Assessing the lumber manufacturing sector in western Washington

The production structure of the lumber manufacturing sector in western Washington was investigated using a translog cost function with capital, labor, and sawlog inputs. Analyses were performed with a panel data set of biennial observations from 1972 to 2002 on a cross section of sixteen western Washington counties. Production structure was examined using Allen and Morishima partial elasticities of substitution, own- and cross-price factor demand elasticities, and total factor productivity decomposed into scale effects and technical change effects. Allen and Morishima substitution elasticities agreed that capital and labor were most easily substituted inputs. Own-price elasticity at the regional level showed that capital demand was the most responsive to changes in own-price while log demand was least. Demand for logs was virtually unresponsive to changes in capital and labor price, suggesting that producers had little flexibility to reduce total costs by substituting away from log inputs. Total factor productivity increased by 1.54% every two years on average; productivity gains in the industry were dominated by scale effects. Hicks-neutral technological change was rejected; technical change bias was sawlog-saving, capital-using, and labor-neutral Results suggest that policies influencing log costs had the greatest impact on sawmill viability.