Lecture 5_catchup

# Lecture 5_catchup - Lecture Lecture5 Elasticities contd...

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cture 5 Lecture 5 Elasticities cont’d

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Hicks Marshall Laws of Derived Demand All else equal, the own price elasticity of labor emand is high when: demand is high when: ) e price elasticity of demand for output is high 1) The price elasticity of demand for output is high. [through costs] 2) Other factors in production can easily be substituted for labor. 3) The supply of other factors in production is highly elastic (e.g. can increase capital without increasing price of capital). ) bor costs are a large share of total production costs 4) Labor costs are a large share of total production costs [think of (1)].
hy does it matter? Why does it matter? cidence of taxes Incidence of taxes Least responsive pays tax. fect of minimum wages Effect of minimum wages Loss of jobs is high when employers demand is lastic elastic. Effect of unions.

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Payroll Taxes (paid by employer) Effect depends on slopes!
roblem 1 Problem 1 Suppose the labor supply curve for lifeguards is 40 and the labor demand curve is L 200 L S =40 and the labor demand curve is L D =200 40W. If the gov’t imposes a tax of \$1 per hour er worker on ployers ow will this affect per worker on employers , how will this affect the wage for lifeguards and the number mployed? Show this graphically employed? Show this graphically. Now suppose L S =10W. How does this change your answer?

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Solution ith a \$1 per hour tax on employers it is as if they have to pay W+1 to all With a \$1 per hour tax on employers, it is as if they have to pay W+1 to all employees. As such we can write labor demand with the tax as L D =200 40(W+1). hen we plot labor market curves we always have wage on the Y axis so we When we plot labor market curves, we always have wage on the Y axis, so we must re write the labor demand in terms of W. Without taxes: W=(200 L D )/40 = 5 L D /40 (L D =200 when W=0) ith ta es W (200 40 4 0 (L 160 henW0 ) With taxes: W=(200 L D )/40 – 1 = 4 L D /40 (L D =160 when W=0) find the equilibrium wage and employment level, we must set To find the equilibrium wage and employment level, we must set labor demand equal to labor supply (we can also equate wages). Without taxes: 40=200 40(W) , 160=40W , W=4 & L=40 With taxes: 40=200 40(W+1) , 160=40W 40 ,120=40W, W=3 & L=40. Wages paid to workers decrease by the exact amount of the tax with no effect on employment. This is because labor supply is not responsive to the wage.
raph Graph 200 40

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If L S =10W. Then we equate labor supply and labor demand as before.
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## This note was uploaded on 01/09/2010 for the course ILRLE 2400 at Cornell.

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Lecture 5_catchup - Lecture Lecture5 Elasticities contd...

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