Estimating The Elasticity Of Factor Substitution With Biased Technical Change In China

With China’s accession to the WTO, China’s factor mobility is more frequent and technological innovation capability has rapidly increased. Through scientific and technological innovation, and education and training, it has stimulated the economic growth, promoted industrial upgrading and absorbed the majority of the surplus labor. At the same time, the direction of technical progress is undergoing profound changes. With the development of China’s economy, Chinese labor-factor income share gradually decline, which has caused widespread concern. Therefore, it has a strong practical significance that we explore the relationship between elasticity of factor substitution, biased technological progress and factor income share.Both capital-labor elasticity of substitution and biased technical progress are not only the key parameters of the economy, but also important variables in macroeconomic calibration models. Previous studies have concluded that this joint identification of two parameters cannot be made at the same time. This paper will challenge this "impossibility theorem". This article will take advantage of a new estimation theory and method, which is the normalized supply side system approach, to solve the above problems. Firstly, this paper will review the existing literatures on the elasticity of substitution with biased technical progress. Secondly, we will analyze the theoretical development of the CES production function. Thirdly, with the normalized CES production function framework; we will use supply-side system estimation approach to establish a system model including the elasticity of substitution with biased technical progress and system estimation method to estimated value of the parameters. This article find that after the reform and opening up, China’s factor substitution elasticity is significantly less than1and technological progress is capital-biased, which provides a new way for the economic development in China. The empirical studies about biased technical progress also contribute to the understanding of the change of factor income share. Calibration is the mainstream method in modern macroeconomics. It is one of critical procedures to determine the model parameters in calibration model. So the parameter estimation of this paper also provides a solid foundation for calibration model. The above study also provides a sample of estimating the elasticity of substitution from a developing country.In the last part, according to the research direction at home and abroad on the normalized CES production function, this article will propose a number of new fields of application.