Capital and Labor Substitution Elasticity Measure

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A Capital and Labor Substitution Elasticity Measure is an elasticity of substitution measure for the sensitivity of the changes in cost of capital in response to a (one percent) cost of labor change (with all other factors held as equal).



References

2018

  • (Cuadrado et al., 2018) ⇒ Francisco Alvarez-Cuadrado, Ngo Van Long, and Markus Poschke. (2018). “Capital-labor Substitution, Structural Change and the Labor Income Share.” In: Journal of Economic Dynamics and Control 87
    • ABSTRACT: Recent work has documented declines in the labor income share in the United States and beyond. This paper documents that this decline was more pronounced in manufacturing than in services in the U.S. and in a broad set of other industrialized economies, and shows that a model with cross-sectoral differences in productivity growth and in the degree of capital-labor substitutability is consistent with these trends. We calibrate the model exploiting additional information on the pace of structural change from manufacturing to services, on which the model also has predictions. We then conduct a decomposition to establish the relative importance of several potential drivers of changes in factor income shares and structural change that have been proposed in the literature. This exercise reveals that differences in the degree of capital bias of technical change across sectors, combined with differences in substitution possibilities, are key determinants of the observed patterns.
    • QUOTE: Figure 3: The common component of the labor income share in 17 countries, 1970-2007 (displays fitted values from the regressions in equations (3) and (4).)

2014

2011

1961