An Estimation of Capital-Labor Substitution Elasticity: a Case of Iran Manufacturing

A key parameter that determines the distribution impacts of a policy shift in General Equilibrium Models (GEM) is the elasticity of substitution between capital and labor. This parameter can be useful for researchers conducting simulation and sensitive analyses. Besides the importance of this parameter in applied modeling, its role is notable in the macroeconomic policy-making. In this study the long- run and short-run production factor elasticity of substitution in the aggregate level of Iran manufacturing during 1979-2005 has been investigated using Constant Elasticity Substitution (CES) production function. For this purpose, Error Correction Model (ECM) was used after performing D.F. unit root test and Peron`s structural change. Results showed that there is a weak substitution relation between capital and labor. Moreover, the long-run elasticity of substitution is greater than its short-run. Considering the value of this parameter, Cobb-Douglas form is specified to be the most appropriate for production function of Iran manufacturing.