Copyright © 2009 Pearson Education, Inc. Chapter 4 Labor Demand Elasticities
Copyright © 2009 Pearson Education, Inc. Chapter 4 Labor Demand Elasticities.
Dec 26, 2015
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Copyright © 2009 Pearson Education, Inc.
Chapter 4
Labor Demand Elasticities
Copyright © 2009 Pearson Education, Inc. 4- 2
Important Definitions - Elasticity of Demand I
Elastic DemandInelastic DemandUnitary Elasticity
Own-Wage Elasticity of Demand =
% change in employment/ % change in wages
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Calculating Own Price Elasticity of Demand
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QuickTime™ and aTIFF (Uncompressed) decompressorare needed to see this picture.
QuickTime™ and aTIFF (Uncompressed) decompressor
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Or, using differential calculus
Or, using the mid-point formula
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Figure 4.1: Relative Demand Elasticities
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Figure 4.2: Different Elasticities along a Demand Curve
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Marshall-Hicks Laws of Derived Demand
Elasticity of Demand For The Final ProductEase Of Substitution Of Other FactorsThe Share Of Labor In Total CostsThe Supplies Of Other Factors
Own-Wage Elasticity of DemandIs Affected By:
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Marshall-Hicks Laws of Derived Demand
Own-Wage Elasticity of DemandWill Be Higher:
1. When the price elasticity of demand for the final product is high.
2. The easier it is to substitute other factors for a given category of labor.
3. The more price elastic the supply of other factors of production.
4. When the costs of a category of labor is large relative to total costs of production.
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Table 4.1: Components of the Own-Wage Elasticity of Demand for Labor: Empirical Using Plant-Level data
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Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand =The percentage change in the demand for input j induced by a one percent change in the price of input k.
Or
The percentage change in the demand for labor input k induced by a one percent change in the wage of labor input j.
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Cross-Wage Elasticity of Demand I
The relative strength of the scale and substitution effects of a change input j’s wage or price on input k will determine whether the sign of the cross-wage elasticitycoefficient is positive or negative
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Cross-Wage Elasticity of Demand
If the scale effect dominates, inputs j and kare gross complements and the sign of the coefficient is negative
If the substitution effect dominates, inputs j and k are gross substitutes and the sign of the coefficient is positive
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Important Definitions - The Minimum Wage
Fair Labor Standards Act Of 1938Nominal WageReal WageCovered SectorUncovered SectorPoverty And The Minimum Wage
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Figure 4.3: Federal Minimum Wage Relative to Wages in Manufacturing,
1938-2007
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Wm
We
QD QE QS
D
S
A Minimum Wage Results in a Surplus of Labor
UnemploymentMinimum wage
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Figure 4.4: Minimum Wage Effects: Growing Demand Obscures Job Loss
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Figure 4.5: Minimum Wage Effects: Incomplete Coverage Causes
Employment Shifts
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Figure 4.6: The Production Possibilities for a Hypothetical Society
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Empirical Study: Estimating the Labor Demand Curve: Time Series Data and
Coping with “Simultaneity”
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