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Micro Data and the Macro Elasticity of Substitution

  • Ezra Oberfield
  • Devesh Raval

We estimate the aggregate elasticity of substitution between capital and labor in the US manufacturing sector. We show that the aggregate elasticity of substitution can be expressed as a simple function of plant level structural parameters and sufficient statistics of the distribution of plant input cost shares. We then use plant level data from the Census of Manufactures to construct a local elasticity of substitution at various levels of aggregation. Our approach does not assume the existence of a stable aggregate production function, as we build up our estimate from the cross section of plants at a point in time. Accounting for substitution within and across plants, we find that the aggregate elasticity is substantially below unity at approximately 0.7. Lastly we assess the sources of the bias of aggregate technical change from 1987 to 1997. We find that the labor augmenting character of aggregate technical change is due almost exclusively to labor augmenting productivity growth at the plant level rather than relative growth in capital intensive plants.

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File URL: ftp://ftp2.census.gov/ces/wp/2012/CES-WP-12-05.pdf
File Function: First version, 2012
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 12-05.

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Length: 54 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:cen:wpaper:12-05
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  1. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2009. "Identifying the elasticity of substitution with biased technical change," Working Paper Series 1001, European Central Bank.
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