Substitution among Labour, Capital, Imported Raw Materials, and Bank Credit in Pakistan’s Manufacturing

In view of its central importance to economic analysis a vast number of studies relating to the production function in its various functional forms has been undertaken during the last three decades in both the developed and the developing countries. Studies pertaining of the developing countries were primarily directed towards finding the degree of substitution between labour and capital. These efforts were ignited by the desire to explain the existence of high rates of unemployment, particularly in the urban areas. It has been argued that the near zero elasticity of substitution between labour and capital has been responsible for the existence of the high rate of unemployment.l On the other hand, higher values for the elasticity of substitution could lead to the substitution of abundant or the faster growing factor of production (labour) for the scarce or slow growing factor (capital). Hence, a knowledge of the value of the elasticity of substitution between labour and capital in the manufacturing sector is essential for understanding the growing unemployment problem in developing countries, including Pakistan.