The evaluation of mutual substitution elasticity of capital and labour factors by application of CES function for economy of Azerbaijan

This study estimates parameters of CES production function in a Mathcad system using non-linear ordinary least squares method (Markvart method) based on statistical data of republics of Azerbaijan and Kazakhstan. Identified parameter estimates were comparatively analyzed to reveal a number of findings. For both countries, capital-labour substitution elasticity (?) turned out less than one, which indicates insufficiency of labour, namely qualified labour (skilled labour) in both economies. Azerbaijan have experienced windfall revenues from exploitation of natural resources (particularly, crude oil) in recent years. These revenues induced greatly the imports of capital-intensive products of sophisticated technologies, in other words capital imports. Naturally, scarcity of adequate labour that could deploy increased capital (skilled labour-intensive capital) resulted in decline of reciprocal elasticity of capital-labour substitution. Thus, it can be concluded that utilization of oil revenues to accumulate qualified labour (i.e. development of education, science, etc., technical specializations) would increase reciprocal elasticity of capital-labour substitution. Hence, expenditures on building qualified labour, including spending on education and science are preferred areas of efficient use of oil revenues.