Working Paper: NBER ID: w20452
Authors: Ezra Oberfield; Devesh Raval
Abstract: We develop a framework to estimate the aggregate capital-labor elasticity of substitution by aggregating the actions of individual plants, and use it to assess the decline in labor's share of income in the US manufacturing sector. The aggregate elasticity reflects substitution within plants and reallocation across plants; the extent of heterogeneity in capital intensities determines their relative importance. We use micro data on the cross-section of plants to build up to the aggregate elasticity at a point in time. Our approach places no assumptions on the evolution of technology, so we can separately identify shifts in technology and changes in response to factor prices. We find that the aggregate elasticity for the US manufacturing sector has been stable since 1970 at about 0.7. Mechanisms that work solely through factor prices cannot account for the labor share's decline. Finally, the aggregate elasticity is substantially higher in less-developed countries.
Keywords: Capital-labor elasticity of substitution; Labor share; Manufacturing sector; Technology; Factor prices
JEL Codes: E10; E23; E25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital-labor elasticity of substitution (D24) | labor's share of income (E25) |
| changes in technology (O33) | labor's share of income (E25) |
| factor prices (F16) | labor's share of income (E25) |
| aggregate elasticity of substitution (E16) | labor's share of income (E25) |
| aggregate elasticity of substitution (higher in less-developed countries) (C43) | response of output per worker to changes in interest rates (E43) |