Elasticity of Demand for Labour

5 Key excerpts on "Elasticity of Demand for Labour"

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  Fundamentals of Labor Economics

  • Thomas Hyclak, Geraint Johnes, Robert Thornton, , Thomas Hyclak, Thomas Hyclak, Geraint Johnes, Robert Thornton(Authors)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  44 C H A P T E R If the wage increases by 10%, does the quantity of labor demanded change by a lot or a little? If the salaries of finance professors increase significantly, will the quantity demanded of economics professors go up, go down, or stay the same? Do workers tend to be paid their marginal product? 3 Topics in Labor Demand In Chapter 2 we derived a long-run labor demand schedule; now we are ready to analyze the elasticity of labor demand. In general, the elasticity of demand tells us what the percentage change in the quantity demanded of something will be given a certain percentage change in the price of that something. Knowledge of the elasticity of demand for certain types of labor can be very useful. For example, it could tell us what might happen to the number of workers employed if the federal minimum wage were raised to $15 per hour or if a union demanded a 20% increase in its negotiated wage level. In fact, understanding the adverse employment effects stemming from a wage demand of this magnitude can serve as a brake on union wage demands generally. In this chapter, we first look at three important labor demand elasticities: the wage elasticity of labor demand, the cross-elasticity of labor demand, and the elasticity of sub- stitution. We then turn to some useful extensions and embellishments of marginal produc- tivity theory, such as efficiency wage theory. We conclude this chapter by posing a simple but important question: On average, are workers paid about what they are worth to their employers? To put it another way, do their wages tend to equal their marginal product? Elasticities The Wage Elasticity of Labor Demand The wage elasticity of the demand for labor is the percentage change in the quantity of labor demanded divided by the percentage change in the wage. The symbol h is often used for this elasticity, and we can express h as follows: h 5 D%LyD%w (3-1) Copyright 2021 Cengage Learning.

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  In Defence of Labour Market Institutions

  Cultivating Justice in the Developing World

  • J. Berg, D. Kucera, J. Berg, D. Kucera(Authors)
  • 2008(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  28 In order to derive the Elasticity of Demand for Labour, two different assumptions are made – the first holding output constant, the second holding capital constant – which lead to different functional forms. (i) Holding output constant : In this first case, output and the user cost of capital are held constant. On the other hand, capital and labour vary as the relative price of inputs changes. The Elasticity of Demand for Labour is obtained by solving the three-equation system given by differentiating the production function and the two first-order conditions. This yields η LL/Q = −(1 − a)σ, where (1 − a) is the share of capital in total output (assumed to be equal to capital’s output elasticity) and σ is the elasticity of substitution. Assuming the production function is the Cobb–Douglas Q = A 0 e λt L α K (1 − α) , the three-equation system leads to the equation: ln L = −{(1 − α)ln[(1 − α)/α]}−λt + ln Q − (1 − α) ln w + (1 − α) ln v (7.1) where the estimate of ln w is the Elasticity of Demand for Labour, given that σ = 1 (Cobb–Douglas). In this case, if the firm is in equi- librium and there is perfect foresight, given a = α = 0.75, if we were to estimate ln L = c + b 1 t + b 2 ln Q + b 3 ln w + b 4 ln v, we should expect that ˆ b 2 = 1.0, ˆ b 3 = −0.25 (the Elasticity of Demand for Labour) and ˆ b 4 = 0.25. A second procedure uses the Cobb–Douglas cost function and Shep- ard’s lemma (∂C/∂w = L). The cost function is given by C = Bw α v (1−α) Qe −λt . 124 In Defence of Labour Market Institutions Differentiating with respect to the real wage rate and expressing the result in logarithmic form leads to expression (7.1). Alternatively, one can use the marginal revenue product of labour curve to obtain an estimate of the Elasticity of Demand for Labour. This can be obtained by differentiating the total revenue function with respect to labour.

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  Theory of Unemployment

  • Arthur Cecil Pigou(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  a fortiori for the elasticities relevant to longer periods.

  1 The following table gives the percentage deficiency in wage-rates associated with a 10 per cent excess of demand for various elasticities of demand in respect of the initial (lower) quantity of labour demanded, upon the assumptions that over the relevant range the demand function is (1) linear, (2) a constant elasticity function.

