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A Skeptical Note on the Role of Constant Elasticity of Substitution in Labor Income Share Dynamics

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  • Paul, Saumik

    (Asian Development Bank Institute)

Abstract

The constancy of the elasticity of factor substitution (σ) makes its role as a driver of the labor income share exogenous. The constant elasticity of substitution (CES) production function has predominantly been used to support this causal relationship. We argue that (i) capital-labor ratio determines the value of σ, and (ii) both capital-labor ratio and σ vary over time. We use a variable elasticity of substitution (VES) production framework that allows both labor income share and σ to change over time. Statistically significant empirical support is provided using the Japanese industrial productivity data. This suggests that the CES model may not be an ideal choice to examine the factor income share dynamics.

Suggested Citation

  • Paul, Saumik, 2019. "A Skeptical Note on the Role of Constant Elasticity of Substitution in Labor Income Share Dynamics," ADBI Working Papers 944, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0944
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    References listed on IDEAS

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    Cited by:

    1. Alessandro Bellocchi & Giovanni Marin & Giuseppe Travaglini, 2021. "The Great Fall of Labor Share:Micro Determinants for EU Countries Over 2011-2019," Working Papers 2102, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2021.
    2. David M. Williams, 2021. "Pay and Productivity in Canada: Growing Together, Only Slower than Ever," International Productivity Monitor, Centre for the Study of Living Standards, vol. 40, pages 3-26, Spring.

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    More about this item

    Keywords

    substitution elasticity; labor income share; production function parameters;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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

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