ECON 3039

Labor Economics I2013

By Elliott FanEconomics, NTU

Lecture 6Economics of Labor, 2013Elliott Fan

Labor demand elasticity

Lecture 6Economics of Labor, 2013Elliott Fan

Tax on PhD’s income

• Guo Taiming argued for tax on PhD’s low income (or occupations)

Lecture 6Economics of Labor, 2013Elliott Fan

Tax on PhD’s income

• There is no way to implement it successfully.• It’s not students who waste resources, it’s the subsidy for

higher education.

Lecture 6Economics of Labor, 2013Elliott Fan

Mandatory tips?

Lecture 6Economics of Labor, 2013Elliott Fan

• AGAIN, There is no way to implement it successfully due to non-compliance.

• Different components of wage compensation are substitues.

Mandatory tip?

Lecture 6Economics of Labor, 2013Elliott Fan

Definition of own-wage elasticity of demand

• The own-wage elasticity of demand is defined by the percent change in its employment (E) induced by a 1 percent increase in its wage rate (W):

• Using percent change, instead of level change, to avoid the effect of measurement unit.

• We usually pay attention only to the magnitude, as the sign is assumed to be negative.

Lecture 6Economics of Labor, 2013Elliott Fan

Definition of own-wage elasticity of demand

• Note that it is a measure for a point, not for the entire curve. But colloquially, a flatter demand curve exhibits a higher elasticity than a sleeper one.

• For a straight line, the higher region is more elastic than the lower region. (why?)

Lecture 6Economics of Labor, 2013Elliott Fan

Lecture 6Economics of Labor, 2013Elliott Fan

Hicks–Marshall laws of derived demand

1. When the price elasticity of demand for the product being produced is high.

2. When other factors of production can be easily substituted for the category of labor.

3. When the supply of other factors of production is highly elastic (that is, usage of other factors of production can be increased without substantially increasing their prices).

4. When the cost of employing the category of labor is a large share of the total costs of production.

To view the proof, here is an example.

Lecture 6Economics of Labor, 2013Elliott Fan

Laws 1 and 2

Lecture 6Economics of Labor, 2013Elliott Fan

Estimates of LD elasticity

Lecture 6Economics of Labor, 2013Elliott Fan

Applications of LD elasticity

Elasticity and union:

• Most unions value both wage and employment opportunities for their members.

• So the more elastic the demand for labor, the smaller the wage gain that a union will succeed in winning for its members.

• Because, the more elastic the demand curve, the greater the percentage employment decline associated with any given percentage increase in wages.

Lecture 6Economics of Labor, 2013Elliott Fan

Applications of LD elasticity

So we can infer the following:

1. Unions would win larger wage gains for their members in markets with inelastic labor demand curves.

2. Unions would strive to take actions that reduce the wage elasticity of demand for their members’ services.

3. Unions might first seek to organize workers in markets in which labor demand curves are inelastic (because the potential gains to unionization are higher in these markets).

Lecture 6Economics of Labor, 2013Elliott Fan

Applications of LD elasticityThe truck industry is split into two distinct segments:

1. One type of general freight carrier exclusively handles full truckloads (TLs), taking them directly from a shipper to a destination – LD is more elastic (why?)

2. The other type of carrier handles less than-truckload (LTL) shipments, which involve multiple shipments on each truck and an intricate coordination of pickups and deliveries – LD is less elastic.

Lecture 6Economics of Labor, 2013Elliott Fan

Definition of cross-wage elasticity of demand

• The cross-wage elasticity of demand is defined by the percent change in its employment (E) induced by a 1 percent increase in the price of another factor:

• the two factors are gross substitutes

• the two factors are gross complements

Lecture 6Economics of Labor, 2013Elliott Fan

Definition of cross-wage elasticity of demand

whether two inputs are gross substitutes or gross complements depends on the relative sizes of the scale and substitution effects. Assume that adults and teenagers are substitutes in production, a decrease in the teenage wage:

1. There is a substitution effect: for a given level of output, employers will now have an incentive to substitute teens for adults in the production process and reduce adult employment.

2. There is a scale effect: a lower teenage wage reduces costs and provides employers with an incentive to increase employment of all inputs, including adults.

Lecture 6Economics of Labor, 2013Elliott Fan

Important findings about the cross elasticity

1. Skilled labor and unskilled labor are substitutes in production.

2. We are not certain whether either skilled or unskilled labor is a substitute for or a complement with capital in the production process. What does appear to be true is that skilled (or well-educated) labor is more likely to be complementary with capital than is unskilled labor—and that if they are both substitutes for capital, the degree of substitutability is smaller for skilled labor.

Lecture 6Economics of Labor, 2013Elliott Fan

Important findings about the cross elasticity

Thus, we have 2 important implications:

1. The finding that skilled labor is more likely than unskilled labor to be a gross complement with capital is important to our understanding of recent trends in the earnings of skilled and unskilled workers (see chapter 15), because the prices of computers and other high-tech capital goods have fallen dramatically in the past decade or so.

2. Other things equal, own-wage labor demand elasticity will be larger in magnitude for unskilled than for skilled workers. (why?)

Lecture 6Economics of Labor, 2013Elliott Fan

Example: minimum wageTo estimate the effects of MW, we need to consider at least the following concerns:

1. Real vs nominal wage

Lecture 6Economics of Labor, 2013Elliott Fan

Example: minimum wageTo estimate the effects of MW, we need to consider at least the following concerns:

2. Uncovered sector – an issue about partial vs general equilibrium

Lecture 6Economics of Labor, 2013Elliott Fan

Example: minimum wageTo estimate the effects of MW, we need to consider at least the following concerns:

3. Noncompliance

• It is possible that some firms do not comply with the regulation

• This is especially possible for countries such as Taiwan, where wage compensation structure is complex and overtime work is often unpaid.

Lecture 6Economics of Labor, 2013Elliott Fan

Facts about minimum wage• Card and Kreuger’s 1992 paper is one of few outliers.

Neumark has reviewed more than 100 academic studies on the impact of government wage-setting and concluded that the vast majority “find a negative employment effect on low-skilled workers.”

• The effect of MW on confronting poverty is also limited.

• Alternative policies, such as EITC, should be considered.