Curvature Conditions and Substitution Pattern among Capital, Materials and Heterogeneous Labour

This study deals with the determinants of factor demand in 27 industries of the manufacturing sector during the period 1978 to 1990. Using a quadratic cost function, six production factors are distinguished: capital, energy, three types of labour and intermediate materials. A parametric test of the concavity of the cost function in prices is provided and price elasticities are compared when curvature conditions are imposed or not. The results show, firstly, that in general estimates do not appear very sensitive to imposing theoretical restrictions implied by optimising behaviour. Secondly, demand for unskilled labour is relatively elastic to wage increases compared to the higher skill levels. Third, the substitutability is stronger between unskilled and medium-skilled labour than any other pairs of inputs.

Falk, Martin and Bertrand Koebel (1999), Curvature Conditions and Substitution Pattern among Capital, Materials and Heterogeneous Labour, ZEW Discussion Paper No. 99-06, Mannheim.