Labor Market

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4. 1) Labor demand is more elastic the greater the elasticity of demand for the output. When the wage rises, the marginal cost of production increases. A wage increase, therefore, raises the industry’s price and reduces consumers’ demand for the product. Because less output is being sold, firms cut employment. The greater the reduction is consumer demand, the larger the cut in employment and the more elastic the industry’s labor demand curve. Unions want to limit the availability of goods that compete with the output of unionized forms. For example, the United Auto Workers (UAW) was a strong supporter of policies that made it difficult for Japanese cars to crack into the US market. If the UAW obtained a huge wage increase for its workers, the price of American-made cars would rise substantially. This price increase would drive many potential buyers toward foreign imports. If the union could prevent the entry of Toyotas, Nissans, and Hondas into the American marketplace, consumers would have few alternatives to buying a high-priced American-made car. It is in the union’s interests, therefore, to reduce the elasticity of product demand by limiting the variety of goods that are available to consumers. 2) Labor demand is more elastic the greater labor’s share in total costs. Suppose labor is a relatively “important” input in the production process, in the sense that labor’s share of total costs is large. This situation might occur, for example, when production is very labor intensive, as with a firm using highly trained craftpeople to produce expensive handmade ornaments. In this case, even a small increase in the wage rate would substantially increase the marginal cost of production. This increase in marginal cost raises the output price and induces consumers to cut back on their purchases of the ornaments. Firms, in turn, would cut back on employment substantially. In contrast, if labor is “unimportant,” so that labor makes up only a small share of total costs, a...
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