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The effects of globalization and technology on the elasticity of substitution

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  • Hector Sala

    () (Universitat Autònoma de Barcelona
    IZA)

  • Pedro Trivín

    () (Universitat de Girona)

Abstract

The elasticity of substitution between capital and labor ( $$\sigma$$ σ ) is usually considered a “deep parameter”. This paper shows, in contrast, that $$\sigma$$ σ is affected by both globalization and technology, and that different intensities in these drivers have different consequences for the OECD and the non-OECD economies. In the OECD, we find that the elasticity of substitution between capital and labor is below unity; that it increases along with the degree of globalization; but it decreases with the level of technology. Although results for the non-OECD area are more heterogeneous, we find that technology enhances the substitutability between capital and labor. We also find evidence of a non-significant impact of the capital-output ratio on the labor share irrespective of the degree of globalization (which would be consistent with an average aggregate Cobb–Douglas technology). Given the relevance of $$\sigma$$ σ for economic growth and the functional distribution of income, the intertwined linkage among globalization, technology and the elasticity of substitution should be taken into account in any policy makers’ objective function.

Suggested Citation

  • Hector Sala & Pedro Trivín, 2018. "The effects of globalization and technology on the elasticity of substitution," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 617-647, August.
  • Handle: RePEc:spr:weltar:v:154:y:2018:i:3:d:10.1007_s10290-018-0315-7
    DOI: 10.1007/s10290-018-0315-7
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    1. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.

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    More about this item

    Keywords

    Labor share; Capital-output ratio; Elasticity of substitution; Globalization; Technology;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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