Micro Data and the Macro Elasticity of Substitution

54 Pages Posted: 20 Mar 2012

See all articles by Ezra Oberfield

Ezra Oberfield

Princeton University

Devesh Raval

University of Chicago

Date Written: March 1, 2012


We estimate the aggregate elasticity of substitution between capital and labor in the US manufacturing sector. We show that the aggregate elasticity of substitution can be expressed as a simple function of plant level structural parameters and sufficient statistics of the distribution of plant input cost shares. We then use plant level data from the Census of Manufactures to construct a local elasticity of substitution at various levels of aggregation. Our approach does not assume the existence of a stable aggregate production function, as we build up our estimate from the cross section of plants at a point in time. Accounting for substitution within and across plants, we find that the aggregate elasticity is substantially below unity at approximately 0.7. Lastly we assess the sources of the bias of aggregate technical change from 1987 to 1997. We find that the labor augmenting character of aggregate technical change is due almost exclusively to labor augmenting productivity growth at the plant level rather than relative growth in capital intensive plants.

Keywords: Elasticity of Substitution, Aggregation, Bias of Technical Change

Suggested Citation

Oberfield, Ezra and Raval, Devesh, Micro Data and the Macro Elasticity of Substitution (March 1, 2012). US Census Bureau Center for Economic Studies Paper No. CES-WP-12-05, Available at SSRN: https://ssrn.com/abstract=2025927 or http://dx.doi.org/10.2139/ssrn.2025927

Ezra Oberfield (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Devesh Raval

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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