Economic Growth and the CES Production Function with Human Capital

Employing a neoclassical growth model with a constant elasticity of substitution production function, we develop a comparative static and dynamic analysis of the effects of the elasticity of substitution between inputs on the steady state growth path, growth threshold, speed of convergence and savings rates. Unlike earlier studies along these lines, we incorporate human capital, along with physical capital and raw labor, as a third input in the production function. We prove that a higher elasticity of substitution between inputs can lead to a higher steady state level for income per effective unit of labor. To illustrate the quantitative significance of the elasticity of substitution, we consider two ways in which human capital enters the production function. Employing cross country data, we find estimates for the normalized CES production functions with human capital to be significantly below unity. We thank R. Robert Russell for his advice throughout the progress of this paper. We also thank Jang-Ting Guo, Michael Bar, conference participants at the 2013 North American Productivity Workshop, and conference participants at the Society for Nonlinear Dynamics and Econometrics 21st Annual Symposium 2014 for their useful suggestions and comments. Citation: Gerald Daniels and Venoo Kakar, (2017) ''Economic Growth and the CES Production Function with Human Capital'', Economics Bulletin, Volume 37, Issue 2, pages 930-951 Contact: Gerald Daniels [email protected], Venoo Kakar [email protected]. Submitted: November 26, 2017. Published: May 04, 2017.