Factor prices and labour productivity in the canadian manufacturing industries

Abstract

The primary objective of this paper is to get an estimate of the degree of substitutability and complementarity between factors of production. These measures would assist greatly in assessing the ultimate impact of energy and raw material prices on labour productivity, and hence on living standards. For this purpose, we have estimated the four factor share equations (capital, labour, energy and materials) for 22 manufacturing industries. For each industry, we have estimated the factor share equations with and without the assumption of homotheticity. The following are some of the important findings: 1) For all the manufacturing industries the assumption of homotheticity is rejected. This implies that factor proportions are affected by the level of output, independent of factor prices. 2) For majority of the industries, with the exception of capital, all the own-price elasticities are below unity. Moreover, the energy and material price elasticities are quite small. 3) In general our results imply that energy is a good substitute for both capital and labour and a complement to materials. Even in the case of energy intensive manufacturing industries, only for the chemicals and chemical products industries, the substitution elasticity between energy and capital is negative and significant (complementarity).