Lecture 4
Labor Demand Elasticities
1
Own-Wage Elasticity of Demand
Wage
η ii = - ∞
4
Q = 8 - 2P
The lower portion of a downward
sloping labor demand curve
is less elastic
than the upper portion.
3
ηii = -1
2
1
ηii = 0
2
4
8
6
Employment
Own-Wage Elasticity of Demand
Wage
Infinitely Elastic Labor Demand
D
ηii = −∞
Employment
Own-Wage Elasticity of Demand
Completely Inelastic Demand
Price
D
ηii = 0
Quantity
Alfred Marshall (1842-1924)
¾ Wrote one of the
original economics
text books, Principles
of Economics.
¾ First to use demand
and supply curves.
– He’s the one that got
the graphs backwards.
¾ One of the originators
of marginal analysis.
Sir John Hicks (1904-1989)
¾ John Hicks was a
prominent economist
in the middle of the
last century.
¾ Popularized IS-LM
analysis, which he
later rejected.
¾ Won the Nobel Prize
in 1972
Output Constant Labor Demand Elasticities:
US Manufacturing
sic2
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
All
Three year differences (State level IV)
Median
Mean Observations
-0.426 -0.391
8
-0.821 -0.991
4
-0.704 -1.090
13
-1.338 -1.369
15
-0.801 -0.953
9
-1.384 -1.671
7
-0.342 -0.437
7
-0.572 -0.688
8
-0.544 -0.518
8
-0.355 -0.384
9
-0.600 -0.615
6
-1.820 -1.737
8
-0.818 -0.806
8
-0.561 -0.617
12
-1.001 -0.945
12
-0.706 -0.673
16
-0.707 -0.671
17
-1.051 -1.389
6
-0.854 -0.803
12
-0.967 -1.059
8
-0.712 -0.879
193
Five year differences (State level IV)
Median
Mean Observations
-0.365
-0.368
10
-0.705
-0.846
6
-0.739
-0.851
15
-1.041
-1.128
15
-0.773
-0.763
5
-0.871
-1.109
8
-0.420
-0.397
7
-0.595
-0.617
6
-0.668
-0.702
9
-0.298
-0.401
8
-0.497
-0.538
12
-1.382
-1.468
6
-0.700
-0.812
11
-0.574
-0.702
13
-0.961
-0.947
12
-0.837
-0.758
15
-0.789
-0.759
15
-0.714
-1.048
7
-0.923
-1.137
15
-0.829
-0.953
12
-0.714
-0.823
207
Three year differences (No IV)
Median
Mean Observations
-0.405
-0.414
17
-0.892
-0.893
14
-0.432
-0.430
17
-0.486
-0.507
17
-0.394
-0.401
17
-0.465
-0.458
17
-0.329
-0.342
17
-0.497
-0.490
17
-0.307
-0.310
17
-0.402
-0.399
17
-0.426
-0.442
17
-0.555
-0.514
13
-0.441
-0.416
17
-0.388
-0.379
17
-0.413
-0.421
17
-0.433
-0.434
17
-0.430
-0.431
17
-0.446
-0.510
17
-0.344
-0.345
16
-0.503
-0.517
17
-0.444
-0.429
332
Source: Senses, Mine Zeynep, “The Effects of Outsourcing on the Elasticity of Labor Demand, mimeo, University of
Michigan, Oct. 2004.
Estimates of Substitution of Production and
Nonproduction Workers
Study
Description
Kesselman, Williamson,
and Berndt (1977)
Clark and Freeman (1977)
Berndt and White (1978)
Grant (1979)
Manufacturing, annual, 1962-71
σBK
σWK
1.28
-0.48
σBW
ηBB
ηWW
0.49
-0.39
-0.19
Manufacturing, annual, 1950-76
2.1
-1.98
0.91
Manufacturing, annual, 1947-71
0.91
1.09
3.7
SMSAs, 1970; white-collar
Professionals, managers:
0.47
0.08
0.62
Sales, clericals:
0.46
0.14
Freeman and Medoff (1982) 2-digit manufacturing, states, 1972
Union:
0.94
0.53
-0.02
Nonunion:
0.9
1.02
0.76
Source: Hamermesh, Daniel. Labor Demand , Princeton University Press (1993) pp. 110-111
-0.58
-1.23
-0.22
-0.72
-0.32
-0.18
-0.25
-0.24
-0.43
-0.12
-0.61
Own price labor demand elasticity estimates
Industry
Fixed Effects
δW
OLS Estimates
ΔδW
δW
ΔδW
Food
Construction material and ceramics
-0.302
-0.396
(-0.031)
(-0.042)
-0.01
0.007
(-0.038)
(-0.024)
-0.223
-0.295
(-0.021)
(-0.035)
0.011
-0.012
(-0.07)
(-0.092)
Mechanical electric industry
-0.312
(-0.047)
-0.002
(-0.212)
-0.293
(-0.057)
0.009
(-0.07)
Chemical
Textile, clothing and leather
-0.453
-0.213
(-0.024)
(-0.08)
-0.046
0.029
(-0.021)
(-0.012)
-0.448
-0.197
(-0.029)
(-0.038)
-0.053
0.042
(-0.026)
(-0.013)
Other manufacturing
-0.263
(-0.02)
0.003
(-0.07)
-0.201
(-0.024)
-0.008
(-1.254)
Notes: figures in parentheses are standard errors.
