Factor substitution, factor-augmenting technical progress, and trending factor shares: the Canadian evidence

Revised productivity accounts recently released by Statistics Canada are used to estimate a Klump-McAdam-Willman normalized CES supply-side system for the half-century 1961–2010. The model permits distinct rates of factor-augmenting technical change for capital and labour that distinguish between short-term versus long-term effects, as well as a non-unitary elasticity of substitution and timevarying factor shares. The advantage of the Canadian data for this purpose is that they provide a unified treatment of measurement issues that have had to be improvised in the US and European data used by previous researchers. In contrast to the previous US results, we find an elasticity of substitution not significantly less than unity, and an absence of capital-augmenting technical change in both the short and long run. Technical change is thus solely labour augmenting, consistent with Uzawa’s steady state growth theorem. The model also yields plausible TFP estimates, and successfully captures trends in factor shares that have been the subject of recent study in international data.