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Working Paper 003: Capital and Labor Substitution in Computable General Equilibrium Models

By Terrie Walmsley, Csilla Lakatos and Peter Minor
Publishing Date: March 2015

Abstract

The aim of this paper is to provide recommendations on how to model substitution possibilities within value added and between labor value added and services in light of recent improvements to the GTAP database that disaggregate labor into five occupational groups. In addition, we explore the substitutability of foreign and domestic labor. Selecting a set of elasticities of substitution is important for CGE modeling since the values selected will determine important micro and macro-economic results. On the micro, or production, side the ability of firms to substitute factors of production will impact a firm or sectors ability to adjust output in response to changes in demand or prices. At the macro level, the elasticities of substitution, will determine factor shares in national income.

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ImpactECON Working Paper 003:Capital and Labor Substitution in Computable General Equilibrium Models

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