  Passage contains an image CHAPTER III THE DETERMINATION OF THE SHORT-PERIOD Elasticity of Demand for Labour IN PARTICULAR OCCUPATIONS, IN RESPECT OF A GIVEN REAL WAGE-RATE, IN CONDITIONS OF FREE COMPETITION

  § 1.PROVIDED that employers in any centre are not in a position to exercise monopolistic power against their customers, the quantity of labour demanded there at any given rate of real wage is such that the value in terms of wage-goods of its marginal net product (i.e. of the difference made to the total physical yield by the marginal man with the help of existing equipment)1 approximates to that rate of wage plus the rate of employers’ contribution to sickness and unemployment insurance. Henceforth, for economy of language, I shall use the term wage to include these elements, so that reference to them need not again be made. If, then, conditions of competition being assumed, we write x for the quantity of labour employed in any occupation and F′(x) for the rate of wage, as above defined, in terms of wage-goods, the elasticity of the real demand for labour in respect of a quantity x may be written . The purpose of this chapter is not to provide any concrete information, but to set out in an orderly way the questions that must be answered if we are to determine the value of Ed

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  Available until 5 Dec |Learn more

  Modern Labor Economics

  Theory and Public Policy - International Student Edition

  • Ronald G. Ehrenberg, Robert S. Smith, Kevin F. Hallock(Authors)
  • 2021(Publication Date)
  • Taylor & Francis

    (Publisher)

  average consumption per capita, economic theory leads us to say that society has been made better off—but that is not completely correct.

  EMPIRICAL STUDY 4.1

  ESTIMATING THE LABOR DEMAND CURVE: TIME SERIES DATA AND COPING WITH “SIMULTANEITY ”

  When a proposed labor market policy increases the cost of labor, we frequently want economists to tell us more than “it will reduce employment.” We want to know how much employment will be affected. Thus, for practical purposes, estimates of the elasticity of demand for labor are helpful.

  Estimating the elasticity of demand for labor is actually difficult, which helps account for how few studies of demand elasticity were cited in Table 4.1 . First, we can obtain credible estimates only if we have data on wages and employment for groups of workers who are reasonably homogeneous in terms of their job requirements, their substitutability with capital, and the characteristics of product demand facing their employers. Given the diversity of firms that hire workers in a given occupation (e.g., security guards are hired by retailers, schools, and movie stars), homogeneity often requires analyzing groups so narrow that data are difficult to obtain.

  A second problem in estimating labor demand curves is that wages and employment are determined simultaneously by the interaction of supply and demand curves, and both curves show a (different) relationship between wages and employment. If we gather data just on wage and employment levels, we will not be able to tell whether we are estimating a demand curve, a supply curve, or neither. Consider diagrams 1 and 2, which show wage (W) and employment (E) outcomes in the market for an occupation.

  What we hope to do is illustrated in diagram 1. There the labor demand curve remains unchanged, but the supply curve shifts for some reason. All that is observed by the researcher are points a and b

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  Introduction to Economics

  Social Issues and Economic Thinking

  • Wendy A. Stock(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  SUMMARY In this chapter, we learned about the elasticity of demand, which measures how respon- sive consumers are to changes in the prices of goods and services. When changes in quantity demanded are relatively large in response to price changes, demand is elas- tic. When changes in quantity demanded are relatively small in response to price changes, demand is inelastic. Goods with few substitutes and goods that are neces- sities have relatively inelastic demand. Demand tends to be more elastic for goods when consumers have more time to adjust to price changes and when consumers spend larger fractions of their incomes on the goods. How total revenue responds to price changes is influenced by the elasticity of demand. When the demand for a good is inelastic, sellers can increase total revenue by increasing the price of the good. When demand is elastic, sellers can increase total revenue by decreasing the price of the good. KEY CONCEPTS • Elasticity • Price elasticity of demand • Elastic demand • Inelastic demand • Perfectly inelastic demand • Perfectly elastic demand • Unit elastic demand • Elasticity coefficient • Total revenue K e y C o n c e p t s 9 1 9 2 C H A P T E R 5 E l a s t i c i t y DISCUSSION QUESTIONS AND PROBLEMS 1. Suppose that the adoption fee at the animal shelter is initially $15.00 and the average number of animals adopted per week at that price is 100. In the face of ris- ing costs, there is an increase in the pet adoption fees at the animal shelter from $15.00 to $22.50 (a 50 percent price increase). Proponents of the increase argue that it is necessary to raise revenues for the shelter. Critics of the plan worry that the fee increase might decrease adoptions enough to actually lower shelter revenues. a. What is the revenue earned by the shelter for ani- mal adoptions before the fee increase? b. Suppose animal adoptions fall by 10 percent in response to the 50 percent fee increase (to 90 animals per week).

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