Countercyclical Elasticity of Substitution

Dongya Koh and Santaeulà lia-Llopis, Raül
Authors registered in the RePEc Author Service: Raul Santaeulalia-Llopis ()

No 17246, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We empirically show that the short-run elasticity of substitution between capital and labor is countercyclical. In recessions, capital and labor are more substitutable than in expansions. This countercyclicality of the elasticity of substitution 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. Interestingly, the cyclicality of the elasticity of substitution is per se not a source of aggregate fluctuations, but it propagates the effects of other shocks.

Keywords: Short-run; Elasticity; Substitution; Capital; Labor; Cycle; Labor market; Labor share (search for similar items in EconPapers)
JEL-codes: E13 E32 (search for similar items in EconPapers)
Date: 2022-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17246 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Countercyclical Elasticity of Substitution (2017)
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:cpr:ceprdp:17246

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17246

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().