The effects of globalization and technology on the elasticity of substitution

Original Paper
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Abstract

The elasticity of substitution between capital and labor (\(\sigma\)) is usually considered a “deep parameter”. This paper shows, in contrast, that \(\sigma\) is affected by both globalization and technology, and that different intensities in these drivers have different consequences for the OECD and the non-OECD economies. In the OECD, we find that the elasticity of substitution between capital and labor is below unity; that it increases along with the degree of globalization; but it decreases with the level of technology. Although results for the non-OECD area are more heterogeneous, we find that technology enhances the substitutability between capital and labor. We also find evidence of a non-significant impact of the capital-output ratio on the labor share irrespective of the degree of globalization (which would be consistent with an average aggregate Cobb–Douglas technology). Given the relevance of \(\sigma\) for economic growth and the functional distribution of income, the intertwined linkage among globalization, technology and the elasticity of substitution should be taken into account in any policy makers’ objective function.

Keywords

Labor share Capital-output ratio Elasticity of substitution Globalization Technology 

JEL Classification

E25 F62 E22 O33 

Notes

Acknowledgements

We acknowledge helpful comments from three anonymous referees, which have led to significant improvements in the original version of this paper. Pedro Trivín acknowledges the warm hospitality received from the School of Economics and Finance of Queen Mary University of London, where the bulk of this work was developed. We are grateful to Ángel López, Matteo Fragetta, the participants in the XXIX Italian Conference of Labor Economics, the XI Spanish Conference of Labor Economics, the 39th SAEe, and the Economics Seminars at Ryerson University. We are also grateful to the Spanish Ministry of Economy and Competitiveness for financial support through Grant ECO2016-75623-R.

Supplementary material

10290_2018_315_MOESM1_ESM.pdf (278 kb)
Supplementary material 1 (pdf 277 KB)

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Copyright information

© Kiel Institute 2018

Authors and Affiliations

  1. 1.Departament d’Economia AplicadaUniversitat Autònoma de BarcelonaBellaterraSpain
  2. 2.IZABonnGermany
  3. 3.Departament d’EconomiaUniversitat de GironaGironaSpain

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