151 Economics lecture 2-2-2012
Labor Demand Elasticities I will discuss first own-wage elasticity, then cross-wage elasticity and finally, labor demand and technological change. Most of the discussion follows ch. 4 of the textbook. I. A. Own-wage elasticity Many labor demand elasticities
A downward-sloping LD schedule generally is neither elastic nor inelastic. Instead, at different wage levels, LD schedule has ranges that are more or less elastic. --Elasticity depends on both the slope of the demand curve and its position. So for any given labor demand schedule, there are many (an infinite number of) labor demand elasticities. This is very important for empirical work. --Generally, when elasticity is less than (more than) 1, we say demand is inelastic (elastic). A unitary elasticity (= 1) defines the point at which the wage bill stays constant when wages increase.
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B. Marshall's four conditions for a high own-wage elasticity of labor demand. (In the text, these are the HicksMarshall laws of derived demand.) When the price elasticity of demand for the product is high. If u raise the wage, cost cant give to customers Sales decrease Lay off workers
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2. inputs. 3. high.
When there is high substitutability with other When the elasticity of supply of other inputs is
4. When labor costs are high as a share of production costs. - go to concert : the guy guide u to seat is small portion of cost. When they form union and want higher wage, still small cost, so it okay.
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C.
Empirical studies of labor demand elasticities
--In empirical work on policy effects, it is crucial to take into account the proportion of workers in a labor market that are covered and affected by the policy. --For example, the elasticity of restaurant employment with respect to a minimum wage increase will depend upon the proportion of restaurant workers who are paid at or near the minimum wage. We will examine this point in the context of minimum wage studies. --In empirical work on policy effects (of say, a minimum wage increase) the net effect on the target community depends upon the extent to which the wage increase outweighs any employment losses. II. Cross-wage elasticity A. Two types of workers
--Consider the different possibilities with two types of workers in the same production process: for example, skilled carpenters and unskilled carpenters, or carpenters and electricians. --In both cases, the two workers are unlikely to be perfect substitutes or perfect complements, but they can be gross substitutes or gross complements. The net effect depends upon the relative size of the scale and substitution effects.
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--Suppose, for example, that teen-age workers and adult workers are close substitutes maybe in restaurant Then, when the wage of teens falls and teens are substituted for adults, the demand for adult workers falls. But at the same time, with lower costs, the scale of production increases, so the net result could be increasing demand for both kinds of workers. --When the scale effect is smaller than the substitution effect, the two types of workers are gross substitutes. B. Evidence on cross-wage elasticities of demand: two kinds of labor
--Skilled labor is more likely unskilled than labor to be a complement with capital and skilled labor and unskilled are substitutes. --These findings provide the basis for the argument that skill-biased technological change has widened wage differentials. C. Contrary argument: polarization
--The proportion of workers in highly skilled occupations (computer programmers, engineers, managers) has
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increased, but so has the proportion of low skilled jobs (restaurant staff, janitors, security guards). --The middle-skilled jobs (manufacturing production workers) are disappearing with automation. --These developments call for studies with three kinds of labor: skilled, semi-skilled, and unskilled. More on this later in the semester. D. More on teens versus adults
--The text further discusses possible cross-elasticities of teens and adults. --Most teens are household members in households that have adult workers. So there can also be cross-wage labor supply elasticity effects when wages for teenagers change. These effects can be very important in any empirical situation. Ignoring these effects might lead to incorrect answers. --Teen employment rates in the U.S. have declined rapidly in the past two decades, but relative wages of teens and adults have not changed very much. This suggests that looking at the cross-elasticities might not provide the explanation. parallel employment Great recession (After 2000)
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--Minimum wage increases since 2007 have coincided with even larger declines in teen employment rates. Is this correlation or causation? --Could the Great Recession provide an alternative explanation? Stay tuned for more on this question. III. Labor Demand and Technological Change - Many ppl are displaced by technological change A. Capital-saving When a new machine replaces an old machine, technical change can be capital-using or capital-saving. B. Labor-saving
1. Examples of labor-saving technical change: machines replace workers. We usually think of these as capital-using as well as labor-saving. 2. In general, labor-saving technical change need not reduce the demand for labor. Reduced labor costs can reduce prices, which can increase the scale of output and create on net more labor demand than it destroys. 3. Example: as computers have become cheaper and more widespread, the number of workers who use computers has probably grown much more than the number of workers who lost jobs to computer automation.
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--Nonetheless, those who lost jobs may not find new ones if they do not have the skills required, including knowing how to use computers. C. Policy implications
1. Many economists--including the textbook's authors-advocate technological change (or its conceptual cousin-free trade) as improving the size of total output and recommend retraining programs for the workers who are displaced. 2. Problem with this approach: it is rare to find cases, especially in the U.S. where step 2--retraining--is done on a scale that approaches the number who are displaced. --Exception: Denmark, with its flexicurity policy. But it is not cheap--5 percent of GDP in Denmark, vs. 0.2 percent in U.S. 3. This is an example where vested interests--the winners --can prevent compensation for the losers.
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