THE ELASTICITY OF CAPITAL-LABOUR SUBSTITUTION IN HONG KONG CONSTRUCTION

Abstract

Productivity improvement in construction is important because, by nature of its product, construction output is an important form of productive resources. However, the construction industry in general has a reputation for low productivity compared to other sectors in the economy. With the advancement in technology, increasing labour cost and a shortage of skilled workers, there is a need to upgrade productive efficiency through mechanization. In order to mechanize, it is essential to understand the substitutability between capital and labour. Hence, this study uses the constant elasticity of substitution (CES) production function to estimate the extent of capitallabour substitution in the Hong Kong construction industry. Using regression analysis on the selected statistical data from 1985 to 1995, the estimated elasticity of substitution (a) is found to be 0.49 which suggests that the construction firms in Hong Kong are less responsive to changes in the relative prices of factor inputs. Along with, the hypothesis of a unitary elasticity of substitution is rejected at the 5% level of significance. The estimated a value is lower than that in Cassimatis' (1969) study on U.S. construction industry (a = 1.12) and Tan's (1996) study on Singapore construction industry (a = 1.80). In response to this, the study identifies several possible reasons contributing to this low estimate of a. These include the stringent building codes, strong reliance on labour in building works, labour importation, site constraints, unstable demand, lack of research and development, slow diffusion of technology, financing conditions, foreign competition, inadequate training and the use of lump-sum building contracts.