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diminishing returns to the labor input.

In the estimation of equation (4) above, proxies are often used for variables such as the labor force and/or the stocks of private capital and FDI [Aschauer, 1990; Cardoso, 1993; Green and Villanueva, 1991; Lin, 1994; Nazmi and Ramirez, 1997]. For example, population data is used rather than labor force data, or investment data (as a proportion of GDP) is substituted for capital stock data. However, the use of these proxies imposes unduly restrictive assumptions (e.g., such as a fixed capital-output ratio) or unrealistic assumptions (a constant labor force participation rate) that generate both misspecified relationships and significant measurement errors [Alexander, 1994]. Fortunately, for Chile we have a sufficiently long (and official) time series (annual) data set for private investment, public investment, and FDI flows extending back to 1960 . Using a perpetual inventory method, capital stock data can therefore be generated for the variables in question. Chile’s National Institute of Statistics (INE) has also published official data on the labor force for the period under review. This study DOES FOREIGN INVESTMENT ENHANCE LABOR GROWTH IN CHILE 211 thus extends previous empirical work by estimating an empirical counterpart of the growth (labor productivity) model in equation (4) for the 1960-2000 period. The most general formulation of the labor productivity function is (5) Δ ΔΔ Δ Δ y lk k k DDD t t pt i f t i gt i =+ + + + +++ − −− − αβ β β β βββ 11 2 3 4 51 62 73 , , , + + β ε 8ΔTOT ,