Friday, August 19, 2005

Demand Elasticity

It's interesting how many liberal ideas about helping labor rely on the inelasticity of the labor demand curve for low-wage workers. (Large percentage increases in wages lead to small percentage decreases in demand for labor.)
  • Minimum wage increases don't much affect unemployment. This idea clearly relies on the labor demand curve being very inelastic (and the labor supply curve being relatively inelastic.) If it weren't, firms would end up firing a lot of low-wage workers after each minimum wage increase, which is counter to the intent of the increase.
  • Low-skilled immigration drives down wages for low-skilled workers. Perhaps not a uniquely liberal notion, but it also relies on demand inelasticity. An inelastic demand curve implies that increases in labor supply (immigration) translate into large wage decreases and small employment increases. Firms want to hire about the same amount of labor no matter what the wage, so more labor just pushes the wage down.
  • Pushing for higher wages in third world countries won't result in fewer third world jobs. If demand is inelastic, higher wages don't mean much less labor demand. So it's OK to push Nike for better labor conditions in sweatshops because no one will be fired.
I'm not really familiar with the labor demand scholarship (perhaps I should be) but it's interesting to note how many partisan disputes are really just arguments over labor demand that could be resolved with some rigorous study of elasticities.

3 Comments:

Anonymous Battlepanda said...

Of course labor is inelastic. Once you have your family and have you kids, there are certain financial obligations you simply have to meet. If your wage goes down, and you cannot find a better job, you will probably end up working more hours to make up for the shortfall than working less because it is not worth your while anymore. Companies can liquidate capacity. Families can't liquidate members.

10:41 AM  
Anonymous Battlepanda said...

Of course labor is inelastic. Once you have your family and have you kids, there are certain financial obligations you simply have to meet. If your wage goes down, and you cannot find a better job, you will probably end up working more hours to make up for the shortfall than working less because it is not worth your while anymore. Companies can liquidate capacity. Families can't liquidate members.

10:41 AM  
Blogger henry said...

Right...I agree that labor *supply* is probably inelastic, because of the reasons you stated. But I don't think it's nearly as clear that labor *demand* is inelastic, which is what those three things really rely on.

10:51 AM  

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