This paper tests the assumption of a Cobb-Douglas production function (a unitary elasticity of substitution between capital and labour) for 20 of New Zealand’s industries, using Statistics New Zealand’s industry-level productivity data. It also assesses how the Leontief production function (zero substitutability) may apply to New Zealand industries.
The econometric estimates of the capital-labour substitution elasticity provide some evidence for the Cobb-Douglas assumption, at former measured sector and industry level in the long run, but show the Leontief function is more appropriate in the short run.
These results facilitate interpretation of the industry-level productivity data, and highlight the variation in substitutability across industries and sectors.