US Elasticities of Substitution and Factor-Augmentation at the Industry Level

We provide industry-level estimates of the elasticity of substitution (σ) between capital and labor in the US economy. We also estimate rates of factor-augmentation. Aggregate estimates are produced using the same data. Our empirical model comes from the first-order conditions associated with a CES production function. Our data represents 35 industries at roughly the 2-digit SIC level from 1960 to 2005 and covers the entire US economy. We find that aggregate US σ is less than unity and likely less than 0.620. The same is likely true for the large majority of individual industries. The evidence also suggests that aggregate σ is less than the value-added share-weighted average of industry σs. Technical change in the aggregate appears to be net labor-augmenting. Although this also appears to be true for the large majority of individual industries, several industries may be characterized by net capital-augmentation. Mapping our industry-level elasticity estimates to model sectors, the substitution elasticity for the manufacturing sector is lower than that of the services sector; the elasticity of the investment sector is lower than that of the consumption sector