Politická ekonomie 2021, 69(4):435-456 | DOI: 10.18267/j.polek.1324

Elasticity of Substitution in the Manufacturing Sector in the Czech Republic

Cristina Procházková Ilinitchi ORCID...a, Anastasie Pustovalováa, David Procházka ORCID...a
a Prague University of Economics and Business, Czech Republic

The paper estimates the elasticity of substitution between capital and labour under biased technical change in the manufacturing sector in the Czech Republic. We use a dataset covering the period 1995-2019 and a 2-digit industry level, from NACE10 to NACE33. We find industry-level elasticities to be 0.19 and 0.94; therefore, labour and capital seem to be gross complements rather than substitutes across all manufacturing sectors. In the core industries of the Czech manufacturing sector, the elasticity is below average. Even if these core sectors have high and increasing labour costs (except NACE29, where the labour costs are below average), they do not replace labour with capital at a higher pace. This cannot be explained by the direction of technological bias because it is not capital-augmenting. On the other hand, our findings are in line with the literature, as most studies on transition countries report low estimates for the elasticity.

Keywords: elasticity of substitution, capital-labour substitution, Czech Republic, manufacturing sector, technological change
JEL classification: D24, E23, O14

Received: October 2, 2020; Revised: March 23, 2021; Accepted: June 3, 2021; Prepublished online: July 16, 2021; Published: September 11, 2021  Show citation

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Procházková Ilinitchi, C., Pustovalová, A., & Procházka, D. (2021). Elasticity of Substitution in the Manufacturing Sector in the Czech Republic. Politická ekonomie, 69(4), 435-456. doi: 10.18267/j.polek.1324
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