Econometric Studies of Labor-Labor Substitution and Their Implications for Policy

Abstract

A critical synthesis of the rapidly growing literature on substitution among labor force aggregates is presented. Despite the large number of studies now available, the only firm conclusions are: (1) Physical and human capital are complements and are jointly substitutable with raw labor. This has implications for policies that subsidize the wage costs of low-wage workers. (2) Young workers' own-wage elasticity of demand exceeds unity, but the degree to which they are substitutes for older workers is unclear. The paper suggests that future research should concentrate on substitution among workers disaggregated by age, education, or sex rather than by the blue-collar-white-collar distinction used in most work and that has little use in policy analysis.

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