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Education Briefing: The role of capital-labour substitution in economic growth

  • Debdulal Mallick

Purpose – Although the importance of the elasticity of substitution between capital and labour (s) has been recognized in many areas in economics, this parameter has not received enough attention in economic growth. The purpose of this paper is to review the recent development in the importance of s in economic growth. Design/methodology/approach – This paper specifically reviews the possibility of perpetual growth and slowdown, and the asymptotic behaviour of the balanced growth path for different values of s. It also reviews the determinants of the aggregate s. Findings – Based on the empirical evidence that the value of s significantly departs from the Cobb-Douglas value of unity, the paper recommends employing the constant elasticity of substitution (CES) production function in both theoretical and empirical growth research. Originality/value – This paper offers a new perspective on the elasticity of substitution between capital and labour due to its evaluation of various factors, methods and approaches.

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Article provided by Emerald Group Publishing in its journal Indian Growth and Development Review.

Volume (Year): 5 (2012)
Issue (Month): 1 (April)
Pages: 89-101

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Handle: RePEc:eme:igdrpp:v:5:y:2012:i:1:p:89-101
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  1. Theodore Palivos & Giannis Karagiannis, 2007. "The elasticity of substitution as an engine of growth," Discussion Paper Series 2007_03, Department of Economics, University of Macedonia, revised Dec 2007.
  2. Irmen, Andreas, 2010. "Steady-State Growth and the Elasticity of Substitution," Working Papers 0496, University of Heidelberg, Department of Economics.
  3. Dennis R. Maki & Lindsay N. Meredith, 1987. "A Note on Unionization and the Elasticity of Substitution," Canadian Journal of Economics, Canadian Economics Association, vol. 20(4), pages 792-801, November.
  4. Claude Diebolt & Faustine Perrin, 2014. "Growth Theories," Working Papers 02-14, Association Française de Cliométrie (AFC).
  5. Mallick, Debdulal, 2010. "Capital-labor substitution and balanced growth," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1131-1142, December.
  6. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo Group Munich.
  7. Solow, Robert M., 2005. "Reflections on Growth Theory," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 0, pages 3-10 Elsevier.
  8. William Easterly & Stanley Fischer, 1994. "The Soviet Economic Decline: Historical and Republican Data," NBER Working Papers 4735, National Bureau of Economic Research, Inc.
  9. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(04), pages 625-656, September.
  10. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer, vol. 21(1), pages 155-165, 01.
  11. Blackorby, Charles & Russell, R Robert, 1989. "Will the Real Elasticity of Substitution Please Stand Up? (A Comparison of the Allen/Uzawa and Morishima Elasticities)," American Economic Review, American Economic Association, vol. 79(4), pages 882-88, September.
  12. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
  13. Kaz Miyagiwa & Chris Papageorgiou, 2007. "Endogenous Aggregate Elasticity of Substitution," Emory Economics 0707, Department of Economics, Emory University (Atlanta).
  14. Saam, Marianne, 2008. "Openness to trade as a determinant of the macroeconomic elasticity of substitution," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 691-702, June.
  15. 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.
  16. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 41-56, March.
  17. Blitzer, Charles R, 1970. "Elasticity of Substitution and the Retardation of Soviet Growth Rates," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 104-08, February.
  18. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
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