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Factor substitution and labor market friction in the United States: 1948–2010

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  • Mingming Jiang
  • John Shideler
  • Yun Wang

Abstract

We re-estimate the capital-labor elasticity of substitution and the biased factor-augmenting technological progress using a system approach for the aggregate U.S. economy from 1948 to 2010. Due to (i) the significant impacts of labor market dynamics on economic growth and (ii) the fundamental tension between the short-run data that are available and the long-run parameter that is required in the estimation process, we incorporate labor market friction into a supply-side system to re-estimate these important growth parameters and to explore their sensitivity to the incorporation of labor market friction. Our estimation obtains a significantly smaller-than-unity elasticity of substitution. This result is consistent with labor input measured along the extensive and intensive margin, and in both competitive and imperfect labor markets. Technological progress tends to be purely labor-augmenting, with the average growth rate around 2% per year. These findings are robust to alternatively constructed data sets and different estimation strategies.

Suggested Citation

  • Mingming Jiang & John Shideler & Yun Wang, 2019. "Factor substitution and labor market friction in the United States: 1948–2010," Applied Economics, Taylor & Francis Journals, vol. 51(17), pages 1828-1840, April.
  • Handle: RePEc:taf:applec:v:51:y:2019:i:17:p:1828-1840
    DOI: 10.1080/00036846.2018.1529397
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    Cited by:

    1. Ziesemer, Thomas, 2020. "Semi-endogenous growth models with domestic and foreign private and public R&D linked to VECMs with evidence for five countries," MERIT Working Papers 2020-013, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    2. Kerstin Hotte & Melline Somers & Angelos Theodorakopoulos, 2022. "Technology and jobs: A systematic literature review," Papers 2204.01296, arXiv.org.

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