Capital-labor substitution elasticity: A simulated method of moments approach

Edouard Wemy

Economic Modelling, 2021, vol. 97, issue C, 14-44

Abstract: The elasticity of substitution between capital and labor plays an important role in the analysis of economic and policy issues such as factors' share in national income and tax policies on business capital formation. Rather than focusing on long-run relationships to estimate this elasticity, I exploit the short-run variations in the labor income share due to changes in capital-embodied technology. Using the simulated method of moments approach, I obtain an elasticity estimate that is clearly less than one. The study indicates that estimates based on the long-run relationship of factor's share may tend to be significantly larger.

Keywords: Substitution elasticity; Labor income share; Indirect inference; Investment-specific technological change; Business cycles (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:97:y:2021:i:c:p:14-44

DOI: 10.1016/j.econmod.2020.12.022

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