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Policy Study
Estimating the Elasticity of Substitution between Labor and Capital in Korea: Implications for Labor Share

December 31, 2015

  • Author Daehee Jeong
  • Series No. Policy Study 2015-22
  • Language Korean
PDF
Policy Study
Estimating the Elasticity of Substitution between Labor and Capital in Korea: Implications for Labor Share

December 31, 2015

PDF
This paper studies the trend of labor share in Korea and tries to explain the trend in relation with factor prices. In order to investigate the issue, I estimate the substitution elasticity between labor and capital of a CES production function, which is used to decompose the effect of factor prices on the movement of the labor share. I find that Korea’s labor share has been on a downward trend for the past 30 years. Also, the trend is mainly driven by common within-industry decreasing trends of labor shares in most sectors, not by industry composition effect. The estimation results show that the elasticity of substitution is statistically significantly below one, and are robust to the change of specification and data processing. This implies that the decline of labor share in Korea is not driven by the change of factor prices, but by the direction of technological change, e.g., capital biased technological progress; the labor-augmenting technology growth has increased the demand for capital, resulting in a lower labor share. Therefore, it is desirable to consider a new policy tool to direct the productivity gains from the technology growth toward labor income, however policies to affect wage itself is not seemed to be promising.
 
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Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future

The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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