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The Substitution Elasticity, Factor Shares, and the Low-Frequency Panel Model

Bob Chirinko () and Debdulal Mallick ()

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 4, 225-53

Abstract: The value of the elasticity of substitution between labor and capital (σ) is a crucial assumption in understanding the secular decline in the labor share of income. This paper develops and implements a new strategy for estimating this crucial parameter by combining a low-pass filter with panel data to identify the low-frequency/long-run relations appropriate to production function estimation. Standard estimation methods, which do not filter out transitory variation, generate downwardly biased estimates of 40 percent to 70 percent relative to the benchmark value. Despite correcting for this bias, our preferred estimate of 0.40 is substantially below the Cobb-Douglas assumption of σ = 1.

JEL-codes: C51 E22 E24 E25 O41 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20140302
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Handle: RePEc:aea:aejmac:v:9:y:2017:i:4:p:225-53