Chapter 4. Labor Demand Elasticities.

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 wage, 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 Summary of studies by Daniel Hammermesh (1993)

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

8. 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?

9. 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

10. 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.

11. Predictions for Union Wages • Substitution of capital for labor • Reduced labor demand and less employment • More capital intensive • Effect on elasticity of labor demand? • Effect on union bargaining power and wages? • Effect on power of strike threat? • More competitive product market • Reduced Increased competition • Effect on elasticity of labor demand

12. Dockworkers • Containerisation radically altered cargo handling • Capital substituted for labor • Port of NY/NJ • 1970: 30,000 longshorement • 1986: 7,400. Dockworker Earnings, Containerisation, and Shipping Deregulation Author(s): Wayne K. Talley Source: Journal of Transport Economics and Policy, Vol. 36, No. 3 (Sep., 2002), pp. 447-467

13. 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 away • East 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. Dockworker Earnings, Containerisation, and Shipping Deregulation Author(s): Wayne K. Talley Source: Journal of Transport Economics and Policy, Vol. 36, No. 3 (Sep., 2002), pp. 447-467

14. 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)

15. 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).

16. 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.

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: Technological Change • Does technological advance make society worse off? • PPF as illustration of gains from technological advance. • Winners and losers • Gross compliments or gross substitutes? • Gains exceed loss, but can winners compensate losers? • Unemployment insurance, retraining, etc. • These programs lead to inefficiencies as well.