The increase in the elasticity of substitution between capital and labour: a repeated cross-country investigation

Samuele Ialenti and Guido Pialli

Economics of Innovation and New Technology, 2024, vol. 33, issue 3, 380-400

Abstract: The economics literature emphasizes the importance of the elasticity of substitution between capital and labour in several economic contexts. However, analyses of the effect of the elasticity of substitution on the direction of technological change are often overlooked. Most assessments of the direction of technological change rely on a Constant Elasticity of Substitution (CES) production framework. This strand of empirical work considers the elasticity of substitution between capital and labour as a deep and fixed parameter. In this article, we show that the change in the elasticity of substitution that has occurred in recent decades might be an alternative source of change of factor income shares in addition to changes in factor-augmenting technological change. We construct a theoretical environment in which the elasticity of substitution is determined endogenously by the capital share and capital intensity. Rolling window estimates and non-linear estimation methods show that the elasticity of substitution in nine OECD economies observed between 1950 and 2017 was not constant and that, in fact, in the latter half of the 1970s, the elasticity of substitution increased, in the presence of labour-augmenting technical change.

Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/10438599.2023.2185779 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ecinnt:v:33:y:2024:i:3:p:380-400

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/GEIN20

DOI: 10.1080/10438599.2023.2185779

Access Statistics for this article

Economics of Innovation and New Technology is currently edited by Professor Cristiano Antonelli

More articles in Economics of Innovation and New Technology from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().