435 Politická ekonomie, 2021, 69 (4), 435–456, https://doi.org/10.18267/j.polek.1324 ELASTICITY OF SUBSTITUTION IN THE MANUFACTURING SECTOR IN THE CZECH REPUBLIC Cristina Procházková Ilinitchi a , Anastasie Pustovalová a , David Procházka a Abstract 1*2aaa The paper estimates the elasticity of substitution between capital and labour under biased technical change in the manufacturing sector in the Czech Republic. We use a dataset covering the period 1995–2019 and a 2-digit industry level, from NACE10 to NACE33. We find industry-level elasticities to be 0.19 and 0.94; therefore, labour and capital seem to be gross complements rather than substitutes across all manufacturing sectors. In the core industries of the Czech manufacturing sector, the elasticity is below average. Even if these core sectors have high and increasing labour costs (except NACE29, where the labour costs are below average), they do not replace labour with capital at a higher pace. This cannot be explained by the direction of technological bias because it is not capital-augmenting. On the other hand, our findings are in line with the literature, as most studies on transition countries report low estimates for the elasticity. Keywords: elasticity of substitution, capital-labour substitution, Czech Republic, manu- facturing sector, technological change JEL Classifications: D24, E23, O14 Introduction During the last decades, the unemployment rate in the Czech Republic has oscillated around 6%, hitting a maximum of 8.8% in 2000 and being on a path of significant decrease after 2016, reaching 2% only in 2019 (CZSO, 2020). There is a long-lasting deficit of labour supply perceived by Czech companies, which can be a limiting factor to their development. Low unemployment rates are furthermore accompanied by another negative fact: labour productivity increases at a slower rate than wages. This can lead to Czechia’s decreasing international competitiveness. One way to respond to this development is substituting * This paper was written as part of IGA project no. F2/49/2019, “Global value chains and technological changes: the impact on world economy”, Prague University of Economics and Business. a Prague University of Economics and Business, Czech Republic E-mail: Cristina.ilinitchi@vse.cz; anastasie.pustovalova@gmail.com; prochazd@vse.cz