Long-Run Elasticity of Substitution

Actual approaches dealing with measuring supply side of the economy focus on concept of constant elasticity of substitution production function normalization. There is empirical evidence that aggregate production function is better characterized by a non-unitary elasticity of substitution. However, there are theoretical and empirical suggestions for dual elasticity of substitution (short-run and long-run or local and global) supported by the non-stationarity of the studied data as well. In the paper we show, how to estimate long-run elasticity of substitution using labour income co-integration estimation form. We use production function normalization where normalization values are expressing long-run dynamics to derive the estimation form. For estimation we use the U.S. data with huge range and find an indication that U.S. long-run production function is in Cobb-Douglas form.