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A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries

  • Sebastián Claro

    ()

    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

This paper presents a simple methodology to estimate the elasticity of substitution between labor and capital for firms operating in perfectly competitive markets with CRS production functions. It is applied in a cross-country sample to 28 3-digit ISIC manufacturing industries. The econometric procedure relies on measures of sectorial capital stock, that are estimated for a sample of more than 30 countries. Unlike older studies, the estimates are consistent with hicks-neutral cross-country technology differences. The results reveal that in most industries the elasticity of substitution is smaller than one, rejecting the null hypothesis of Cobb-Douglas production functions. The paper provides then an estimation of ¾LK at a level of aggregation extremely useful for research in the international trade literature.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 226.

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Date of creation: 2002
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Publication status: Published as "A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries", Cuadernos de Economía, Vol. 40, Nº 120, pp. 239-257, 2003.
Handle: RePEc:ioe:doctra:226
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  1. Vittorio Corbo & Patricio Meller, 1982. "The Substitution of Labor, Skill, and Capital: Its Implications for Trade and Employment," NBER Chapters, in: Trade and Employment in Developing Countries, Volume 2: Factor Supply and Substitution, pages 193-214 National Bureau of Economic Research, Inc.
  2. Berndt, Ernst R & Christensen, Laurits R, 1973. "The Internal Structure of Functional Relationships: Separability, Substitution and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 403-10, July.
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