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Elasticity of substitution between labor and capital: robust evidence from developed economies

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  • Jakub Mućk

Abstract

This paper provides estimates of the aggregate elasticity of substitution between labor and capital (σ) in developed economies. Our empirical strategy consists in estimating two- and three-equation supply-side systems which combine a normalized CES production function and first order conditions for factors of production. Using a panel of 12 advanced economies between 1980 and 2006, it is found that capital and labor are gross complements and σ is on average around 0.7. Moreover, we also document net labor-augmenting technical progress. Our main findings remain robust to various assumptions on time-varying factor-augmenting technical change. Furthermore, we replicate the benchmark results with two alternative datasets. To strengthen these findings a systematic evidence of capital-labor substitution is provided at the country level. Although substantial cross-country variation in σ can be found, a wide range of estimates confirms that labor and capital are gross complements and technical change is net labor-augmenting.

Suggested Citation

  • Jakub Mućk, 2017. "Elasticity of substitution between labor and capital: robust evidence from developed economies," NBP Working Papers 271, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:271
    Note: I would like to thank Jakub Growiec, Peter McAdam and Jan Hagemejer and seminar participants at the 4th annual conference of International Association of Applied Econometrics and the EcoMod 2017 annual conference for valuable comments and suggestions.
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    File URL: http://www.nbp.pl/publikacje/materialy_i_studia/271_en.pdf
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Poland: heading to middle-income stall?
      by Bruno Duarte in EUnomics on 2018-09-26 21:03:16
    2. How could this change?
      by Bruno Duarte in EUnomics on 2018-10-03 20:09:26

    Citations

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    Cited by:

    1. Jakub Growiec & Peter McAdam & Jakub Muck, 2018. "On the Optimal Labor Income Share," Working Papers 2018-031, Warsaw School of Economics, Collegium of Economic Analysis.

    More about this item

    Keywords

    normalized CES production function; elasticity of substitution between labor and capital; factor-augmenting technical change; factor shares;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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