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Labor Demand and Minimum Wage: Analysis and Implications

Explore labor demand, production functions, elasticity, and implications of minimum wage policy. Understand optimal points, profit maximization, and the impact of factors on demand elasticity.

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Labor Demand and Minimum Wage: Analysis and Implications

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  1. Chapter 3 Labor Demand

  2. Solution Assignment 3 • Hick and Slutsky • Measurement at same utility (How you measure utility? or What is Thai’s utility function?) or same budget (you can measure it easily) • Old and new version • The new version measures at current situation but you can not go back to measure at the past.

  3. We will talk about • Profit maximization • Two steps decision • Short Run and Long run • In the short-run • With CE, price is exogenous variable • Cannot change plant/equipment scale • Fixed capital • Consider MP

  4. Why firm hire labor? • Demand (for good and product) from consumer • Firm acts as middleman  derived demand • Labor is different from other resource • Work situation (environment) • Social status and Opportunity • Need Respectful, Honor, Dignity

  5. Production Function • production function which is • Example Cobb-Douglas • Marginal Product • Law of diminishing returns, marginal product

  6. Optimal Point • Value of Marginal Product • Value of Average Product • Optimal at condition • At competitive market, it is equivalent to

  7. Criticism on short run theory • Homogenous assumption about workers • Realistic • How to calculate marginal product? • How to identify production function?

  8. Output TP AP MP Number of Workers

  9. Output P2 VAP P1 VMP L is not optimal L is optimal Number of Workers

  10. Wage Industry’s Demand P1 P2 Sum of Demand Number of Workers

  11. Long Run Production • In long run, all input variable can be changed • Isoquant and Isoprofit Concept • Shape of Isoquant depends on ability to substitution between two inputs

  12. Example

  13. Capital Cost Minimization Given q* find the lowest C “Least cost combination” C1 C2 C* K* q* E* Number of Workers

  14. Capital Output Maximization Given C* find the highest q If q3 = q* then C3 = C* Or If C3 = C* then q3 = q* C* K* q3 q1 q2 E* Number of Workers

  15. Capital C1 C2 Expansion Path C3 K* q1 q2 q3 E* Number of Workers

  16. Formal Derivation

  17. note

  18. Decreasing in Wage Rate Capital F E q2 q1 w1 w2 Number of Workers

  19. Capital Scale Effect and Substitution Effect W1* This is WRONG!! G F E q2 w1 w2 q1 Number of Workers x1 x2 x3

  20. Capital Scale Effect and Substitution Effect W1* C0/r G C1/r F E q2 w1 w2 q1 Number of Workers x1 x2 x3

  21. About labor demand • Always be downward sloping • Decreasing in wage rate • Scale effect  Increase Production  increase employment • Substitution Effect  labor intensive  increase employment • Factors will be reallocated • More elastic of long run labor demand than short run labor demand

  22. Determination factors of elasticity of demand • Elasticity of substitution • Elasticity of demand for product • increasing price  lower demand  decreasing labor (if labor intensive production) • Elasticity of supply for other inputs • Depend on substitutable between inputs

  23. Marshall’s Rule of Derived Demand • labor demand is more elastic the greater the elasticity of substitution • labor demand is more elastic the greater the elasticity of demand for the output • labor demand is more elastic the greater labor’s share in total cost • the demand for labor is more elastic the greater supply elasticity of other factors of production

  24. Minimum Wage • Form of Policy • A national, government – legislated minimum wage • A national minimum wage (outcome of collective bargaining agreement) • An industry level minimum wage (industry collective bargaining) • Discussion • Should the minimum wage be reduced or increased? • Is the minimum wage effective in reducing earning inequality and poverty? • Why does a minimum wage exist?

  25. Other Issues • Elasticity of labor demand • Elasticity of Substitution • Instrumental variable technique

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