontier model which is
𝜎2
𝑢
defined by 𝛾 = (𝜎2 +𝜎 2 ). This is where it represents a measure of inefficiency
𝑣 𝑢
level in the variance parameter which ranges from 0 to 1.

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 2021-4124-AJBE – 22 FEB 2021

σ2u 𝜎2
𝑢
In this case, since gamma ≈ .93 (yielded either from or 𝛾 = (𝜎2 +𝜎 2) =
σ2 𝑣 𝑢
.06781
= .928).
.07306

which indicates that the variance of the inefficiency effects is a significant term
of the total composite error term variance, and therefore the deviations from
the optimal level of output in the U.S manufacturing industries subject to study
is due to both the random exogenous factors and inefficiency existence in the
production processes. In other words, this implies that the stochastic production
frontier is significantly different from the deterministic frontier which does not
comprise a random error.
Bearing in mind that skills are aggregated with a skill-specific share in
total labour remunerations. With these suggested particular measures of labour
and capital – which can be very often constrained by sources and data to
establish such distinction and cover all labour and capital inputs – the different
impacts of the technological progress resulting from improved (capital,
intermediate inputs, and labour or human capital) need to be reflected in the
varying contributions of each of these inputs.
Moreover, the residual or the disembodied technical change will be
captured in TFP growth, and that is how TFP gathers up the spillover effects on
output growth which came about production factors improvements. The key
point here is that growth in TFP cannot only be attributed to technological
progress. In other words, there are other determinants including; changes in
efficiency, measurement errors, cost adjustments, cyclical effects, economies
of scale, that could give rise to TFP increment.
Model (2) demonstrates the time-varying version of the Cobb-Douglas
stochastic frontier production function presented in table (1). However, in this
model the observed years (T) were factored in the model in order to proxy for
technological change (the so-called Hicksian neutral) given the period of time
over which this set of data was observed is 16 years. The time-varying
technical inefficiency is obtained via the same normalisation for each year of
the panel in the time-invariant case which ensures that 𝑢̂𝑖𝑡 ≥ 0 and that is to
say, 𝑇𝐸𝑖𝑡 = 𝑒𝑥𝑝(−𝑢𝑖𝑡 ). Where 𝑢̂𝑖𝑡 = 𝑚𝑎𝑥𝑖 {𝛽̂𝑖𝑡 } − 𝛽̂𝑖𝑡 . The time trend
parameter is found to be of positive yet not significant impact at any level of
statistical confidence in the model in which heteroscedasticity was assumed to
be present only in uit . Whereas, in the stochastic frontier model which includes
the double heteroscedasticity assumption following the (Hadri, Guermat and
Whittaker, 2003; Hadri, 1999) approach and its extension for panel data, the
time trend was found to be statistically significant and of positive effects in the
model. As presented in model (4). It is also shown in table (2) that the null
hypothesis is accepted via the likelihood ratio test at 99% in this model (4).
In model (3) intermediate inputs were factored in as a third input in the
frontier production function. It can be observed that the value of the capital
input coefficient is not hugely different from its value in the two-input model
presented in models (1) and (2), as is the value of the log likelihood function.
Whereas the labour input parameter is lower than in model (1) when the extra

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 2021-4124-AJBE – 22 FEB 2021

input of intermediates is integrated in model (3). However, the extra production

input of intermediates was not found to be of a significant importance in the
single-heteroscedasticity model.

Table 2. Summary of the Generalised Likelihood-Ratio tests of the null hypothesis

Model 1: Null Production Log Ρ Critical Values
Hypothesis, H0 Function Likelihood of the χ2
Form Function Distribution
H0: βij = 0, i = 99.5% ρ = 22.0*
1,…,8 (0.005)
Translog 143.32 99% ρ = 20.1*
(0.01)
Cobb – 137.44 95% ρ = 15.5*
Douglas (0.05)
LR Test 11.75 90% ρ = 13.4*
(0.1)
Model 2: Null
Hypothesis, H0
H0: βij = 0, i = 99.5% ρ = 22.0*
1,..,8 (0.005)
Translog 147.30 99% ρ = 20.1*
(0.01)
Cobb - 138.40 95% ρ = 15.5
Douglas (0.05)
LR Test 17.78 90% ρ = 13.4
(0.1)
Model 3: Null
Hypothesis, H0
H0: βij = 0, i = 99.5% ρ = 22.0*
1,..,8 (0.005)
Translog 148.09 99% ρ = 20.1*
(0.01)
Cobb - 139.08 95% ρ = 15.5
Douglas (0.05)
LR Test 18.01 90% ρ = 13.4
(0.1)
Model 4: Null
Hypothesis, H0
H0: βij = 0, i = 99.5% ρ = 20.3*
1,..,7 (0.005)
Translog 175.66 99% ρ = 18.5*
(0.01)
Cobb - 167.36 95% ρ = 14.1
Douglas (0.05)
LR Test 16.60 90% ρ = 12.0
(0.1)

