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 Centre for Economic Policy Research

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
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Working Paper: Countercyclical Elasticity of Substitution (2017)
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