The Influence of Labor Price Change on Agricultural Machinery Usage in Chinese Agriculture

The substitution between rural labor and machinery has been a key determinant of farm production, structure, and efficiency in most developed countries and is expected to play a key role in shaping the future of Chinese agriculture. Using disaggregated farm‐level data from Hebei and Shandong provinces of China, we calculated the Allen and Morishima elasticities of substitution between labor and machinery. These elasticities were based on seemingly unrelated regressions and three‐stage least squares estimates of the translog cost function and input cost share functions. In contrast to previous studies, we dissaggregate machinery inputs into three categories: large, medium, and small. In addition, the issue of endogeneity in output quantity and input prices is also addressed. The results show strong evidence of substitution between labor and the three categories of machinery inputs. The findings also support substitution among the three categories of machinery themselves.