A cross-country estimation of the elasticity of substitution between labor and capital in manufacturing industries

Abstract

This paper presents a simple methodology to estimate the elasticity of substitution between labor and capital for firms operating in perfectly competitive factor markets with constant-elasticity-of-substitution technologies. It is applied to a cross-country sample of 28 3-digit ISIC manufacturing industries. The econometric procedure relies on measures of sectorial capital stock, that are estimated for 34 countries in 1990. Unlike previous studies, the estimates are compatible with international technology differences. The results reveal that in most industries she elasticity of substitution is close to one. However, the null hypothesis of Cobb-Douglas production functions is in general rejected.