Transcript Chapter 4: Labor Demand Elasticities

Chapter 4: Labor Demand Elasticities
Own-wage Elasticity of Labor Demand
Labor demand is said to be:
Elasticity and Slope
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Slope involves a relationship between the
change in the level of the wage and a change
in the level of employment. Elasticity involves
a relationship between percentage changes in
these variables.
A constant change in the level of a variable
will not result in a constant percentage
change in that variable.
Elasticity and Slope
Note, for example that:
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an
an
an
an
an
an
increase
increase
increase
increase
increase
increase
from
from
from
from
from
from
1 to 2 is a 100% increase,
2 to 3 is a 50% increase,
3 to 4 is a 33% increase,
4 to 5 is a 25% increase,
10 to 11 is a 10% increase, and
100 to 101 is a 1% increase.
Elasticity Along a Linear Demand Curve
Elasticity Along a Linear Demand Curve
Elasticity and Slope Comparisons
Determinants of Own-wage
Elasticity of Labor Demand
Labor demand will be more elastic
when:
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the substitution effect is larger, and/or
the scale effect is larger
Hicks-Marshall Laws of
Derived Demand
Own-wage elasticity of labor demand is
relatively high when:
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the price elasticity of demand for the final
product is relatively high,
tt is relatively easy to substitute other factors
for this category of labor,
the supply of other factors of production is
relatively elastic, and
this category of labor accounts for a relatively
large share of total costs.
First Hicks-Marshall Law
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Own-wage elasticity of demand is relatively
high when the price elasticity of demand for
the final product is relatively high.
This works through the scale effect:
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Higher wages result in higher average and
marginal costs,
Higher costs result in a higher product price,
Higher prices result in a reduction in the quantity
of the product demanded,
A reduction in sales results in a reduction in
output and in input use.
Second Hicks-Marshall Law
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Own-wage elasticity of labor demand
will be relatively high when it is
relatively easy to substitute other
factors for this category of labor.
This law works through the substitution
effect.
Third Hicks-Marshall Law
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Own-wage elasticity of labor demand is relatively
high when the price elasticity of supply is relatively
high for other factors of production.
This law works through the substitution effect.
Fourth Hicks-Marshall Law
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Own-wage elasticity is relatively large when
this category of labor accounts for a relatively
large share of total costs
This law works through the scale effect:
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Higher wages result in higher average and marginal
costs,
Higher costs result in a higher product price,
Higher prices result in a reduction in the quantity of
the product demanded,
A reduction in sales results in a reduction in output
and in input use.
Hicks-Marshall Laws and
Union Strategy
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unions will be more successful in receiving
wage increases in markets in which labor
demand is relatively inelastic,
unions will attempt to reduce the own-wage
elasticity of demand for their workers, and
unions might prefer to organize those labor
markets in which labor demand is relatively
inelastic.
Hicks-Marshall Laws and
Union Strategy
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price elasticity of demand for the final
product,
ease of substitution of other inputs,
supply elasticity of other inputs,
labor’s share of total costs.
Cross-wage (Cross-price)
Elasticity of Demand
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A positive cross-price elasticity of
demand between two inputs indicates
that the two inputs are gross
substitutes.
Two inputs are gross complements if
the cross-price elasticity is negative.
Empirical Estimates of
Cross-wage Elasticities
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labor and energy are substitutes,
labor and materials are substitutes,
skilled workers are more likely to be
gross complements with capital than
are unskilled workers, and
there is little complementarity or
substitution between immigrant and
native workers.
Minimum Wage Effects
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minimum wages are specified in
nominal, not real terms.
employment reduction under perfect
competition and complete coverage
Minimum Wage Effects Noncovered Sector
Minimum wage (or union) in a
monopsony
Summary of Minimum
Wage Theory
A minimum wage is expected to result in:
 unemployment and economic inefficiency if
the labor market is perfectly competitive and
there is complete coverage,
 economic inefficiency if the labor market is
perfectly competitive and there is a noncovered sector, and
 an ambiguous effect on the level of
employment if firms possess some degree of
monopsony power.
Empirical Results
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early studies suggested a negative
effect on teenage unemployment,
recent studies suggest little or no
impact,
effect on poverty is limited (only 22%
of minimum wage workers live in
households with income below the
poverty level).
Technological Change
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lower cost and higher quality products,
shifts in pattern of labor demand,
automation is approximately equivalent to a
reduction in the price of capital -- thus, it
results in substitution and scale effects,
no evidence of increased aggregate
unemployment due to technological change.