Labor Demand Elasticities - Introduction to Labor Economics - Lecture Slides, Slides of Economics

Download Labor Demand Elasticities - Introduction to Labor Economics - Lecture Slides and more Slides Economics in PDF only on Docsity! Chapter 4: Labor Demand Elasticities Docsity.com 1 i Own-wage Elasticity of Labor Demand _ “o change in employment in labor market i "Yo change in wage m labor market i Docsity.com 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. Docsity.com Elasticity and Slope Note, for example that: – an increase from 1 to 2 is a 100% increase, Docsity.com 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, Docsity.com 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, Docsity.com 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. Docsity.com Elasticity Along a Linear Demand Curve wage large percentage change in quantity demanded / small percentage change in wage small % change in quantity demanded _ large % / change in wage Quantity of labor demanded Docsi locsity.com Determinants of Own-wage Elasticity of Labor Demand • the substitution effect is larger, and/or • the scale effect is larger Labor demand will be more elastic when: Docsity.com Hicks-Marshall Laws of Derived Demand • the price elasticity of demand for the final product is relatively high, Own-wage elasticity of labor demand is relatively high when: Docsity.com Hicks-Marshall Laws of Derived Demand • the price elasticity of demand for the final product is relatively high, • it is relatively easy to substitute other factors for this category of labor, Own-wage elasticity of labor demand is relatively high when: Docsity.com 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. Docsity.com 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. Docsity.com 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. Docsity.com 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. Docsity.com 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. Docsity.com Hicks-Marshall Laws and Union Strategy • unions will be more successful in receiving wage increases in markets in which labor demand is relatively inelastic, Docsity.com Hicks-Marshall Laws and Union Strategy • price elasticity of demand for the final product, Docsity.com Hicks-Marshall Laws and Union Strategy • price elasticity of demand for the final product, • ease of substitution of other inputs, Docsity.com 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, Docsity.com 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. Docsity.com 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. Docsity.com Empirical Estimates of Cross- wage Elasticities • labor and energy are substitutes, Docsity.com 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. Docsity.com Minimum Wage Effects • Minimum wages are specified in nominal, not real terms. Docsity.com Minimum Wage Effects • minimum wages are specified in nominal, not real terms. • employment reduction under perfect competition and complete coverage Docsity.com 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, Docsity.com 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, Docsity.com 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. Docsity.com 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). Docsity.com Technological Change • lower cost and higher quality products, Docsity.com Technological Change • lower cost and higher quality products, • shifts in pattern of labor demand, Docsity.com