1. Chapter 4. Labor Demand Elasticities.
Major points.
Measuring elasticity of labor demand.
Determinants of the elasticity of labor demand
Consequences of inelastic or elastic labor demand
Measuring cross elasticity of labor demand
Consequences of a positive or negative cross elasticity of demand

2. 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 changes
If gii > 1, labor demand is elastic.
< 1, labor demand is inelastic.

3. Elasticity of Labor Demand
For a given level of wages, a steeper labor demand curve is more inelastic

4. 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?

5. 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 labor
the supply of substitutes is more elastic
labor is a larger share of total cost

6. Estimates of Own Wage Elasticity of Labor Demand
From text: British manufacturing firms
Scale Effect
Substitution Effect ( )
Overall ( )

7. Estimates of Own Wage Elasticity of Labor Demand
Summary of studies by Daniel Hammermesh (1993)

8. Application: Unions & Elasticity
Unions wish to raise wages while preserving employment.
How does elasticity of labor demand affect union “bargaining power”?

9. Application: Unions & Elasticity
Truckload (TL) and Less than Truckload (LTL)
TL: hauling grain from one part of country to another.
LTL: UPS, FEDEX
Where is product demand more elastic?
Where is labor demand more elastic?
Where should unions have greater bargaining power?

10. 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 1.34

11. Application: Unions & Elasticity
Unions will be most successful at raising wages in industries with inelastic labor demand.
Labor versus capital intensive
Monopolistic versus competitive
Unions will pursue & promote policies that make labor demand more inelastic.
Trade restrictions
Minimum wage
Immigration
Unions might first seek to organize workers in markets where labor demand is inelastic.

12. 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)

13. Cross-Wage Elasticity
Determinants of cross-elasticity:
As type k labor's share of total cost increases, the scale effect of an increase in Wk 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).

14. 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 small
skilled labor is more likely to be complementary with capital than unskilled labor.

15. Application: Minimum Wage Laws
History of minimum wages.
Fair Labor Standards Act of 1938:
minimum wage
requirements for overtime pay premium
restrictions on use of child labor
Minimum wage provisions in 1938
$.25 per hour
covered 43 percent of all nonsupervisory wage and salary workers
coverage limited primarily to large firms involved in interstate commerce.
minimum wage is stated in nominal terms and is not indexed.
changes in the minimum wage currently require legislative action.

16. Application: Minimum Wage Laws
Historical values of minimum wage.
Minimum wage variation across states.
Who Earns the Minimum Wage?
Is  Minimum Wage Employment Long Lasting?

17. 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)
Would a minimum wage hike hurt training and reduce future wage growth?
Monopsony power.

18. Application: Minimum Wage Laws
Monopsony & minimum wage
MEL LS W2 W1
MRP L1

19. Application: Minimum Wage Laws
Monopsony & minimum wage
With monopsony, what is
Level of employment
Wage?
With minimum wage between W1 & W2, what happens to employment?
With minimum wage above W2, what happens to employment?
How does elasticity of LD affect employment response?