China's Regional Factor Substitution Elasticity and Economic Growth: Stochastic Frontier Production Function Analysis from a Perspective of Heterogeneous Labor

Abstract

This paper employs provincial panel data from 1996 to 2014 to construct regional stochastic frontier production function model, and extends the analysis of factor substitution elasticity from the perspective of labor heterogeneity. And then it combines co-integration model and error correction model for the first time to reveal the effect of factor substitution constraints on economic growth from the perspectives of long-term equilibrium and short-term volatility, and further advance & deepen growth effect study of factor substitution elasticity.It shows that there are significant differences in the changes in substitution elasticity among the three major regions, but the growth effects of factor substitution elasticity are consistent mutually. Among them, the capital-labor substitution elasticity in the eastern region clearly has a growth threshold of 0.805; only the capital-labor substitution elasticity in the western region crosses the threshold value, it does not have significantly positive correlation with regional growth, thus supporting the De La Grandville hypothesis; the promotion roles of the increase in capital-skills complementarity among the three major regions in economic growth are not obvious, but the labor-skills substitution elasticity is manifested as a significant positive growth effect, although its growth coefficient is relatively small, still it shows that there are human capital dividends in these regions. It is worth noting that, different from the De La Grandville hypothesis that capital-labor substitution elasticity can promote economic growth in equilibrium growth path, when considering labor heterogeneity and technical inefficiency, China's regional growth is more supportive of the conclusion that the increase in labor-skills substitution elasticity can improve economic growth. This paper further lays foundation on screening regional growth potential transformation under new normal, and analyzing the rationality of factor matching & the feasibility of industrial structure adjustment.