Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/190260 
Authors: 
Year of Publication: 
2018
Series/Report no.: 
ADBI Working Paper No. 839
Publisher: 
Asian Development Bank Institute (ADBI), Tokyo
Abstract: 
The relationship between a declining labor income share and a falling relative price of capital requires capital and labor to be gross substitutes at the aggregate level (i.e., σ-Agg>1). We argue that this restriction can be relaxed if we distinguish labor by skills and identify differential capital-labor substitutability across skill groups. Using the Morishima elasticity of substitution in a three-factor nested-CES production function, we analytically estimate the elasticity of substitution parameters between capital and skilled labor (ρ) and between capital and unskilled labor (σ). We then derive the necessary conditions for a decline in the labor income share based on ρ and σ, which does not require σ-Agg to be greater than unity.
Subjects: 
substitution elasticity
labor income share
production function parameters
JEL: 
E21
E22
E25
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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