Intl Conference on Economics, Finance & Business, Rome

ELASTICITY OF SUBSTITUTION BETWEEN CAPITAL AND LABOUR

KAROL SZOMOLÁNYI, MARTIN LUKÁČIK, ADRIANA LUKÁČIKOVÁ

Abstract:

Using the Penn World Tables data, the research estimates an econometric specification of capital and labour demand functions to estimate the elasticity of their substitution in various world economies. As the corresponding literature recommends, a frequency filter adjusts the data to filter out the cyclic influences. Panel data are used for further estimations. The first is estimating the global value of the elasticity of input substitution. According to the results, the estimated elasticity value is lower than 1, contrary to the often-used assumption of the Cobb-Douglas production function form. In further estimations, the data sample is split according to the economies' economic development, growth, and openness. The result is a link between the values ​​of the elasticity of substitution between capital and labour and economic growth, economic development, and the degree of openness. The result confirms current theoretical research.

Keywords: frequency filter, panel data, development, openness, economic growth

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