The effect of labor supply changes on output: empirical evidence from US industries

Akay, Gokhan H.; Dogan, Can

doi:10.1007/s11123-012-0290-2

Cited by 4 publications

(1 citation statement)

References 20 publications

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“…Theory and intuition provides little backing for a zero or negative elasticity of substitution between capital and labor, so it seems natural to discard such estimates. Previous researchers (most prominently, Ioannidis et al, 2017) have shown that such a censoring distorts inference 2003Behrman 1982Behrman (1972) Bartelsman and Beetsma (2003) Balistreri et al 2003Asher 1972Artus (1984) Apostolakis (1984) Antras (2004) Akay and Dogan (2013) Abed (1975) Notes: The figure shows a box plot of the estimates of the elasticity of substitution reported in individual studies. The box shows interquartile range (P25-P75) and the median highlighted.…”

Section: Publication Biasmentioning

confidence: 99%

Death to the Cobb-Douglas Production Function? A Meta-Analysis of the Capital-Labor Substitution Elasticity

Havránek¹,

Iršová²,

Gechert³

et al. 2019

Preprint

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We show that the large elasticity of substitution between capital and labor estimated in the literature on average, 0.9, can be explained by three factors: publication bias, use of aggregated data, and omission of the first-order condition for capital. The mean elasticity conditional on the absence of publication bias, disaggregated data, and inclusion of information from the first-order condition for capital is 0.3. To obtain this result, we collect 3,186 estimates of the elasticity reported in 121 studies, codify 71 variables that reflect the context in which researchers produce their estimates, and address model uncertainty by Bayesian and frequentist model averaging. We employ nonlinear techniques to correct for publication bias, which is responsible for at least half of the overall reduction in the mean elasticity from 0.9 to 0.3. Our findings also suggest that a failure to normalize the production function leads to a substantial upward bias in the estimated elasticity. The weight of evidence accumulated in the empirical literature emphatically rejects the Cobb-Douglas specification.

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