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Elasticity of Substitution in the Manufacturing Sector in the Czech Republic

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  • Cristina Procházková Ilinitchi
  • Anastasie Pustovalová
  • David Procházka

Abstract

The paper estimates the elasticity of substitution between capital and labour under biased technical change in the manufacturing sector in the Czech Republic. We use a dataset covering the period 1995-2019 and a 2-digit industry level, from NACE10 to NACE33. We find industry-level elasticities to be 0.19 and 0.94; therefore, labour and capital seem to be gross complements rather than substitutes across all manufacturing sectors. In the core industries of the Czech manufacturing sector, the elasticity is below average. Even if these core sectors have high and increasing labour costs (except NACE29, where the labour costs are below average), they do not replace labour with capital at a higher pace. This cannot be explained by the direction of technological bias because it is not capital-augmenting. On the other hand, our findings are in line with the literature, as most studies on transition countries report low estimates for the elasticity.

Suggested Citation

  • Cristina Procházková Ilinitchi & Anastasie Pustovalová & David Procházka, 2021. "Elasticity of Substitution in the Manufacturing Sector in the Czech Republic," Politická ekonomie, Prague University of Economics and Business, vol. 2021(4), pages 435-456.
    • Handle: RePEc:prg:jnlpol:v:2021:y:2021:i:4:id:1324:p:435-456
    DOI: 10.18267/j.polek.1324
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    References listed on IDEAS

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    1. Alvarez-Cuadrado, Francisco & Long, Ngo & Poschke, Markus, 2017. "Capital-labor substitution, structural change and growth," Theoretical Economics, Econometric Society, vol. 12(3), September.
    2. Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
    3. Young, Andrew T., 2013. "U.S. Elasticities Of Substitution And Factor Augmentation At The Industry Level," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 861-897, June.
    4. Sebastian Gechert & Thomas Havranek & Zuzana Irsova & Dominika Kolcunova, 2019. "Death to the Cobb-Douglas Production Function," FMM Working Paper 51-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    5. Gechert, Sebastian & Havranek, Tomas & Irsova, Zuzana & Kolcunova, Dominika, 2019. "Death to the Cobb-Douglas Production Function? A Quantitative Survey of the Capital-Labor Substitution Elasticity," EconStor Preprints 203136, ZBW - Leibniz Information Centre for Economics.
    6. Berthold Herrendorf & Christopher Herrington & Ákos Valentinyi, 2015. "Sectoral Technology and Structural Transformation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 104-133, October.
    7. Antràs Pol, 2004. "Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-36, April.
    8. Balistreri, Edward J. & McDaniel, Christine A. & Wong, Eina Vivian, 2003. "An estimation of US industry-level capital-labor substitution elasticities: support for Cobb-Douglas," The North American Journal of Economics and Finance, Elsevier, vol. 14(3), pages 343-356, December.
    9. repec:dgr:rugggd:gd-103 is not listed on IDEAS
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    More about this item

    Keywords

    elasticity of substitution; capital-labour substitution; Czech Republic; manufacturing sector; technological change;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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