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The Substitution Elasticity, Factor Shares, Long-Run Growth, and the Low-Frequency Panel Model

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  • Robert S. Chirinko
  • Debdulal Mallick

Abstract

The value of the elasticity of substitution between labor and capital (ó) is a “crucial” assumption in understanding the secular decline in the labor share of income and long-run growth. This paper develops and implements a new strategy for estimating this crucial parameter by combining a low-pass filter with panel data to identify the low-frequency/long-run relations appropriate to production function estimation. Using spectral analysis, we assess the extent to which our choices of the critical periodicity and window defining the low-pass filter are successful in emphasizing long-run variation. The empirical results are based on the comprehensive panel industry dataset constructed by Dale Jorgenson and his research associates. Our preferred estimate of ó is 0.40. We document that standard estimation methods, which do not filter-out transitory variation, generate downwardly biased estimates. As high frequency variation is introduced into the model variables, ó declines by 40% to 70% relative to the benchmark value. Despite correcting for this bias, our preferred estimate is substantially below the Cobb-Douglas assumption of ó = 1, and thus implies that the secular decline in the labor share of income cannot be explained by secular increases in the capital/income ratio or secular decreases in the relative price of investment or capital taxation.

Suggested Citation

  • Robert S. Chirinko & Debdulal Mallick, 2014. "The Substitution Elasticity, Factor Shares, Long-Run Growth, and the Low-Frequency Panel Model," CESifo Working Paper Series 4895, CESifo.
  • Handle: RePEc:ces:ceswps:_4895
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    1. George Sorg-Langhans & Clemens Struck & Adnan Velic, 2017. "On the Factor Content of Trade," Trinity Economics Papers tep0817, Trinity College Dublin, Department of Economics, revised Jan 2018.
    2. Robert Z. Lawrence, 2015. "Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account," NBER Working Papers 21296, National Bureau of Economic Research, Inc.
    3. Sharon Belenzon & Ulya Tsolmon, 2016. "Market frictions and the competitive advantage of internal labor markets," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1280-1303, July.
    4. Dilip Mookherjee & Debraj Ray, . "Growth, Automation and the Long-Run Share of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    5. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "Balanced Growth Despite Uzawa," American Economic Review, American Economic Association, vol. 107(4), pages 1293-1312, April.
    6. Szomolányi, Karol & Lukáčik, Martin & Lukáčiková, Adriana, 2017. "Long-Run Elasticity of the Substitution in the Slovak Economy," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2017), Dubrovnik, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Dubrovnik, Croatia, 7-9 September 2017, pages 228-232, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    7. Brueckner, Markus, 2017. "Rent extraction by capitalists," European Journal of Political Economy, Elsevier, vol. 50(C), pages 157-170.
    8. Mallick, Debdulal, 2015. "Elusive Relationship between Business-cycle Volatility and Long-run Growth," MPRA Paper 64502, University Library of Munich, Germany.
    9. Milić Milovanović, 2015. "Thomas Piketty’s Capitalism Revisited," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(5), pages 663-677, December.
    10. Dilip Mookherjee & Debraj Ray, . "Growth, Automation and the Long-Run Share of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    11. Clemens Struck & Adnan Velic, 2017. "To Augment Or Not To Augment? A Conjecture On Asymmetric Technical Change," Trinity Economics Papers tep0117, Trinity College Dublin, Department of Economics.
    12. Daron Acemoglu & James A. Robinson, 2015. "The Rise and Decline of General Laws of Capitalism," Journal of Economic Perspectives, American Economic Association, vol. 29(1), pages 3-28, Winter.
    13. Alexander Guschanski & Özlem Onaran, 2018. "Determinants of the Wage Share: A Cross-country Comparison Using Sectoral Data," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 19(02), pages 44-54, July.
    14. Obregon, Carlos, 2015. "Piketty is wrong," MPRA Paper 64593, University Library of Munich, Germany.
    15. repec:ces:ifofor:v:19:y:2018:i:2:p:44-54 is not listed on IDEAS
    16. Mello, Marcelo de Albuquerque e, 2017. "Another Look at Panel Estimates of the Elasticity of Substitution between Capital and Labor," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(2), November.

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    More about this item

    Keywords

    substitution elasticity; labor income share; long-run growth; low-pass filter; production function parameters;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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