Countercyclical Elasticity of Substitution

Dongya Koh and Raül Santaeulà lia-Llopis

No 946, Working Papers from Barcelona School of Economics

Abstract: We empirically show that the short-run elasticity of substitution between capital and labor (σ_t) is countercyclical. In recessions, capital and labor are more substitutable than in expansions. This countercyclicality of σ_t introduces an asymmetry in an otherwise standard competitive-markets business cycle model that contributes to resolve several labor market puzzles: the labor productivity puzzle, the Dunlop-Tarshis phenomenon, the hours-productivity puzzle, and the labor share puzzle.

Keywords: labor market; labor share; capital; short-run; elasticity; substitution; labor; cycle (search for similar items in EconPapers)
JEL-codes: E13 E32 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Countercyclical Elasticity of Substitution (2022)
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