Micro Data and Macro Technology

Working Paper No. 20452 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 substi...

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Bibliographic Details
Published in:NBER Working Paper Series 2014-09, p.20452
Main Authors: Oberfield, Ezra, Raval, Devesh
Format: Article
Language:English
Subjects:
Bias
Censuses
Economic theory
Elasticity
Elasticity of demand
Estimates
Income
Industrial plants
Labor market
Manufacturing
Prices
Production functions
Statistical analysis
Technology
Time series
Value added
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Summary:Working Paper No. 20452 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.
ISSN:0898-2937
DOI:10.3386/w20452