Chapter 4
Labor Demand
Elasticities
Copyright © 2009 Pearson Education, Inc.
Important Definitions - Elasticity of Demand I
Elastic Demand
Inelastic Demand
Unitary 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
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Or, using differential calculus
Quic kT i me™ and a
T IFF (Unc ompres s ed) dec ompres s or
are needed t o s ee thi s pi c ture.
Or, using the mid-point formula
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
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:
Elasticity of Demand For The Final Product
Ease Of Substitution Of Other Factors
The Share Of Labor In Total Costs
The 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
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
Fair Labor Standards Act Of 1938
Nominal Wage
Real Wage
Covered Sector
Uncovered Sector
Poverty 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