Chapter 4. Labor Demand Elasticities.

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Chapter 4. Labor Demand Elasticities.

• Major points.
• Measuring elasticity of labor demand.
• Determinants of the elasticity of labor demand
• Consequences of inelastic or elastic labor demand
• Measuring cross elasticity of labor demand
• Consequences of a positive or negative cross
  elasticity of demand

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Elasticity of Labor Demand

• OWN-WAGE ELASTICITY OF DEMAND.
• where Ei is the level of employment for type i
  labor and Wi is the wage rate for type i labor
• use mid-point for calculating percent changes
• If gii gt 1, labor demand is elastic.
• lt 1, labor demand is inelastic.

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Elasticity of Labor Demand

• For a given level of wages, a steeper labor
  demand curve is more inelastic

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Elasticity of Labor Demand
For a linear labor demand curve, the "midpoint"
divides the curve into an elastic and an
inelastic portion.

• Calculate elasticity for wages between
• 10-12
• 6-8
• 2-4
• What happens to total labor income as the wage
  rises?
• What wage maximizes total labor income?

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HICKS-MARSHALL LAWS OF DERIVED DEMAND

• Based on scale or substitution effects, why is
  labor demand more elastic when
• product demand is more elastic
• other inputs can be easily substituted for labor
• the supply of substitutes is more elastic
• labor is a larger share of total cost

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Estimates of Own Wage Elasticity of Labor Demand

• From text British manufacturing firms
• Scale Effect -0.53
• Substitution Effect -0.45 (-0.15--0.75)
• Overall -0.93 (-1.0---1.4)

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Estimates of Own Wage Elasticity of Labor Demand
Summary of studies by Daniel Hammermesh (1993)
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Application Unions Elasticity

• Unions wish to raise wages while preserving
  employment.
• How does elasticity of labor demand affect union
  bargaining power?

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Application Unions Elasticity

• Truckload (TL) and Less than Truckload (LTL)
• TL hauling grain from one part of country to
  another.
• LTL UPS, FEDEX
• Where is product demand more elastic?
• Where is labor demand more elastic?
• Where should unions have greater bargaining power?

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Application Unions Elasticity

• TL Average union rate 28.4 cents.mile
  union-non-union ratio of 1.23
• LTL average union rate 35.8 cents/mile
  union-non-union ratio 1.34

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Application Unions Elasticity

• Unions will be most successful at raising wages
  in industries with inelastic labor demand.
• Labor versus capital intensive
• Monopolistic versus competitive
• Unions will pursue promote policies that make
  labor demand more inelastic.
• Trade restrictions
• Minimum wage
• Immigration
• Unions might first seek to organize workers in
  markets where labor demand is inelastic.

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Cross-Wage Elasticity
If cross elasticity gt0 ? i j are gross
substitutes (substitution effect gt scale
effect) If cross elasticity lt0 ? i j are gross
complements (substitution effect lt scale effect)
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Cross-Wage Elasticity

• Determinants of cross-elasticity
• As type k labor's share of total cost increases,
  the scale effect of an increase in Wk grows,
  making it more likely that Ej drops (i.e. more
  likely gross complements).
• As product demand becomes more elastic, the scale
  effect of an increase in Wk grows, making it more
  likely that Ej drops (i.e. more likely gross
  complements).
• As the substitutability between the two types of
  labor increases, the substitution effect of an
  increase in Wk on Ej grows (i.e. more likely
  gross substitutes).

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Cross-Wage Elasticity

• Some empirical evidence
• labor and energy are substitutes in production,
  but the degree of substitutability is small.
• labor and materials are probably substitutes in
  production, with the degree of substitutability
  being small
• skilled labor is more likely to be complementary
  with capital than unskilled labor.

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Application Minimum Wage Laws

• History of minimum wages.
• Fair Labor Standards Act of 1938
• minimum wage
• requirements for overtime pay premium
• restrictions on use of child labor
• Minimum wage provisions in 1938
• .25 per hour
• covered 43 percent of all nonsupervisory wage and
  salary workers
• coverage limited primarily to large firms
  involved in interstate commerce.
• minimum wage is stated in nominal terms and is
  not indexed.
• changes in the minimum wage currently require
  legislative action.

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Application Minimum Wage Laws

• Historical values of minimum wage.
• Minimum wage variation across states.
• Who Earns the Minimum Wage?
• Is  Minimum Wage Employment Long Lasting?

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Application Minimum Wage Laws

• The debate over the desirability of a minimum
  wage hike turns on
• Elasticity of labor demand
• Who earns the minimum wage (effect on family
  poverty rates)
• Would a minimum wage hike hurt training and
  reduce future wage growth?
• Monopsony power.

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Application Minimum Wage Laws

• Monopsony minimum wage

MEL
LS
W2
W1
MRP
L1
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Application Minimum Wage Laws

• Monopsony minimum wage
• With monopsony, what is
• Level of employment
• Wage?
• With minimum wage between W1 W2, what happens
  to employment?
• With minimum wage above W2, what happens to
  employment?
• How does elasticity of LD affect employment
  response?