Source: Haouas, Ilham and Mahmoud Yagoubi. "Trade Liberalization and Labor Demand Elasticities:
Evidence from Tunisia, IZA Working Paper No. 1084, Bonn, Germany (March 2004).
Estimates of Substitution of Labor for
Energy and Materials
Study
ηLE
ηLM
Studies using U.S. Time Series Data
Berdt and Wood (1975)
Anderson (1981)
Morrison and Berndt (1981)
Morsworthy and Harper (1981)
Pindyck and rotemberg (1983)
Pollak, Sickles, and Wales (1984)
Manufacturing annual, 1947-71
McElroy (1987)
Kim (1988)
Harper and Gulllickson (1989)
Source: Hamermesh, Daniel. Labor Demand , Princeton University Press (1993) pp. 106-107
0.03
0.05
0.07
0.03
0.11
0.03
0.07
0.06
0.07
0.37
0.34
0.34
0.66
0.5
0.38
0.32
0.08
0.03
Effect of an Increase in the Minimum Wage
Wage
($ per hour)
Unemployment = 50
S
At the price of
$7.00, QD=125 while
Qs=175 resulting in
unemployment of
50 employees.
7.00
5.15
D
125
150
175 Employment
Effect of an Increase in the Minimum Wage
Wage
Wage
Covered Sector
Uncovered Sector
S
S1
S2
7.00
5.15
5.15
4.75
D
125 150
175
Employment
D
150 175
Employment
Federal Minimum Wage—1938-2004
19
38
19
45
19
52
19
59
19
66
19
73
19
80
19
87
19
94
20
01
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Nominal Wage
Real Wage ($2004 Dollars)
Source: Department of Labor web site: http://www.dol.gov/esa/minwage/chart.htm
Federal Minimum Wage: Level, and Relative to
Wages in Manufacturing, 1938–2004
Estimated effects of a 10% increase in the minimum wage
on teenage employment and unemployment: time-series
studies
Study
Kaitz (1970)
Adie (1971)
Moore (1971)
Kosters and Welch (1972)
Lovell (1972)
Adie (1973)
Lovell (1973)
Kelly (1975)
Gramlich (1976)
Kelly (1976)
Hashimoto and Mincer (1970);
Mincer (1976)
Welch (1976)
Regan (1977)
Mattila (1978)
Iden (1980)
Abowd and Killingsworth (1981)
Betsey and Dunson (1981)
Boschen and Grossman (1981)
Hamermesh (1981)
Ragan (1981)
Freeman (1982)
Wachter and Kim (1982)
Brown et al. (1983)
Solon (1990)
Wellington (1991)
Klerman (1992)
Card and Krueger (1995)
Percent change in
teenage
employment
-0.98
Change in teen
unemployment
rate (in
percentage
points)
-0.01
2.53
3.65
-2.96
0
0.52
-0.25
-1.2
-0.94
-0.66
-2.31
-1.78
-0.65
-0.84
-2.26
-2.13
-1.39
-1.5
-1.21
-0.52
-2.46
-2.52
-1.14
-0.99
-0.63
-0.52
-0.72
0.45
0.75
0.1
0
0.51
0.01
Minimum Wage Controversy
¾ Essentially this is what Card and Krueger did.
