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Econometric estimation of capital-labor substitution elasticities for Ukrainian CGE model

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  • M. Chepeliev

Abstract

The paper presents econometric estimation of the capital-labor substitution elasticities for 10 economic activities based on the 2003-2009 data. Elasticities are estimated in the context of computable general equilibrium methodology, particularly, based on the constant elasticity of substitution production functions and cost minimization assumptions. Choice of methods and approaches to elasticities estimation is based on the literature review. Thus paper considers issues of minimum statistical data amount requirements needed to obtain reliable estimates, choice of functional forms to be used for approximation and specification of economic indicators to represent variables of production functions. According to the received estimates, values of Ukrainian capital-labor substitution elasticities are rather low (0.13-0.82). At the same time, service industries are characterized by lower elasticity values, compared to the real sector of Ukrainian economy, which can be explained by the fact that services have higher intensity of labor employment. Despite the availability of relatively small amount of historical data and some methodological aspects, obtained estimates call into question the appropriateness of the utilization of certain production functions for modelling the investigated processes. In particular, this includes the case of Cobb-Douglas production functions that have unitary elasticity of substitution. In general, given the characteristics of CGE modelling approach, the obtained elasticity's point estimates should be used as initial values of exogenous parameters, which should be reconsidered and changed during the sensitivity analysis and verification of results reliability.

Suggested Citation

  • M. Chepeliev, 2015. "Econometric estimation of capital-labor substitution elasticities for Ukrainian CGE model," Economy and Forecasting, Valeriy Heyets, issue 2, pages 33-46.
  • Handle: RePEc:eip:journl:y:2015:i:2:p:33-46
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    File URL: http://eip.org.ua/docs/EP_15_2_33_uk.pdf
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    References listed on IDEAS

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    1. Yazid Dissou & Lilia Karnizova & Qian Sun, 2015. "Industry-level Econometric Estimates of Energy-Capital-Labor Substitution with a Nested CES Production Function," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 107-121, March.
    2. Kemfert, Claudia & Welsch, Heinz, 2000. "Energy-Capital-Labor Substitution and the Economic Effects of CO2 Abatement: Evidence for Germany," Journal of Policy Modeling, Elsevier, vol. 22(6), pages 641-660, November.
    3. Eromenko, Igor, 2010. "Accession to the WTO. Computable General Equilibrium Analysis: the Case of Ukraine. Part I," MPRA Paper 67476, University Library of Munich, Germany.
    4. Ha, Soo Jung & Lange, Ian & Lecca, Patrizio & Turner, Karen, 2012. "Econometric estimation of nested production functions and testing in a computable general equilibrium analysis of economy-wide rebound effec ts," Stirling Economics Discussion Papers 2012-08, University of Stirling, Division of Economics.
    5. Koesler, Simon & Schymura, Michael, 2012. "Substitution elasticities in a CES production framework: An empirical analysis on the basis of non-linear least squares estimations," ZEW Discussion Papers 12-007, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Edward J. Balistreri & Christine A. McDaniel & Eina Vivian Wong, 2003. "An Estimation of U.S. Industry-Level Capital-Labor Substitution," Computational Economics 0303001, EconWPA.
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    Cited by:

    1. O. Diachuk, 2016. "Ukraine's contribution to the new Global agreement on climate change," Economy and Forecasting, Valeriy Heyets, issue 1, pages 129-141.

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