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Elasticity of substitution between labor and capital: robust evidence from developed economies

Jakub Mućk

No 271, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: This paper provides estimates of the aggregate elasticity of substitution between labor and capital (σ) in developed economies. Our empirical strategy consists in estimating two- and three-equation supply-side systems which combine a normalized CES production function and first order conditions for factors of production. Using a panel of 12 advanced economies between 1980 and 2006, it is found that capital and labor are gross complements and σ is on average around 0.7. Moreover, we also document net labor-augmenting technical progress. Our main findings remain robust to various assumptions on time-varying factor-augmenting technical change. Furthermore, we replicate the benchmark results with two alternative datasets. To strengthen these findings a systematic evidence of capital-labor substitution is provided at the country level. Although substantial cross-country variation in σ can be found, a wide range of estimates confirms that labor and capital are gross complements and technical change is net labor-augmenting.

Keywords: normalized CES production function; elasticity of substitution between labor and capital; factor-augmenting technical change; factor shares (search for similar items in EconPapers)
JEL-codes: C22 C23 E23 E25 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff and nep-mac
Date: 2017
Note: I would like to thank Jakub Growiec, Peter McAdam and Jan Hagemejer and seminar participants at the 4th annual conference of International Association of Applied Econometrics and the EcoMod 2017 annual conference for valuable comments and suggestions.
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