Labor Demand Elasticities Measurement Determinants Consequences of inelastic or elastic labor demand Labor market shocks Government policy Unions Cross elasticity of labor demand Consequences of positive or negative cross elasticity of demand ID: 273063
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Slide1
Chapter 4. Labor Demand Elasticities.
Measurement
Determinants
Consequences of inelastic or elastic labor demand
Labor market shocks
Government policy
Unions
Cross elasticity of labor demand
Consequences of positive or negative cross elasticity of demandSlide2
Elasticity of Labor Demand
OWN-WAGE ELASTICITY OF DEMAND.
where
Ei is the level of employment for type i labor and Wi is the wage rate for type i labor use mid-point for calculating percent changesIf > 1, labor demand is elastic. < 1, labor demand is inelastic.
Slide3
Elasticity of Labor Demand
For a given wage, a steeper labor demand curve is more inelasticSlide4
Elasticity of Labor Demand
For a linear labor demand curve, the "midpoint" divides the curve into an elastic and an inelastic portion
.
Calculate elasticity for wages between
$10-12
$6-8
$2-4
What happens to total labor income as the wage rises?
What wage maximizes total labor income?Slide5
HICKS-MARSHALL LAWS OF DERIVED DEMAND
Based on scale or substitution effects, why is labor demand more elastic when:
product demand is more elastic
other inputs can be easily substituted for laborthe supply of substitutes is more elastic labor is a larger share of total costSlide6
Estimates of Own Wage Elasticity of Labor DemandSlide7
Application: Unions & Elasticity
Unions wish to raise wages while preserving employment.
How does elasticity of labor demand affect union “bargaining power”?
How can unions influence elasticity of labor demand?Slide8
Application: Unions & Elasticity
Truckload (TL) and Less than Truckload (LTL)
TL: hauling grain from one part of country to another.
LTL: UPS, FEDEXWhere is product demand more elastic?Where is labor demand more elastic?Where should unions have greater bargaining power?Slide9
Application: Unions & Elasticity
TL: Average union rate 28.4 cents.mile; union-non-union ratio of 1.23
LTL: average union rate 35.8 cents/mile; union-non-union ratio 1.34Slide10
Application: Unions & Elasticity
Unions will be most successful at raising wages in industries with inelastic labor demand.
Labor versus capital intensive
Monopolistic versus competitiveUnions will pursue & promote policies that make labor demand more inelastic.Trade restrictionsMinimum wageImmigrationUnions might first seek to organize workers in markets where labor demand is inelastic.Slide11
Predictions for Union Power
Substitution of capital for labor
Reduced labor demand and less employment
More capital intensiveEffect on elasticity of labor demand?Effect on union bargaining power and wages?Effect on power of strike threat?More competitive product marketIncreased competitionEffect on elasticity of labor demandSlide12
Dockworkers
Wayne K. Talley. Dockworker Earnings, Containerisation, and Shipping Deregulation.
Journal of Transport Economics and Policy
, Vol. 36, No. 3 (Sep., 2002), pp. 447-467Containerisation radically altered cargo handling Capital substituted for laborPort of NY/NJ
1970: 30,000 longshoremen
1986: 7,400. Slide13
Dockworkers
1984 deregulation of shipping increased competition across ports
Allowed “door-to-door” rates in addition to “port-to-port”
Made it possible for shippers to decide on best combination of routes for “door to door”Ports began competing with others 100s of miles awayEast coast began competing with west coast Asia shipping to East Coast began dropping cargo off ship on west coast and using rail across the states.
Wayne K. Talley. Dockworker Earnings, Containerisation, and Shipping Deregulation.
Journal of Transport Economics and Policy, Vol. 36, No. 3 (Sep., 2002), pp. 447-467Slide14
Cross-Wage Elasticity
If cross elasticity >0
i & j are
gross substitutes
(substitution effect > scale effect)
If cross elasticity <0 i & j are
gross complements (substitution effect < scale effect)Slide15
Cross-Wage Elasticity
Determinants of cross-elasticity:
As type k labor's share of total cost increases, the scale effect of an increase in W
k grows, making it more likely that Ej drops (i.e. more likely gross complements).As product demand becomes more elastic, the scale effect of an increase in Wk grows, making it more likely that Ej drops (i.e. more likely gross complements). As the substitutability between the two types of labor increases, the substitution effect of an increase in Wk on Ej grows (i.e. more likely gross substitutes).Slide16
Cross-Wage Elasticity
Some empirical evidence:
labor and energy are substitutes in production, but the degree of substitutability is small.
labor and materials are probably substitutes in production, with the degree of substitutability being smallskilled labor is more likely to be complementary with capital than unskilled labor.Slide17
Application: Minimum Wage Laws
The debate over the desirability of a minimum wage hike turns on:
Elasticity of labor demand
Who earns the minimum wage (effect on family poverty rates)training and reduce future wage growthmonopsony power Schooling choices