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Economic growth and factor substitution with elastic labor supply

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  • Gómez, Manuel A.

Abstract

We study the link between the elasticity of factor substitution and economic growth in the Ramsey–Cass–Koopmans model with elastic labor supply and normalized CES production. If the baseline value of capital per unit of effective labor is below its steady-state value, an increase in the elasticity of substitution generates a higher steady-state income, capital and consumption per capita. This is due to the combination of a positive efficiency effect of a higher elasticity of substitution and a positive distribution effect. However, the effect of a higher elasticity of substitution on these variables along the transition is ambiguous.

Suggested Citation

  • Gómez, Manuel A., 2018. "Economic growth and factor substitution with elastic labor supply," Mathematical Social Sciences, Elsevier, vol. 94(C), pages 49-57.
    • Handle: RePEc:eee:matsoc:v:94:y:2018:i:c:p:49-57
    DOI: 10.1016/j.mathsocsci.2018.05.003
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    References listed on IDEAS

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    1. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(4), pages 625-656, September.
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    7. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(1), pages 155-165, January.
    8. Rainer Klump, 2001. "Trade, money and employment in intertemporal optimizing models of growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 411-428.
    9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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