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One for all? The capital-labour substitution elasticity in New Zealand

Adam Tipper
Statistics New Zealand
info@stats.govt.nz 

Abstract

This paper tests the assumption of a Cobb-Douglas production function (a unitary elasticity of substitution between capital and labour) for 20 of New Zealand’s industries using Statistics New Zealand’s industry-level productivity data. It also assesses how the Leontief production function (zero substitutability) may apply to New Zealand industries. The econometric estimates of the capital-labour substitution elasticity provide some evidence for the Cobb-Douglas assumption at sector and industry level in the long-run, but show the Leontief function is more appropriate in the short-run. These results facilitate interpretation of the industry-level productivity data, highlight the variation in substitutability across industries and sectors, and suggest existing official multifactor productivity estimates may be biased downwards but the impact is marginal.

Keywords

Capital-labour substitution; multifactor productivity; Cobb-Douglas; Leontief

JEL codes: D24; E23; O47

pdf icon. One for all? The capital-labour substitution elasticity in New Zealand (PDF, 325kb)

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