Econometrica: Aug, 1969, Volume 37, Issue 3

Capital-Labor Substitution in Manufacturing in Underdeveloped Countries

https://doi.org/0012-9682(196908)37:3<528:CSIMIU>2.0.CO;2-X
p. 528-537

Christopher K. Clague

This paper gives estimates of the elasticity of substitution between capital and labor in eleven manufacturing industries. The elasticities are calculated from capital-labor ratios and factor prices (wage rates, machinery prices, and interest rates) in two countries--the United States and Peru. The distinguishing feature of this study is that capital is measured directly (starting from book value of fixed assets) instead of being inferred from the nonlabor share of value added. The resulting elasticity estimates are strikingly low.