Piketty's Elasticity of Substitution: A Critique

Semieniuk, Gregor

Abstract

This article examines Thomas Piketty’s explanation of a falling wage share. Piketty explains rising income inequality between labor and capital as a result of one parameter of a production function: an elasticity of substitution, σ, between labor and capital greater than one. This article reviews Piketty’s elasticity argument, which relies on a non-standard definition of capital. In light of the theory of land rent, it discusses why the non-standard capital definition is a measure of wealth, not capital and is problematic for estimating elasticities. It then presents simple long-run estimates of σ in constant elasticity of substitution functions for Piketty’s data as well as for a subset of his capital measure that comes closer to the standard definition of productive capital. The estimation results cast doubt on Piketty’s hypothesis that σ is greater than one.

Citation

Semieniuk, G. (2017). Piketty's Elasticity of Substitution: A Critique. Review of Political Economy, 29(1), 64-79. https://doi.org/10.1080/09538259.2016.1244916

• Journal Article Type: Article
• Acceptance Date: Sep 30, 2016
• Online Publication Date: Mar 1, 2017
• Publication Date: Mar 1, 2017
• Deposit Date: Dec 17, 2016
• Publicly Available Date: Dec 17, 2016
• Journal: Review of Political Economy
• Print ISSN: 0953-8259
• Electronic ISSN: 1465-3982
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• Volume: 29
• Issue: 1
• Pages: 64-79
• DOI: https://doi.org/10.1080/09538259.2016.1244916