The Substitution Elasticity, Factor Shares, and the Low-Frequency Panel Model
American Economic Journal: Macroeconomics
vol. 9,
no. 4, October 2017
(pp. 225-53)
Abstract
The value of the elasticity of substitution between labor and capital (σ) is a crucial assumption in understanding the secular decline in the labor share of income. This paper develops and implements a new strategy for estimating this crucial parameter by combining a low-pass filter with panel data to identify the low-frequency/long-run relations appropriate to production function estimation. Standard estimation methods, which do not filter out transitory variation, generate downwardly biased estimates of 40 percent to 70 percent relative to the benchmark value. Despite correcting for this bias, our preferred estimate of 0.40 is substantially below the Cobb-Douglas assumption of σ = 1.Citation
Chirinko, Robert S., and Debdulal Mallick. 2017. "The Substitution Elasticity, Factor Shares, and the Low-Frequency Panel Model." American Economic Journal: Macroeconomics, 9 (4): 225-53. DOI: 10.1257/mac.20140302Additional Materials
JEL Classification
- C51 Model Construction and Estimation
- E22 Investment; Capital; Intangible Capital; Capacity
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E25 Aggregate Factor Income Distribution
- O41 One, Two, and Multisector Growth Models
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