ec350Chp4 - Elasticity of Labor Demand l Let us talk about...

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Elasticity of Labor Demand Let us talk about the minimum wage law Traditional microeconomic analyses tells us that federally mandated minimum wage laws will lead to increased unemployment Since a minimum wage that is higher than the equilibrium wage would result in excess supply of workers,that is unemployment.
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Elasticity of Labor Demand D S Wo L0 Wm Excess labor L2 L1
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Elasticity of Labor Demand The important question is how responsive is the demand for labor? For sure LARGE increases in the minimum wage will lower the level of employment but what about SMALL increases? The responsiveness of labor demand to a change in wage rates is normally measured as an “elasticity”
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Elasticity of Labor Demand The own wage elasticity of demand for labor is defined as the percentage change in its employment given a 1% change in the wage rate η =(% E)/(% W) If η >1, then labor demand is elastic If η <1, then labor demand is inelastic If η =1, then labor demand is unit-elastic
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Elasticity of Labor Demand This elasticity is negative since E and W move in opposite directions. We are concerned about the ABSOLUTE VALUE of this elasticity This is because if wages go up (down), employment goes down (up) Look at the magnitude
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Elasticity of Labor Demand Suppose wages goes up by 5% and as a result employment falls by 2%. Then the elasticity of labor demand is 0.4 which implies labor demand is INELASTIC since the percentage change in employment is less than the percentage change in wages What is η is wages go up by 2% and employment declines by 3%?
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Elasticity of Labor Demand Different elasticities D1 D2 W1 W2 E1 E2 E3 E4 The Demand curve D2 is much more elastic than D1
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Elasticity However it is not quite accurate to talk about the elasticity of a demand curve On a straight line demand curve the elasticity varies from one region to the other Consider the demand curve: W=14 - 0.2L
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Elasticity Graphically it looks like 14 70 Employees Wages($) 7 35 10 20 4 50 Midpoint elasticity=1 Elastic Inelastic M
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Hicks-Marshall Law of Derived Demand Own wage elasticities are important for policy making Factors affecting own wage elasticity can be summed by “Four laws” The laws state that other things being equal the own wage elasticity of demand for a category of labor is high under the following conditions:
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Hicks-Marshall Law of Derived Demand 1. When the price elasticity of product being produced with labor is high 2. When there are close substitutes available 3. When the supply of other factors of production is highly elastic when the labor costs are a large share of the total cost of production
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Hicks-Marshall Law of Derived Demand An increase in the wage rate affects the demand for labor in two steps. First, an increase in the wage rate makes labor
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This note was uploaded on 11/20/2010 for the course ECONOMICS 331 taught by Professor Mj during the Fall '10 term at University of Alberta.

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ec350Chp4 - Elasticity of Labor Demand l Let us talk about...

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