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Chapter 4: Labor Demand Elasticities

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Chapter 4: Labor Demand Elasticities Own-wage Elasticity of Labor Demand Labor demand is said to be: Elasticity and Slope Slope involves a relationship between the ... – PowerPoint PPT presentation

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Title: Chapter 4: Labor Demand Elasticities


1
Chapter 4 Labor Demand Elasticities
2
Own-wage Elasticity of Labor Demand
Labor demand is said to be
3
Elasticity and Slope
  • 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.

4
Elasticity and Slope
  • Note, for example that
  • an increase from 1 to 2 is a 100 increase,
  • an increase from 2 to 3 is a 50 increase,
  • an increase from 3 to 4 is a 33 increase,
  • an increase from 4 to 5 is a 25 increase,
  • an increase from 10 to 11 is a 10 increase, and
  • an increase from 100 to 101 is a 1 increase.

5
Elasticity Along a Linear Demand Curve
6
Elasticity Along a Linear Demand Curve
7
Elasticity and Slope Comparisons
8
Determinants of Own-wage Elasticity of Labor
Demand
Labor demand will be more elastic when
  • the substitution effect is larger, and/or
  • the scale effect is larger

9
Hicks-Marshall Laws of Derived Demand
Own-wage elasticity of labor demand is relatively
high when
  • 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.

10
First Hicks-Marshall Law
  • 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
  • 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.

11
Second Hicks-Marshall Law
  • 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.

12
Third Hicks-Marshall Law
  • 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.

13
Fourth Hicks-Marshall Law
  • 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
  • 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.

14
Hicks-Marshall Laws and Union Strategy
  • 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.

15
Hicks-Marshall Laws and Union Strategy
  • price elasticity of demand for the final product,
  • ease of substitution of other inputs,
  • supply elasticity of other inputs,
  • labors share of total costs.

16
Cross-wage (Cross-price) Elasticity of Demand
  • 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.

17
Empirical Estimates of Cross-wage Elasticities
  • 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.

18
Minimum Wage Effects
  • minimum wages are specified in nominal, not real
    terms.
  • employment reduction under perfect competition
    and complete coverage

19
Minimum Wage Effects - Noncovered Sector
20
Minimum wage (or union) in a monopsony
21
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 non-covered
    sector, and
  • an ambiguous effect on the level of employment if
    firms possess some degree of monopsony power.

22
Empirical Results
  • 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).

23
Technological Change
  • 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.
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