Econometric Studies of Labor-Labor Substitution and Their Implications for Policy

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. University of Wisconsin Press andThe Board of Regents of the University of Wisconsin System are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Human Resources. ABSTRACTA critical synthesis of the rapidly growing literature on substitution among labor force aggregates is presented. Despite the large number of studies now available, the only firm conclusions are: (1) Physical and human capital are complements and are jointly substitutable with raw labor. This has implications for policies that subsidize the wage costs of low-wage workers.(2) Young workers' own-wage elasticity of demand exceeds unity, but the degree to which they are substitutes for older workers is unclear. The paper suggests that future research should concentrate on substitution among workers disaggregated by age, education, or sex rather than by the bluecollar-white-collar distinction used in most work and that has little use in policy analysis.There has simultaneously been a recognition by economists analyzing labor market policy that empirical estimates of elasticities of substitution are essential for predicting the effects of policy changes. Tax credits for employment, such as that contained in the 1977 tax revisions, which subsidize a greater fraction of employment costs of low-wage workers, affect the employment of types of labor and also investment demand depending upon how substitutable these factors are. The targeted tax credits in the 1978 tax revisions explicitly subsidize only the wages of certain labor force groups. Investment tax credits decrease labor demand, assuming capital and labor are substitutes, but their effects on demand for some types of labor may be positive if capital is complementary with them in production. The extent of displacement of adult labor induced by a reduced minimum wage for youth depends on the substitution between youth and adult labor. The effect of a rise in the payroll tax base, such as in 1979, depends on the substitutability of high-and low-wage labor (unless the increase is shifted back fully to workers). Finally, the effects of a training program that converts low-to high-skilled labor will depend on how substitutable these are in production, for their substitutability will determine the extent of the change in their relative wages in the new, posttraining equilibrium.' (Interestingly, Johnson [26] assumes that the partial elasticity of substitution of high-for low-skilled labor is at least one, while Baily and Tobin [3] assume it is less than one.)In this essay we present a summary of the empirical literature on skill substitution. As Hamermesh [22] did for time-series studies of labor demand, we organize the literature to indi...

Energy efficiency and exporting: Evidence from firm-level data

“…22 The results are available upon request. 23 Hamermesh and Grant (1979) and Maskus and Bohara (1985), among others, discuss why specifications based on cost functions may be preferred to those motivated by profit functions. Also, see Christensen and Greene (1976) and Morrison (1992).…”

Efficiency Gains from the Elimination of Global Restrictions on Labour Mobility

“…There does not seem to be consensus as to an approximate value for the labour-labour substitution elasticity, and this is reflected by the fact that there is a rather large range of variation in the elasticity estimates, from 0.14 to 7.5 (Hamermesh and Grant 1979). 8 The big differences in the elasticity estimates can be the result of major methodological differences, such as the choice of estimating a cost or a production function, the choice of functional forms, the choice of data (time-series versus cross-section), and the disaggregation of the labour force according to various criteria, among others.…”

Owning Up to Uncertainty in Macroeconomics

“…Letting i represent blue-collar labor, j white-collar labor, and k capital, they found with manufacturing data going back to 1929 that the degree of substitution of i and j for k is very far from being the same. Instead, white-collar labor is complementary with capital in the previous study, or at least far less substitutable for capital than blue-collar labor (Daniel Hamermesh and James Grant 1979). By contrast, Carmel Chiswick (1985) has found that the long-run elasticity of substitution of physical capital for each of the two levels of human capital is much higher (about 2.5) than between capital and a single labor aggregate (less than unity).…”