Application of Rate of Return to Scale and Elasticity of Factor Substitution to Determine the Job Creation Power of Investment

In this paper using the "rate of return to scale" and "elasticity of factor substitution" as two determinants of the job creation power of investment, I have firstly tried to provide a theoretical framework to explain this issue. Then I have empirically investigated and tested the role of " rate of return to scale" and "elasticity of factor substitution" in enhancing the job creation power of investment in Iran manufacturing sub-sectors. In this study, it is assumed that if the rate of return to scale is increasing and the elasticity of factor substitution is low, the positive effect of investment on job creation will be high. Based on this assumption, all the manufacturing sub-sectors have been catagorized. The labor demand function is also estimated for all manufacturing sub-sectors during 1970-2004 to calculate the direct effect of investment on employment. The results reveal that the manufacturing of textile, wearing apparel and leather product(code 32), manufacturing of food, beverage and tobacco products(code 31), manufacturing of machinery, equipment, and metal instruments and products (code 38), manufacturing of basic metals(code 37), manufacturing of paper, publishing and printing (code 34), manufacturing of wood and products of wood (code 33), manufacturing of chemical products (code 35), manufacturing of non- metallic mineral products (code 36) which have respectively the higher ranks have experienced the highest effect of investment on employment.