What they found was:
Employment Before and After New Jersey Wage
Increase (Average Number of FTE Workers Per
Resturant)
New Jersey Pennsylvania Difference
Before
20.4
23.3
-2.9
After
21
21.2
-0.2
Difference
0.6
-2.1
2.7
TABLE 1
Summary Statistics of Kentucky adults, 2004
(Author's tabulation of 2005 March CPS)
All nonelderly
Workers Under $7
adults
Per Hour
All workers
All Poor Workers
2,696,043
2,012,061
380,929
201,300
Weighted Sample in Kentucky
Individual Demographics
Age in years
Aged 16 to 19
Aged 20 to 29
Aged 30 to 39
Aged 40 to 49
Aged 50 to 59
Aged 60 to 64
Married
Male
No High School Diploma/GED
Enrolled in School
White
African-American
39.1
7.90%
22.70%
19.10%
22.70%
21.00%
6.70%
53.70%
49.50%
21.30%
9.90%
90.70%
7.20%
38.5
5.30%
24.90%
21.00%
25.30%
18.80%
4.60%
56.70%
51.10%
13.40%
7.00%
90.90%
7.10%
32.1
16.80%
36.30%
18.50%
14.50%
11.10%
2.90%
33.80%
42.00%
32.00%
23.20%
90.60%
7.80%
32.2
10.10%
41.00%
23.70%
12.80%
11.10%
1.40%
29.90%
43.30%
27.80%
11.80%
88.90%
6.70%
TABLE 1
Summary Statistics of Kentucky adults, 2004
(Author's tabulation of 2005 March CPS)
All nonelderly
Workers Under
adults
All workers $7 Per Hour All Poor Workers
Individual Work Behavior
Worked in 2004
Uninsured
Annual hours worked
Usual Work Hours Per Week
Weeks Worked in 2004
Wage Rate
Annual Cost of Raising Wage
74.60%
19.00%
100.00%
18.40%
1831.3
39.3
45.5
$18.32
$368.72
100.00%
37.00%
1441.2
35.9
39.2
$5.63
$1,947.60
100.00%
50.50%
1219.6
36
33
$7.14
$1,390.49
TABLE 1
Summary Statistics of Kentucky adults, 2004
(Author's tabulation of 2005 March CPS)
All nonelderly
Workers Under
adults
All workers $7 Per Hour All Poor Workers
Family Characteristics
Family Total Income
Number of Family Members
Number of Children Under 18
Under 100% of Poverty
Over 400% of Poverty
How Worker Fits Into Household
One worker (single or married) with kids
Worker lives with parent or relative
Two workers in married couple with or without kids
One worker (single or married) without kids
Non-relative
$58,601.86
2.7
0.7
16.50%
36.10%
$65,107.69
2.8
0.7
10.00%
41.90%
$34,355.79
2.7
0.7
36.20%
15.30%
$8,619.94
2.5
1
100.00%
0.00%
11.70%
15.50%
45.80%
20.70%
6.30%
12.50%
28.00%
25.60%
21.90%
12.00%
29.20%
12.10%
16.80%
24.40%
17.60%
Figure 1
Poverty Status of Low Wage Workers
Over 400%
14%
Under 100%
37%
300% to 400%
9%
200% to 300%
13%
100% to 200%
27%
Figure 2
Household structure of low earners
Non-relative in household
12%
Single earner with kids
12%
One earner, no kids
22%
Living with a parent or relative
28%
Dual earner
26%
TABLE 2
Estimates of job loss by raising minimum wage to $6.50 per hour
(Authors' calculations using 2005 March CPS)
Elasticity
Job Loss Low Wage Workers % of Low Wage Workers
-0.22 except Louisville & Cincinnati 24,298
380,929
6.4%
-0.22
21,556
380,929
5.7%
-0.10
9,792
380,929
2.6%
-0.30
29,392
380,929
7.7%
TABLE 4
Impact of Policies on Poverty Rates
Individuals in families with Individuals in poor
All individuals
low wage worker
families
Baseline Poverty Rate
18.50%
28.27%
100.00%
Raise Minimum Wage to $7 with hours reduction
17.90%
25.72%
96.79%
Full time, full-year work for non-elderly adults
16.58%
20.04%
89.64%
State level EITC equal to federal EITC for adults not
enrolled in school
17.28%
26.69%
93.44%
Population
4,074,129
947,953
753,608
Summary
• Own-wage elasticity of demand (ηii)
measures the percentage change in the
quantity demanded of labor that results
from a one percent change in the wage.
– If |ηii| > 1 then labor demand is elastic.
– If |ηii| < 1 then labor demand is inelastic.
– If |ηii| = 1 then labor demand is unitary elastic.
Summary
•
Hicks-Marshall Law of demand says that
the own-wage elasticity of demand is
higher when:
– The price elasticity of demand for the
product being produced is high;
– The other factors of production can easily be
substituted for the category of labor;
– The supply of other factors of production is
highly elastic;
– The cost of employing the category of labor
is a large share of the total costs of
production.
Summary
• Cross wage elasticity of demand
measures the percentage change in the
quantity demanded of one input that
results from a one percent change in the
price of another input.
• Overall demand for labor in U.S.
manufacturing appears to be slightly
inelastic.
Summary
• Demand for low skilled workers is more
elastic than the demand for high skilled
workers.
• A rise in the minimum wage should lead to
a rise in the average wages of workers in
the covered sector but a fall in
employment.
– Could lead to a fall in wages in the uncovered
sector
Summary
• Minimum wage first implemented in 1938.
• The real value of the minimum wage has
fallen since the late 1960s.
• Estimated employment effect of the
minimum wage is small, but it is negative
in all but one study.
• The minimum wage does not appear to be
an effective tool against poverty.
– EITC is much better targeted.