Chapter 4 Labor Demand Elasticities Copyright 2009 Pearson

Chapter 4 Labor Demand Elasticities Copyright © 2009 Pearson Education, Inc.

Important Definitions - Elasticity of Demand I üElastic Demand üInelastic Demand üUnitary Elasticity Own-Wage Elasticity of Demand = % change in employment/ % change in wages Copyright © 2009 Pearson Education, Inc. 4 - 2

Calculating Own Price Elasticity of Demand Or, using differential calculus Or, using the mid-point formula Copyright © 2009 Pearson Education, Inc. 4 - 3

Figure 4. 1: Relative Demand Elasticities Copyright © 2009 Pearson Education, Inc. 4 - 4

Figure 4. 2: Different Elasticities along a Demand Curve Copyright © 2009 Pearson Education, Inc. 4 - 5

Marshall-Hicks Laws of Derived Demand Own-Wage Elasticity of Demand Is Affected By: üElasticity of Demand For The Final Product üEase Of Substitution Of Other Factors üThe Share Of Labor In Total Costs üThe Supplies Of Other Factors Copyright © 2009 Pearson Education, Inc. 4 - 6

Marshall-Hicks Laws of Derived Demand Own-Wage Elasticity of Demand Will 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. Copyright © 2009 Pearson Education, Inc. 4 - 7

Table 4. 1: Components of the Own-Wage Elasticity of Demand for Labor: Empirical Using Plant-Level data Copyright © 2009 Pearson Education, Inc. 4 - 8

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. Copyright © 2009 Pearson Education, Inc. 4 - 9

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 elasticity coefficient is positive or negative Copyright © 2009 Pearson Education, Inc. 4 - 10

Cross-Wage Elasticity of Demand If the scale effect dominates, inputs j and k are 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 Copyright © 2009 Pearson Education, Inc. 4 - 11

Important Definitions - The Minimum Wage üFair Labor Standards Act Of 1938 üNominal Wage üReal Wage üCovered Sector üUncovered Sector üPoverty And The Minimum Wage Copyright © 2009 Pearson Education, Inc. 4 - 12

Figure 4. 3: Federal Minimum Wage Relative to Wages in Manufacturing, 1938 -2007 Copyright © 2009 Pearson Education, Inc. 4 - 13

A Minimum Wage Results in a Surplus of Labor Wm S Minimum wage Unemployment We D QD Copyright © 2009 Pearson Education, Inc. QE QS 4 - 14

Figure 4. 4: Minimum Wage Effects: Growing Demand Obscures Job Loss Copyright © 2009 Pearson Education, Inc. 4 - 15

Figure 4. 5: Minimum Wage Effects: Incomplete Coverage Causes Employment Shifts Copyright © 2009 Pearson Education, Inc. 4 - 16

Figure 4. 6: The Production Possibilities for a Hypothetical Society Copyright © 2009 Pearson Education, Inc. 4 - 17

Empirical Study: Estimating the Labor Demand Curve: Time Series Data and Coping with “Simultaneity” Copyright © 2009 Pearson Education, Inc. 4 - 18