Fourth, and perhaps most important, an elasticity of substitution between
capital and labor near the Cobb-Douglas value suggests considerable
flexibility in responding to trade and domestic-sector policies that
alter the relative costs of capital and labor services. Examples of such
policies are legion. Capital subsidies through favorable import and credit
treatment and minimum wages are illustrations of frequently used policies
that increase the cost of labor relative to that of capital. The estimated
value of the elasticity of substitution between capital and labor
implies that manufacturing enterprises can respond to such incentives
and use relatively more capital and less labor. In many contexts such
responses may exacerbate employment problems.