No. 4

Jalava, Jukka, Matti Pohjola, Antti Ripatti and Jouko Vilmunen, Biased Technical Change and Capital-labour Substitution in Finland, 1902-2003 (March 2005)

The paper argues that a Cobb-Douglas specification of the Finnish aggregate production function cannot be rejected if a sufficiently long enough time period (100 years) is considered. It is, however, a misleading description of the production technology for shorter (3-5 decades) periods. Controlling for biased technical change, the elasticity of substitution is significantly below one, in the range 0.4-0.5 during 1945-2003. Given that similar results have been obtained for the US economy, the analysis shows that the value of the elasticity of substitution cannot be dependent on some specific structure of economic institutions but is likely to reflect more general aspects of technology and production.