Long run effects of a change in wages

1. Long run effects of a change in wages • Substitution Effect: Change in labor demand caused by a change in relative input prices, holding output fixed • Always toward input that became relatively less expensive • Scale Effect: Change in labor demand caused by a change in output, holding relative input prices fixed • Always in the same direction as change in output

2. Complements and substitutes Suppose price of capital falls. What will happen to labor demand? Substitution effect? Away from N Scale effect? Toward N Total effect? Depends on whether gross substitutes or gross complements

3. Complements and substitutes • Two inputs x and y are gross substitutes if as the price of x rises, the quantity of y demanded rises • PX Substitution effect toward y • Scale effect away from y Substitution effect dominates

4. Complements and substitutes • Two inputs x and y are gross complements if as the price of x rises, the quantity of y demanded falls • PX Substitution effect toward y • Scale effect away from y Scale effect dominates

5. If gross complements, scale effect dominates Suppose price of capital falls. What will happen to labor demand? Substitution effect? Away from N Scale effect? Toward N Total effect toward N

6. If gross substitutes, substitution effect dominates Suppose price of capital falls. What will happen to labor demand? Substitution effect? Away from N Scale effect? Toward N Total effect away from N

7. High wage Cost minimizing combination of H, l MPH P*MPH wH MPlP*MPlwl wH wl P*MPH P*MPl = = H0 = l0 Low wage

8. Long-Run Demand for Labor and relative unit labor costs Cost minimizing combination of H, l wH wl P*MPH P*MPl Approximate by relative unit labor costs: wH wl P*(Q/N)H P*(Q/N)l = =

9. Judith Banister. “Manufacturing earnings and compensation in China.” Monthly Labor Review August 2005

10. Source: Bureau of Labor Statistics

11. Source: Bureau of Labor Statistics

12. Source: Bureau of Labor Statistics

13. Values >100 imply that costs have risen faster in the U.S. Source: Bureau of Labor Statistics

14. Golub S.S.; Hsieh C-T.“Classical Ricardian Theory of Comparative Advantage Revisited.” Review of International Economics May 2000 WI / WUS API / APUS

15. Various corrections for currency value Golub S.S.; Hsieh C-T.“Classical Ricardian Theory of Comparative Advantage Revisited.” Review of International Economics May 2000

16. No relationship between w and ULC Peter F. Orazem (1998) “Empirical Isoquants and Observable Optima: Cobb and Douglas at Seventy” Review of Agricultural Economics 20: 489-501.

17. As ULC increases, require rising tariff protection to keep producing Peter F. Orazem (1998) “Empirical Isoquants and Observable Optima: Cobb and Douglas at Seventy” Review of Agricultural Economics 20: 489-501.

18. Toyota vs GM Production Time per Vehicle GM: 34.3 hours, 2.5% improvement since 2003 Toyota: 27.9 hours, 5.5% improvement since 2003 Source: 2005 Harbour Report  Average Labor Cost per U.S. Hourly Worker GM: $73.73 Toyota: $48 Source: GM & Toyota  Profitability per Vehicle GM: Loses $2,331 per vehicle Toyota: Makes $1,488 per vehicle Source: 2005 Harbour Report

19. How important is outsourcing for job loss in the United States? Brown , Sharon P., and Lewis B. Siegel. “Mass Layoff Data Indicate Outsourcing and Offshoring Work.” Monthly Labor Review 128 (August 2005): 3-10. Action Mass Layoff Events Separations Total excluding seasonal 3,222 641,519 (0.4% of LF) with movement of work 366 73, 217 (11% of Total) movement within country 259 (est) 57,020 (8.9% of Total) movement out of country 107 (est) 16,197 (2.5% of Total) 52% of outsourcing is to China and Mexico

20. Bednarzik, Robert W. “Restructuring information technology: is offshoring a concern?” Monthly Labor Review 128 (August 2005): 11-21. Outsourcing represents about 1% of all job losses (U.S. destroys 30 million jobs per year) U.S. has a $51 billion trade surplus in services

21. From 1979-1999, 69% of nonmanufacturing workers who lost jobs from outsourcing found jobs within one year. • 55% of these employed at lower pay • 25% had pay cuts of 30% or more

22. Circuit City lays off all sales associates paid 51 cents or more per hour above an "established pay range" - essentially firing 3,400 of its top performers in one fell swoop. Over the next eight months Circuit City's share price drops by almost 70%.