Joshua Wilde

Understanding how easily fixed factors can be substituted one for another in production is crucial in determining the impact fixed resources may have on future economic growth. If fixed factors (such as land, oil, coal, etc.) are difficult to substitute with nonfixed factors (labor, capital, education, etc.), then population growth may lead to larger reductions in income per capita than most modern macroeconomic models predict. This study attempts to quantify this substitutability by estimating a parameter of a macroeconomic production function—the elasticity of fixed factors with respect to non-fixed factors—in order to determine the effect of population size on overall economic performance.

I used three different datasets to estimate this parameter. First, I estimate the parameter using data on factor shares in preindustrial England from Clark (2007) to get an idea of what the substitutability was like in the past for an autarkic, relatively closed economy. Second, I estimate the elasticity using factor shares in a modern cross-section of countries. Finally, I estimate the model using factor shares in a modern panel data set, and test whether the elasticity is different for the developed world versus the developing world.
I find that the elasticity of substitution in preindustrial England was much smaller than currently thought, implying a larger negative effect of population size on economic development. In addition, I find evidence that the elasticity has risen over time for developed countries, but remains small for the developing world.

Contact Information:
Joshua Wilde, mailto:joshua_wilde@brown.edu, Brown University