The Effects of Globalization and Technology on the Elasticity of Substitution

Hector Sala and Pedro Trivin

No 10898, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The elasticity of substitution between capital and labor (?) is usually considered a "deep parameter". This paper shows, in contrast, that ? is affected by both globalization and technology, and that different intensities in these drivers have different consequences for the OECD and the non-OECD economies. In the OECD, we find that the elasticity of substitution between capital and labor is below unity; that it increases along with the degree of globalization; but it decreases with the level of technology. Although results for the non-OECD area are more heterogeneous, we find that technology enhances the substitutability between capital and labor. We also find evidence of a non-significant impact of the capital-output ratio on the labor share irrespective of the degree of globalization (which would be consistent with an average aggregate Cobb-Douglas technology). Given the relevance of ? for economic growth and the functional distribution of income, the intertwined linkage among globalization, technology and the elasticity of substitution should be taken into account in any policy makers' objective function.

Keywords: elasticity of substitution; capital-output ratio; labor share; globalization; technology (search for similar items in EconPapers)
JEL-codes: E22 E25 F62 O33 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-07
New Economics Papers: this item is included in nep-mac
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Published - published in: Review of World Economics, 2018, 154 (3), 617-647

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Journal Article: The effects of globalization and technology on the elasticity of substitution (2018)
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