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  5. The Elasticity of Aggregate Output with Respect to Capital and Labor

The Elasticity of Aggregate Output with Respect to Capital and Labor

  • Dietrich Vollrath
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

It is often assumed that the elasticity of GDP with respect to capital is one-third, but this assumes zero markups and an aggregate production function. I estimate the elasticity allowing markups to vary by industry and with a rich input-output structure. Assumptions about capital costs provide bounds on the elasticity. In the U.S. from 1948–1995 the capital elasticity was in the range 0.19–0.32 and this shifted to 0.24-0.37 by 1996-2018. Excluding housing or de-capitalizing intellectual property lowers those bounds to as low as 0.11–0.26. Based on these elasticities, common estimates of total factor productivity growth represent a lower bound.

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