1 ANEXOS AL TOMO II
1.2 ANEXO – MOVILIDAD EN NUEVO ROCES
The previous analysis indicated that the demand for labour is a negative function of the wage rate. Consequently, in this static, partial-equilibrium framework, an exogenous increase in wages, other things held constant, would lead to a reduction in the quantity of labour demanded. The exogenous increase in wages, for example, could emanate from a union wage demand, a wage parity scheme, or wage-fixing legislation, such as minimum wages, equal pay, fair-wage legislation, or extension legislation. Although there may be offsetting factors (to be discussed later), it is important to realize that economic theory predicts there will be an adverse employment effect from these wage increases. The magnitude of the adverse employment effect depends on the elasticity of the derived demand for labour. As illustrated in Figure 5.7 , if the demand for labour is inelastic, as in Figure 5.7(a) , then the adverse employment effect is small; if the demand is elastic, as in Figure 5.7(b) , then the adverse employment effect is large. From a policy perspective, it is important to know the expected magnitude of these adverse employment effects, because they may offset other possible benefits of the exogenous wage increase. Consequently, it is important to know the determinants of the elasticity of demand for labour. As originally outlined by Marshall and formalized by Hicks (1963, pp. 241–6 and 374–84), the basic determinants of the elasticity of demand for labour are the availability of substitute inputs, the elasticity of supply of substitute inputs, the elasticity of demand for out- put, and the ratio of labour cost to total cost. These factors are related to the magnitude of the substitution and scale effects discussed previously. Each of these factors will be discussed in turn, in the context of an inelastic demand for labour in Figure 5.7(a) , which implies a wage increase being associated with a small adverse employment effect.
Availability of Substitute Inputs
The derived demand for labour will be inelastic, and hence the adverse employment effect of an exogenous wage increase will be small, if alternative inputs cannot be substituted easily for
LO4 LO4
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the higher-price labour. This would be depicted by an isoquant that is more an L-shaped as opposed to a negatively sloped straight line; that is, the marginal rate of technical substitution between other inputs and labour is small. This factor relates to the magnitudes of the substitu- tion effect.
The inability to substitute alternative inputs could be technologically determined (e.g., if the particular type of labour is essential to the production process) or it could be institution- ally determined (e.g., if the union prevents such substitution as outsourcing or the use of non- union labour or the introduction of new technology. Time also is a factor, since in the long run the possibility of substituting cheaper inputs is more feasible.
Examples of workers for whom substitute inputs may not readily be available are con- struction trades-people, teachers, and professionals with specialized skills. Even in these cases, however, substitutions are technically possible in the long run, especially when one considers alternative production processes and delivery systems (e.g., prefabricated construction, larger class size with clickers and other computer enabled devices, and the use of paraprofessionals).
Elasticity of Supply of Substitute Inputs
The substitution of alternative inputs can also be affected by changes in the price of these inputs. If the substitutes are relatively inelastic in supply, so that an increase in the demand for the inputs will lead to an increase in their price, then this price increase may choke off some of the increased usage of these substitutes. In general, this is probably not an important fac- tor, however, because it is unlikely that the firm or industry where the wage increase occurs is such a large purchaser of alternative inputs that it affects their price. Certainly, in the long run the supply of substitute inputs is likely to be more elastic.
Elasticity of Demand for Output
Since the demand for labour is derived from the output produced by the firm, then the elastic- ity of the demand for labour will depend on the price-elasticity of the demand for the output or services produced by the firm. The elasticity of product demand determines the magni- tude of the scale effect. If the demand for the output produced by the firm is inelastic, so that a price increase (engendered by a wage increase) will not lead to a large reduction in the quantity demanded, then the derived demand for labour will also be inelastic. In such circum- stances, the wage increase can be passed on to consumers in the form of higher product prices without there being much of a reduction in the demand for those products and hence in the derived demand for labour.
Steeper labour demand functions, as in panel (a), are usually more inelastic than flatter ones, as in panel (b). For a given percentage increase in the wage (from a common starting point), the reduction in employment is lower for the more inelastic demand curve.
