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

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  • Sebastián Claro

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

Abstract

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.

Suggested Citation

  • Sebastián Claro, 2002. "A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries," Documentos de Trabajo 226, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:226
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    References listed on IDEAS

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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. Ernst R. Berndt & Laurits R. Christensen, 1973. "The Internal Structure of Functional Relationships: Separability, Substitution, and Aggregation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(3), pages 403-410.
    3. Jere Behrman, 1982. "Country and Sectoral Variations in Manufacturing Elasticities of Substitution between Capital and Labor," NBER Chapters, in: Trade and Employment in Developing Countries, Volume 2: Factor Supply and Substitution, pages 159-192, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Leon Bettendorf & Albert van der Horst, 2006. "Documentation of CORTAX," CPB Memorandum 161.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Avetisyan, Misak & Hertel, Thomas, 2021. "Impacts of trade facilitation on modal choice and international trade flows," Economics of Transportation, Elsevier, vol. 28(C).
    3. Sebastián Claro, 2003. "Tariffs, Technology and Global Integration," Documentos de Trabajo 240, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Antoszewski, Michal, 2017. "Panel estimation of sectoral substitution elasticities for CES production functions," MF Working Papers 28, Ministry of Finance in Poland.
    5. Don Fullerton & Garth Heutel, 2007. "Who bears the burden of a tax on carbon emissions in Japan?," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 8(4), pages 255-270, December.
    6. Marcos Minoru Hasegawa, 2010. "The Tax Policy in the Chilean Economy: a Regional Applied General Equilibrium Analysis," Documentos de Trabajo en Economia y Ciencia Regional 05, Universidad Catolica del Norte, Chile, Department of Economics, revised Dec 2010.
    7. Zachlod-Jelec, Magdalena & Boratynski, Jakub, 2016. "How large and uncertain are costs of 2030 GHG emissions reduction target for the European countries? Sensitivity analysis in a global CGE model," MF Working Papers 26, Ministry of Finance in Poland.
    8. Leon Bettendorf & Albert van der Horst, 2006. "Documentation of CORTAX," CPB Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Fullerton, Don & Heutel, Garth, 2007. "The general equilibrium incidence of environmental taxes," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 571-591, April.
    10. Sebastián Claro, 2005. "Understanding International Differences in Trade and Capital Market Integration," Documentos de Trabajo 285, Instituto de Economia. Pontificia Universidad Católica de Chile..
    11. Cristián Mardones Poblete, 2010. "Evaluando Reformas Tributarias en Chile con un Modelo CGE," Estudios de Economia, University of Chile, Department of Economics, vol. 37(2 Year 20), pages 243-284, December.
    12. Julia Hall & Grant Scobie, 2005. "Capital Shallowness: A Problem for New Zealand?," Treasury Working Paper Series 05/05, New Zealand Treasury.
    13. Sebastián Claro, 2004. "Vertical and Horizontal Dimensions of Trade Liberalization," Documentos de Trabajo 265, Instituto de Economia. Pontificia Universidad Católica de Chile..
    14. Cristián Mardones P., 2014. "Complementarity between flat tax and conditional cash transfers to improve the income distribution in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(3), pages 04-27, December.
    15. Wong, Tsz-Nga & Yip, Chong K., 2010. "Indeterminacy and the elasticity of substitution in one-sector models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 623-635, April.
    16. Mr. Christopher S Adam & Mr. Edward F Buffie, 2020. "The Minimum Wage Puzzle in Less Developed Countries: Reconciling Theory and Evidence," IMF Working Papers 2020/023, International Monetary Fund.
    17. Mardones D., Cristián, 2012. "Chile: building a computable general equilibrium model with an application to the Bío Bío region," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    18. López, Ramón & Islam, Asif, 2011. "Fiscal spending for economic growth in the presence of imperfect markets," CEPR Discussion Papers 8709, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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