Econometric Estimation of Capital-Labor Substitution Elasticities for Ukrainian CGE Model

Abstract

The paper presents econometric estimates of the capital-labor substitution elasticities in terms of 10 economic activities based on the 2003-2009 data. Elasticities are estimated in the context of computable general equilibrium (CGE) methodology, particularly, based on the constant elasticity of substitution in production functions and cost minimization assumptions.

Selection of methods and approaches to elasticities estimation is based on the literature review. Thus the paper considers several issues: minimum amount of statistical data, required to obtain reliable estimates; choice of functional forms; and specification of economic indicators for production functions variables representation.

According to the received estimates, values of Ukrainian capital-labor substitution elasticities are rather low – 0,13-0,82. Service industries are characterized by lower elasticity values, compared to the real sector of Ukrainian economy, which can be explained by the fact that services have higher labor intensity.

Despite the availability of relatively small amount of historical data and some methodological aspects, obtained estimates call into question the appropriateness of application of certain production functions for modeling the investigated processes. In particular, this includes the case of Cobb-Douglas production functions that have unitary elasticity of substitution.

Keywords: substitution elasticities, labor, capital, econometric estimation, computable general equilibrium model, Ukraine

JEL Classification: E23, C50, C68