Labor Economics. Unit 4. The definition of electricity of labor demand

Transcription

1 Labor Economics Unit 4. The definition of electricity of labor demand Prof. Min-jung, Kim Department of Economics Wonkwang University Textbook : Modern Labor Economics: Theory and Public policy written by Ronald G. Ehrenberg This power point slides are written using the Modern Labor Economics: Theory and Public policy

2 The own-wage elasticity of demand for a category of labor is defined as th e percentage change in its employment (E) induced by a 1 percent increase in its wage rate (W): ii E W i i (4.1) 1. η ii is relatively elastic labor demand if the ΔE i > ΔW i 2. η i is relatively inelastic labor demand if the ΔE i < ΔW i 3. η ii is unitary elastic labor demand if the ΔE i = ΔW i 4. η i is perfectly elastic labor demand if the ΔE is infinite for no Δw i 5. η i is perfectly inelastic labor demand if the ΔE is zero for positive or negative changes in the wage rate (Δw i )

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5 The Hicks-Marshall Laws of Derived Demand These laws assert that, other things equal, the own-wage elasticity of demand for a category of labor is generally higher under the following conditions: 1.When price elasticity of demand for the product being produced is higher. 2.When other factors of production can be more easily substituted for the category of labor. 3.When the supply of other factors of production is more highly elastic. 4.When the cost of employing the category of labor is a larger share of the total costs of production.

6 Demand for the Final Product The greater the price elasticity of demand for the final product, the larger the percentage decline in output (- and the greater percentage loss in employment) associated with a given price increase - the greater the elasticity of demand for the product, the greater the elasticity of demand for labor. The implication is that wage elasticities will be higher in the long run than in the short run. Substitutability of Other Factors When substitution possibilities exist, a reduction in employment will accompany whatever reductions are caused by the scale effect the easier it is to substitute other factors of production, the greater the wage elasticity of labor demand.

7 The Supply of Other Factors If an increase in the wages of unskilled workers caused employers to attempt to substitute skilled employees for unskilled employees, the wages of the skilled workers (fixed number) would be bid up by employers. If the price of other inputs did not increase when employers attempted to increase their use, the substitution effect the wage elasticity of labor demand would be larger. The Share of Labor in Total Costs The share of labor cost (TC L = wl) in total costs of production [TC(Q) = rk + wl or ck + wl] is expressed as: wl, thus, the greater the category s share in total rk wl costs, the greater the wage elasticity of demand.

8 Estimates of Own-Wage Labor Demand Elasticities Employers labor demand responses to a wage change c an be broken down into two components which can be ex pressed in elasticities: Scale effect Substitution effect The short-run scale effect (elasticity) is defined as: ii E W i i holding production technology constant The substitution effect (elasticity) is defined as: ii E W i i holding output constant

9 Table 4.1

10 Applying the Laws of Derived Demand: Inferential Analysis Labor demand elasticities and wage gains are related, that is, the more elastic the demand for labor, the smaller the wage gain a union will succeed in winning for its members. 1. Unions would win larger wage gains for their members in markets with inelastic labor demand curves. 2. Unions would strive to take actions that reduce the wage elasticity of demand for their members services. 3. Unions might first seek to organize workers in markets in which labor demand curves are inelastic (because the gains from unionization are higher in markets). these

11 and/or (4.2) j jk k k kj j E W E W and/or 0, inputs and are gross substitutes j jk k k kj j E W j k E W and/or 0, inputs and are gross complements j jk k k kj j E W j k E W If If

12 Can the Laws of Derived Demand Be Applied to Cross-Elasti cities? The Hicks-Marshall laws of derived demand that applied to η ii cannot be applied directly to η jk because the substitution effect and the scale effect work in opposite direction. The Scale Effect The size of the scale effect will depend on TC L /TC(Q). The greater the price elasticity of product demand, the greater the scale effect (and thus the greater the likelihood of gross complementarity).

13 The Substitution Effect Are teenagers and adults substitutes or complements in production? If they are complements, the use of more teenagers will reinforce the scale effect and serve to unambiguously increase adult employment. If they are substitutes, more teenagers will be used, and the question becomes whether this substitution effect is large or small relative to the scale effect. Estimates Relating to Cross-Elasticities Knowing the sign of cross-wage labor demand elasticities is useful for answering many public-policy questions, that is, it is crucial to know whether two inputs are gross complements or gross substitutes in production.

14 Empirical studies that paired together factors of production offer at least a few generalizations: 1. Labor and energy (materials) are clearly (probably) substitutes in production, although their degree of substitutability is small. 2. Skilled and unskilled labor are substitutes in production. 3. Though uncertain whether skilled or unskilled L is substitute for or a complement with K, but it appears that skilled L is more likely to be complementary with K than is unskilled L. 4. Skilled L is more likely to be a gross complement with K. 5. If wages of both skilled and unskilled L were to rise by the same percentage, employment loss will be greater for unskilled.

15 History and Description The Fair Labor Standard Act (FLSA) of October,1938 was the first major piece of protective legislation adopted at the national level in the United States. Pro visions of the FLSA included: Minimum wage (W min ),which initially was set at $0.25 per hour covered r oughly 43 of all nonsupervisory wage and salary workers. By July, 20 09, the W min was set at $7.25 per hour and it covered 90 of all nonsup ervisory workers. Overtime-pay premium for workers who worked long workweeks. Restrictions on the use of child labor.

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