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Elasticity of Substitution Between Capital and Labor

The Elasticity of Substitution Between Capital and Labor is a key parameter in economics. It measures the ease with which one can substitute capital to replace workers, or substitute workers to replace capital, and maintain the same level of output. The Elasticity of Substitution Between Capital and Labor is a key component of models estimating the impact of monetary policy, it is a critical parameter to explain the decrease in the labor share of the value added in developed countries and over several important problems.

A very convenient value for the Elasticity of Substitution Between Capital and Labor is one. In this case, the production function takes the Cobb-Douglass form and the analysis of many problems is greatly simplified.

Recently, Gechert et al. (2021) have shown that the value of the Elasticity of Substitution Between Capital and Labor is probably equal to 0.3, rejecting the Cobb-Douglass specification. Gechert et al. (2021) also find strong evidence of publication bias in the literature estimating the Elasticity of Substitution Between Capital and Labor: the mean of the published estimates is equal to 0.9 and cannot be statistically distinguished from one.