Economic Growth and the CES Production Function with Human Capital
Economics Bulletin, Volume 37, Issue 2, pages 930-951
23 Pages Posted: 3 Dec 2016 Last revised: 28 May 2017
Date Written: 2017
Employing a neoclassical growth model with a constant elasticity of substitution production function, we develop a comparative static and dynamic analysis of the effects of the elasticity of substitution between inputs on the steady state growth path, growth threshold, speed of convergence and savings rates. Unlike earlier studies along these lines, we incorporate human capital, along with physical capital and raw labor, as a third input in the production function. We prove that a higher elasticity of substitution between inputs can lead to a higher steady state level for income per effective unit of labor. To illustrate the quantitative significance of the elasticity of substitution, we consider two ways in which human capital enters the production function. Employing cross country data, we find estimates for the normalized CES production functions with human capital to be significantly below unity.
Keywords: Elasticity of Substitution, Human Capital, Economic Growth, Factor Shares, CES Production
JEL Classification: O41, O47, E24
Suggested Citation: Suggested Citation