On the elasticity of substitution between labor and ICT and IP capital and traditional capital

Abstract

I estimate a nested CES production function for a panel of European countries, distinguishing between information and communication technologies (ICT), intellectual property (IP) capital, and traditional capital. I allow for differences in the elasticities of substitution between labor, an aggregate of ICT and IP capital, and traditional capital. Results indicate that ICT and IP together are gross substitutes for labor, whereas traditional capital is a gross complement. Rapid technological progress and capital accumulation in ICT and IP capital largely explain the decline in labor income share. The imputed labor-aggregate capital elasticity of substitution is below 1 but increases over time.