ANNOUNCEMENTS
The evolution of industries has relied, largely, on substitution of capital for labor. The traditional academic debate on substitution has revolved around capital and labor. This literature can be sub-divided in two categories- first that examines when capital and labor can be substituted, and second, studies the impact of capital and labor substitution on efficiency and output. However, different strands of substitution literature have evolved over time. One such strand is inclusion of energy into the analysis. The motivation for the same is- if energy and capital turned out to be substitutes, increasing energy price will facilitate capital accumulation. Otherwise, a complementary relationship implies rising energy prices will hamper capital accumulation.
This thesis is an attempt to answer the question- Does the technology used by Indian firms to replace labor, also replace energy? Or do firms need to choose between the two- one that saves labor; other that saves energy. This is done by estimating elasticity of substitution.
Using a trans-log cost function, Morishima Elasticity of Substitution has been estimated with ASI pooled cross-sectional data covering 1999-00 to 2014-15. The core result is Capital turns out to be substitute to Energy as well as Labor. The technology that has been employed to replace labor is also substituting energy.
The analysis has also been extended to include two applications- (i) categorizing states on basis of rate of growth of electricity tariffs- expected result is that firms in state with high tariff rate of growth will exhibit relatively high substitution. However, substitution between capital and energy was almost similar for firms in both groups- high and low rate of growth of tariff- which goes against the expected result. (ii) Similarly, classifying states either as states with rigid labor laws (that do not permit easy hiring and firing of workers) or states that have flexible labor regulations (allowing for easy hiring and firing or labor). Expected result is that firms in pro-employer states will exhibit relatively high substitution between capital and labor. Unfortunately, this was not the case.
