An Estimation of U.S. Industry-Level Capital-Labor Substitution

Edward J. Balistreri (), Christine McDaniel () and Eina Vivian Wong
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Eina Vivian Wong: University of Colorado

Computational Economics from EconWPA

Abstract: A key parameter that determines the distributional impacts of a policy shift in general equilibrium models is the elasticity of substitution between capital and labor. Despite the importance of this parameter in applied modeling, its identification continues to pose a challenge. Given the structure of most growth models, we posit that the true relationship between capital and labor is likely to be close to Cobb- Douglas. Using a rich new data set from the Bureau of Economic Analysis, we estimate substitution elasticities for 28 industries, which cover the entire economy, and provide an indication of the long- and short-run estimates. We fail to reject the Cobb-Douglas specification in 20 of the 28 industries. These findings lend support to the Cobb-Douglas specification as a transparent starting point in simulation analysis.

Keywords: Econometric Methods; Time Series Models; Computable General Equilibrium Models (search for similar items in EconPapers)
JEL-codes: C20 C22 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: Written
Note: Type of Document - PDF; pages: 26; figures: Included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpco:0303001

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