Modeling factor price elasticities and factor substitution

Abstract

This chapter uses a multiple-input, multiple-output translog cost function to calculate Allen-Uzawa and Morishima elasticities of substitution for 36 Australian universities. The input prices are academic and nonacademic labor and capital. The six outputs are undergraduate, postgraduate and PhD completions, national competitive and industry grants, and publications. The results suggest that the derived demand for academic labor in the Australian university sector is highly price inelastic while the demand for nonacademic labor and capital is highly price elastic. This suggests that the cost drivers in the Australian university sector are presently price-related for academic inputs and technology-related for nonacademic and capital inputs. Moreover, the opportunities for input substitution are not symmetric, with the sector generally finding it easier to switch to capital than academic and nonacademic labor. Finally, while the Allen-Uzawa measures indicate that academic and nonacademic labor is a substitute, the less-restrictive Morishima measures suggest neither complementarity nor substitutability at the aggregate level.