Econometric estimation of capital-labor substitution elasticities for Ukrainian CGE model

Maksym Chepeliev ()

Economy and Forecasting, 2015, issue 2, 33-46

Abstract: The paper presents econometric estimation of the capital-labor substitution elasticities for 10 economic activities based on the 2003-2009 data. Elasticities are estimated in the context of computable general equilibrium methodology, particularly, based on the constant elasticity of substitution production functions and cost minimization assumptions. Choice of methods and approaches to elasticities estimation is based on the literature review. Thus paper considers issues of minimum statistical data amount requirements needed to obtain reliable estimates, choice of functional forms to be used for approximation and specification of economic indicators to represent variables of production functions. According to the received estimates, values of Ukrainian capital-labor substitution elasticities are rather low (0.13-0.82). At the same time, service industries are characterized by lower elasticity values, compared to the real sector of Ukrainian economy, which can be explained by the fact that services have higher intensity of labor employment. Despite the availability of relatively small amount of historical data and some methodological aspects, obtained estimates call into question the appropriateness of the utilization of certain production functions for modelling the investigated processes. In particular, this includes the case of Cobb-Douglas production functions that have unitary elasticity of substitution. In general, given the characteristics of CGE modelling approach, the obtained elasticity's point estimates should be used as initial values of exogenous parameters, which should be reconsidered and changed during the sensitivity analysis and verification of results reliability.

Date: 2015
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