Factor Substitution and Factor Augmenting Technical Progress in the Us: A Normalized Supply-Side System Approach

Abstract

Using a normalized CES function with factor-augmenting technical progress, we estimate a supply-side system of the US economy from 1953 to 1998. Avoiding potential estimation biases that have occurred in earlier studies and putting a high emphasis on the consistency of the data set, required by the estimated system, we obtain robust results not only for the aggregate elasticity of substitution but also for the parameters of labor and capital augmenting technical change. We find that the elasticity of substitution is significantly below unity and that the growth rates of technical progress show an asymmetrical pattern where the growth of laboraugmenting technical progress is exponential, while that of capital is hyperbolic or logarithmic.

Keywords: Capital-labor substitution, technological change, factor shares, normalized CES function, supply-side system, United States

JEL Classification: C22, E23, E25, O30, O51