# № 2015/2

**Forecasting methods and models
***CHEPELIEV M. *^{1}

^{1}Institute for Economics and Forecasting, NAS of Ukraine

Econometric estimation of capital-labor substitution elasticities for Ukrainian CGE model

## ABSTRACT ▼

*The paper presents econometric estimation of the capital-labor substitution elasticities for 10 economic activities based on the 2003-2009 data. Elasticities are estimated in the context of computable general equilibrium methodology, particularly, based on the constant elasticity of substitution production functions and cost minimization assumptions. *

Choice of methods and approaches to elasticities estimation is based on the literature review. Thus paper considers issues of minimum statistical data amount requirements needed to obtain reliable estimates, choice of functional forms to be used for approximation and specification of economic indicators to represent variables of production functions.

According to the received estimates, values of Ukrainian capital-labor substitution elasticities are rather low (0.13-0.82). At the same time, service industries are characterized by lower elasticity values, compared to the real sector of Ukrainian economy, which can be explained by the fact that services have higher intensity of labor employment.

Despite the availability of relatively small amount of historical data and some methodological aspects, obtained estimates call into question the appropriateness of the utilization of certain production functions for modelling the investigated processes. In particular, this includes the case of Cobb-Douglas production functions that have unitary elasticity of substitution.

In general, given the characteristics of CGE modelling approach, the obtained elasticity’s point estimates should be used as initial values of exogenous parameters, which should be reconsidered and changed during the sensitivity analysis and verification of results reliability.

Keywords:* substitution elasticities, labor, capital, econometric estimation, computable general equilibrium model, Ukraine*

JEL: E23, C50, C68

Article in English (pp. 33 - 46) | Download | Downloads :125 |

Article in Ukrainian (pp. 33 - 46) | Download | Downloads :144 |

## REFERENCES ▼

1. Taylor, L., von Arnim, R. (2006). Computable General Equilibrium Models of Trade Liberalization: The Doha Debate. Retrieved from http://62.58.77.233/sn2/training%20docs/Lecture%20Missaglia/Lecture%20Missaglia_Taylor%20CGE%20Models%20of%20Tarde%20Liberalization%20Doha%20Debate.pdf

2. Dissou, Y., Karnizova, L., Sun, Q. (2012). Industry-level Econometric Estimates of Energy-capital-labour Substitution with a Nested CES Production Function. University of Ottawa, Working Paper, 1214E. Retrieved from http://sciencessociales.uottawa.ca/sites/default/files/public/eco/1214e.pdf

3. Fragiadakis, A., Paroussos, L., Kouvaritakis, N., Capros, P. (2012). A Multi-Country Econometric Estimation of the Constant Elasticity of Substitution. WIOD Conference. Retrieved from http://www.wiod.org/conferences/groningen/Paper_Fragiadakis_et_al.pdf

4. Koesler, S., Schymura, M. (2012). Substitution Elasticities in a CES Production Framework. An Empirical Analysis on the Basis of Non-Linear Least Squares Estimations. ZEW – Centre for European Economic Research Discussion Paper, 12-007. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2014655

5. Lucas, R. (1976). Econometric policy evaluation: A critique Carnegie-Rochester Conference Series on Public Policy 1 (1). Retrieved from http://pareto.uab.es/mcreel/reading_course_2006_2007/lucas1976.pdf

6. Pavel, F., Burakovsky, I., Selitska, N., Movchan, V. (2004). Economic Impact of Ukraine’s WTO Accession: First Results from a Computable General Equilibrium. Institute for Economic Research and Policy Consulting, Working Paper, 30. Retrieved from http://www.ier.com.ua/files/publications/WP/2004/WP_30_eng.pdf

7. Eromenko, I. (2010). Accession to the WTO: Part II – Computable General Equilibrium Analysis: The Case of Ukraine. Ventus Publishing ApS. Retrieved from http://library.ku.ac.ke/wp-content/plugins/download-monitor/download.php?id=135

8. Implementation of energy strategic planning into the state management system of social and economic development. Scientific report (2012). Institute for economics and forecasting, NAS of Ukraine. Kyiv, pp. 84-106 [in Ukrainian].

9. Turner, K., Lange, I., Lecca, P., Ha, S. J. (2012). Econometric estimation of nested production functions and testing in a computable general equilibrium analysis of economy-wide rebound effects. Stirling Economics Discussion Paper, 07. doi:

https://doi.org/10.2139/ssrn.2054122
10. Okagawa, A., Ban, K. (2008). Estimation of substitution elasticities for CGE models. Discussion Paper 08-16. Retrieved from http://www2.econ.osaka-u.ac.jp/library/global/dp/0816.pdf

11. Werf van der, E. (2007). Production functions for climate policy modeling: an empirical analysis. Climate change modeling and policy. doi:

https://doi.org/10.2139/ssrn.983034
12. Balistreri, E. J., McDaniel, C. A., Wong, E. V. (2002). An estimation of U.S. industry-level capital-labor elasticities: Cobb-Douglas as reasonable starting point? Retrieved from http://econmodels.com/upload7282/5b64cdcaeeae6c312ce74e75eb19e2ed.pdf

13. Kemfert, C., Welsch, H. (1998). Energy-Capital-Labor Substitution and the Economic Effects of CO2 Abatement: Evidence for Germany. Retrieved from http://www.feem.it/userfiles/attach/Publication/NDL1998/NDL1998-076.pdf

14. Shumska, S.S. (2007). The tool of production function in the development of Ukraine's economy. Ekon. prognozuvannâ – Economy and Forecasting, 4, 104-123 [in Ukrainian].

15. State statistics service of Ukraine Demographic and social statistics (2015). Retrieved from http://ukrstat.gov.ua/

16. State statistics service of Ukraine. Labor in Ukraine in 2010. Kyiv, 2011 [in Ukrainian].

17. Directive on the number of employees statistics. Approved by the State statistics service of Ukraine order of 28.09.2005 No. 286. Retrieved from http://zakon.nau.ua/doc/?uid=1092.1470.3&nobreak=1 [in Ukrainian].

18. Statistical yearbook of Ukraine 2010 (2011). State statistics service of Ukraine. Kyiv, 2011 [in Ukrainian].