The micro elasticity of substitution and non‐neutral technology

Abstract

Abstract This article provides evidence on the micro capital‐labor elasticity of substitution and the bias of technology. Using data on US manufacturing plants, I find several facts inconsistent with a Cobb‐Douglas production function, including large, persistent variation in capital shares. I then estimate the elasticity using variation in local wages, and several instruments for them, for identification. Estimates of the substitution elasticity using all plants range between 0.3 and 0.5, with similar estimates across industries. I use these elasticity estimates to measure labor augmenting productivity, and find that labor augmenting productivity is highly persistent, and correlated with exports, size, and growth.