On the other hand, still the time trend (T) shows no sign of any statistical
significance in both models. However, in model (4), the exogenous factors

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 2021-4124-AJBE – 22 FEB 2021

were included as an extra vector of variables to correct for heteroscedasticity in

the two-sided error term (random noise).
The integration of the exogenous variables in the maximum likelihood
procedure for the panel data yielded a variation in the values of the parameters
estimated in the inefficiency function. see model (4). This is where the change
in technology indicates significant positive impact on the frontier production
function in this model.
It can be noticed that the human capital (college and noncollege labour)
and ICT capital coefficients’ weights in the inefficiency functions in model (1),
(2), and (3) do not change substantially, despite the information technology
capital parameter does not appear to be statistically significant even when the
time trend has been included as an additional variable in the production
function. Nonetheless, in model (4) the impact of human capital represented by
the college labour remains statistically significant and positively associated
with higher levels of efficiency. While the noncollege workers component is
still contributing in a negative way to the efficiency in the American industries.
In terms of the effects of both college and non-college labour inputs on
productive efficiency, there seems to be some differences between the two
models (the single-heteroscedasticity model and the double-heteroscedasticity
model both presented in models (3) and (4). In addition, there seems to be
marked disparity in the weights of the coefficients associated with each factor
(college and non-college labour inputs) where in the doubly-heteroscedasticity
model the values of human capital parameters appear to be more inflated than
the values reported in the model with heteroscedasticity assumed in
inefficiency term only.
The interesting point here is that the noncollege labour coefficient appears
to have positive impact on efficiency but from a statistical point of view this
seems to be with insignificant contribution. There might be a technical
justification to this. As far as the maximum likelihood estimation is concerned,
the cost of the half-normal model estimation is that the restriction of the mean
to zero usually inflates the standard errors of the parameters and at times it
attends extreme parameters’ values and also prevents the iterations
convergence from being executed.
In the double-heteroscedasticity three-input model (4), the weights of the
parameters of capital, labour differed from their values in models (1, 2, and 3)
when the intermediate input and time trend factor are introduced in the model
with a statistical significance this time for both variables. This might be
ascribed to the substitutability between production inputs where when more
intermediate inputs such as energy and materials are supplied, less labour and
less capital will be required. That is, the use of extra intermediate inputs might
imply a reduction in the labour and capital inputs needed to generate the same
volume of output.

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Conclusions

To conclude, the different efficiency models presented in this paper

whether in the presence of heteroscedasticity in the one-sided error term or in
the symmetric two-sided error term demonstrated the importance of college
labour (those workers with tertiary education) in enhancing efficiency and
productivity at the industry level in the manufacturing sector in the U.S.
It is also proved that the Information and telecommunication capital has
played a key role in promoting industry efficiency in the U.S. over the period
from 1998 to 2013 thanks to the information revolution and the stream of
innovations and new technologies in the mid-1990s and its continuous
spillovers over the two decades that followed. Regarding the non-college
labour (those workers with high school education), the role of this component
of human capital in reducing inefficiency at industry level does not seem to be
key in the U.S. In fact, in some models it is found to have had negative
contributions to efficiency. However, in the double heteroscedasticity model,
the sign of the non-college labour parameter changes from a negative non-
college labour impact on efficiency to a positive one when the correction for
heteroscedasticity in v is considered but no effect is in any way significant.
The selected sample in this paper is formed of industries with different
levels of technology ranging from low and med low technology industries to
high and med high technology industries. These industries will – in one way or
another – have inter and intra-industries trade links, which by extension will
stimulate innovation and technological diffusion among industries. In addition,
intra-industry trade in vertically differentiated goods which are recognised by
their variety in quality and prices can reflect some endowments in production
factors between industries such as highly skilled labour Hence, trading in these
types of markets can offer some industries the opportunity to specialise and
direct their resources and trading in the goods that they have a comparative
advantage in their production cost such as using expensive educated workers
for research and development and knowledge creation activities while
allocating less skilled labour in less complex activities.

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