FIGURE 5.7 Inelastic and Elastic Demand for Labour
W 0 N W 0 N D D
(a) Inelastic (b) Elastic
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CHAPTER 5: Demand for Labour in Competitive Labour Markets
3Hicks (1963, pp. 245–46) proves formally that this is true as long as the elasticity of demand for the final product is greater than the elasticity of substitution between the inputs—that is, as long as consumers can substitute away from the higher-priced product more easily than producers can substitute away from higher-priced labour. This factor thus depends on the magnitude of both the substitution and the scale effects.
This could be the case, for example, in construction, especially nonresidential construc- tion where there are few alternatives to building in a particular location. It could also be the case in tariff-protected industries, or in public services where few alternatives are available, or in most sectors in the short run. On the other hand, in fiercely competitive sectors, such as the clothing or personal computer industry where alternative products are available, then the demand for the product is probably quite price elastic. In these circumstances, the derived demand for labour would be elastic and a wage increase would lead to a large reduction in the quantity of labour demanded.
Share of Labour Costs in Total Costs
The extent to which labour cost is an important component of total cost can also affect the responsiveness of employment to wage changes. Specifically, the demand for labour will be inelastic, and hence the adverse employment effect of a wage increase small, if labour cost is a small portion of total cost. 3 In such circumstances, the scale effect would be small; that is,
the firm would not have to reduce its output much because the cost increase emanating from the wage increase would be small. In addition, there is the possibility that if wage costs are a small portion of total cost then any wage increase more easily could be absorbed by the firm or passed on to consumers.
For obvious reasons, this factor is often referred to as the “importance of being unimport- ant.” Examples of the wage cost for a particular group of workers being a small portion of total cost could include construction craftworkers, airline pilots, and employed professionals (e.g., engineers and architects). In such circumstances their wage increases simply may not matter much to the employer, and consequently their wage demands may not be tempered much by the threat of reduced employment. On the other hand, the wages of government workers and miners may constitute a large portion of the total cost in their respective trades. The resultant elastic demand for labour may thereby temper their wage demands.
Empirical Evidence
Clearly, knowledge of the elasticity of demand for particular types of labour is important for policymakers, enabling them to predict the adverse employment effects that may emanate from such factors as minimum wage and equal pay laws, or from wage increases associated with unionization, occupational licensing, or arbitrated wage settlements. Estimates of the elasticity of the demand for the particular type of labour being affected would be useful in pre- dicting the employment effect of an exogenous wage increase. However, even without precise numerical estimates, judicious statements still can be made on the basis of the importance of the various factors that determine the elasticity of the demand for labour.
Hamermesh (1986, 1993) reviews the extensive empirical literature that can be used to calculate estimates of the elasticity of demand for labour. He concludes, largely on the basis of private-sector data from the United States, that the elasticity ranges between 2 0.15 and 2 0.75, with 2 0.30 being a reasonable “best guess.” 4 That is, a 1 percent increase in wages
would lead to approximately a one-third of 1 percent reduction in employment. This adverse employment effect is, roughly, equally divided between the substitution and scale effects; that is, the substitution and scale effects are approximately equal. Many of the other propositions regarding labour demand elasticities also seem to be reflected in the empirical evidence. For example, the labour demand elasticity decreases as the skill level of the labour increases.
4Hamermesh (1993, p. 135).
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Canadian studies have obtained broadly similar estimates. For example, Gordon (1996) found that the elasticity of demand for the whole Canadian manufacturing sector was in the –0.1 to –0.3 range for the 1961–86 period. There are also a number of other Canadian studies based on microeconomic industry- or firm-level data. These studies also yield elasticity esti- mates in the middle of the range suggested by Hamermesh. Card (1990) analyzes manufac- turing employment in unionized firms, using contract-level data, and finds an implied labour demand elasticity of 2 0.62. In a study of public sector employment, teachers in school boards in Ontario, Currie (1991) also estimates an elasticity in the neighbourhood of 2 0.55. Since the technology and market conditions vary across these diverse settings, it is remarkable that the empirical studies paint such a consistent picture of the price elasticity of the demand for labour. 5