Cross-Section Production Functions and the Elasticity of Substitution in American Manufacturing Industry

Abstract

V = y[8 K-P + (I -)L-P] P ( () where V, K, L are value added per man year, capital, and man-years of labor time and y, 8, p are the efficiency, distribution, and substitution parameters respectively. From (i) it may be shown that I/(i + p) is the elasticity of substitution and that it corresponds exactly to the regression coefficient (b) in the following logarithmic regression equation: log (V/L) = log a + b log W + u, (2) where W is the annual wage rate. The authors used international data from I9 countries and 24 ISIC three-digit industries to fit this regression. Their results were very good. The b's were significant in all cases; and in all but eight cases, the b's were significantly different from unity, mostly in the interval o < b < i. On the basis of these results and other tests, ACMS concluded that there is some evidence that the elasticity of substitution between capital and labor in manufacturing may typically be less than unity. There are weaker indications that in primary production this conclusion is reversed. 2