Chapter 4.
Labor Demand Elasticities.
• Measurement
• Determinants
• Consequences of inelastic or elastic labor
demand
– Labor market shocks
– Government policy
– Unions
• Cross elasticity of labor demand
• Consequences of positive or negative cross
elasticity of demand
Elasticity of Labor Demand
• OWN-WAGE ELASTICITY OF DEMAND.
%Ei
ii 
`
%Wi

where Ei is the level of employment
for type i labor and Wi is the
wage rate for type i labor
ii
use mid-point for calculating percent changes
• If 𝜂𝑖𝑖 > 1, labor demand is elastic.
•
< 1, labor demand is inelastic.
Elasticity of Labor Demand
• For a given wage, a steeper labor demand curve
is more inelastic
At any given wage rate,
LD0 is more inelastic than LD1.
LD0
LD1
Elasticity of Labor Demand
For a linear labor demand curve, the "midpoint" divides the curve into
an elastic and an inelastic portion.
•Calculate elasticity for
wages between
•$10-12
•$6-8
•$2-4
•What happens to total
labor income as the
wage rises?
•What wage maximizes
total labor income?
HICKS-MARSHALL LAWS OF
DERIVED DEMAND
Based on scale or substitution effects, why
is labor demand more elastic when:
1) product demand is more elastic
2) other inputs can be easily substituted for
labor
3) the supply of substitutes is more elastic
4) labor is a larger share of total cost
Estimates of Own Wage
Elasticity of Labor Demand
Application: Unions & Elasticity
• Unions wish to raise wages while
preserving employment.
• How does elasticity of labor demand affect
union “bargaining power”?
• How can unions influence elasticity of
labor demand?
Application: Unions & Elasticity
• Truckload (TL) and Less than Truckload
(LTL)
– TL: hauling grain from one part of country to
another.
– LTL: UPS, FEDEX
• Where is product demand more elastic?
• Where is labor demand more elastic?
• Where should unions have greater
bargaining power?
Application: Unions & Elasticity
• TL: Average union rate 28.4 cents.mile; unionnon-union ratio of 1.23
• LTL: average union rate 35.8 cents/mile; unionnon-union ratio 1.34
Application: Unions & Elasticity
• Unions will be most successful at raising wages in
industries with inelastic labor demand.
– Labor versus capital intensive
– Monopolistic versus competitive
• Unions will pursue & promote policies that make labor
demand more inelastic.
– Trade restrictions
– Minimum wage
– Immigration
• Unions might first seek to organize workers in
markets where labor demand is inelastic.
Predictions for Union Power
• Substitution of capital for labor
– Reduced labor demand and less employment
– More capital intensive
• Effect on elasticity of labor demand?
• Effect on union bargaining power and wages?
• Effect on power of strike threat?
• More competitive product market
– Increased competition
– Effect on elasticity of labor demand
Dockworkers
• Containerisation radically altered cargo handling
• Capital substituted for labor
• Port of NY/NJ
• 1970: 30,000 longshoremen
• 1986: 7,400.
Wayne K. Talley. Dockworker Earnings, Containerisation, and
Shipping Deregulation. Journal of Transport Economics and Policy,
Vol. 36, No. 3 (Sep., 2002), pp. 447-467
Dockworkers
• 1984 deregulation of shipping increased competition across ports
• Allowed “door-to-door” rates in addition to “port-to-port”
• Made it possible for shippers to decide on best combination
of routes for “door to door”
• Ports began competing with others 100s of miles away
• East coast began competing with west coast
• Asia shipping to East Coast began dropping cargo off ship on
west coast and using rail across the states.
Wayne K. Talley. Dockworker Earnings, Containerisation, and
Shipping Deregulation. Journal of Transport Economics and Policy,
Vol. 36, No. 3 (Sep., 2002), pp. 447-467
Cross-Wage Elasticity
%Ei
ij 
%W j
If cross elasticity >0  i & j are gross substitutes
(substitution effect > scale effect)
If cross elasticity <0  i & j are gross complements
(substitution effect < scale effect)
Cross-Wage Elasticity
Determinants of cross-elasticity:
• As type k labor's share of total cost increases, the scale
effect of an increase in Wk grows, making it more likely
that Ej drops (i.e. more likely gross complements).
• As product demand becomes more elastic, the scale
effect of an increase in Wk grows, making it more likely
that Ej drops (i.e. more likely gross complements).
• As the substitutability between the two types of labor
increases, the substitution effect of an increase in Wk on
Ej grows (i.e. more likely gross substitutes).
Cross-Wage Elasticity
Some empirical evidence:
• labor and energy are substitutes in production,
but the degree of substitutability is small.
• labor and materials are probably substitutes in
production, with the degree of substitutability
being small
• skilled labor is more likely to be complementary
with capital than unskilled labor.
Application: Minimum Wage Laws
• The debate over the desirability of a
minimum wage hike turns on:
– Elasticity of labor demand
– Who earns the minimum wage (effect on
family poverty rates)
– training and reduce future wage growth
– monopsony power
– Schooling choices