You are here

Economics in a picture

Economia numa imagem

In Portugal, capital to labor ratios grow with firm age


Economics in a picture: In Portugal, capital to labor ratios grow with firm age

Firm behavior is central to answering many modern macroeconomic questions, including the role of firms in driving aggregate growth, the design of government policies that promote growth, and the type of support a government provides to firms during a recession. For understanding the sources of firm growth, we use a simple theory of firm production over the lifecycle and investigate the relative importance of labor market frictions and frictions to capital accumulation. With this objective, we use panel data on the balance sheets of the universe of Portuguese firms. We focus on cohorts born in 2009–12 and track the same firms over time.

According to the model, for a standard production function, the capital to labor ratio is constant over time for firms. If there are frictions to capital accumulation then capital is depressed when firms are young, and grows gradually over time, generating an increasing capital to labor ratio. The opposite is true when there are frictions in the labor market. In the data we see a clear pattern of the capital to labor ratio increasing with firm age, which suggests that frictions to capital accumulation are dominant (see Figure). This finding provides motivation for further investigation into the nature of these frictions, and whether there are ways to ease them.


For more details see “Firm lifecycles”, Banco de Portugal Economic Studies, Vol. VIII, No. 4, pp. 53-73.


Prepared by António Santos, László Tétényi and Pedro Dias Moreira. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.


If you want to receive an e-mail whenever a new “Economics in a picture” is published send your request to