Topics in Labor Demand

1
Chapter 3

• Topics in Labor Demand

2

• Elasticities of Demand
• Elasticity of Demand percent change in quantity
  demanded in response to a percent change in price
• One-Wage Elasticity of labor Demand
• ? ?L/?w
• Inelastic 0??lt-1 (quantity of labor demanded
  not sensitive to changes in the wage)
• Elastic ?lt-1 (quantity of labor demanded
  sensitive to changes in the wage)
• Graphical demonstration of elasticity

3

• The elasticity of labor demand is less elastic
  when
• Price elasticity of product demand is low
• When it is difficult to substitute other factors
  for labor in the production process
• When labors proportion of total cost is low
• When the supply of substitutes for labor is
  inelastic
• Applications of the elasticity of labor demand
• Minimum wage
• Union bargaining strategy

4

• The Independence of Wages and Productivity
• Weve assumed that wage and marginal production
  function (labor demand curve) are independent.
• In real life this may not be the case
• Efficiency wages A wage increase leads to higher
  productivity
• Higher wages may not mean less employment
• Adverse selection
• Moral hazard
• Shock Effect wage increase leads to higher
  productivity based on increased managerial
  efficiency
• Minimum wage from this perspective might not lead
  to less employment.
• Are firms maximizing profits if a shock effect
  occurs?