U.S. elasticities of substitution and factor augmentation at the industry level

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Abstract

We provide industry-level estimates of the elasticity of substitution (σ) between capital and labor in the United States. We also estimate rates of factor augmentation. Aggregate estimates are produced. Our empirical model comes from the first-order conditions associated with a constant-elasticity of substitution production function. Our data represent 35 industries at roughly the 2-digit SIC level, 1960-2005. We find that aggregate U.S. σ is likely less than 0.620. σ is likely less than unity for a large majority of individual industries. Evidence also suggests that aggregate σ is less than the value-added share-weighted average of industry σ's. Aggregate technical change appears to be net labor-augmenting. This also appears to be true for the large majority of individual industries, but several industries may be characterized by net capital augmentation. When industry-level elasticity estimates are mapped to model sectors, the manufacturing sector σ is lower than that of services; the investment sector σ is lower than that of consumption.

Original languageEnglish
Pages (from-to)861-897
Number of pages37
JournalMacroeconomic Dynamics
Volume17
Issue number4
DOIs
StatePublished - Jun 2013

Keywords

  • Capital-Augmenting Technical Change
  • Corporate Taxation
  • Elasticity of Substitution
  • Factor-Augmenting Technical Change
  • Industry-Level Studies
  • Labor-Augmenting Technical Change

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