Abstract
For inclusive growth, it is very important to determine a reasonable proportion of income distribution between labor and capital. It is also important that capital and labor are combined in such a way that the pace of growth is not lessened. Inclusive growth becomes more convenient if capital and labor can be substituted. The substitution between labor and capital can be found by elasticity of substitution from the production function. There is a wide choice of algebraic forms which can be used to represent production functions. This study uses constant elasticity of substitution (CES) production function to find the possibility of substitution between labor and capital by using Census of Manufacturing Industries (CMI) data of 3155 manufacturing industries of Punjab. Analysis has been done firstly for overall industries and then for small, medium and large scale industries. The results reveal that there is high substitution between capital and labor. It implies that there exists flexibility to adjust labor and capital in production process for better distribution of income. Furthermore results reveal that: elasticity of substitution, returns to scale and labor share is highest in small scale industries, so small scale industry may be more helpful in inclusive growth as compared to medium and large scale industries.