Transcript Topic 3 - Empirical and policy aspects of demand for labour Professor Christine Greenhalgh P Cahuc and A Zylberberg (2004) Labor Economics, Chapter 4:

Topic 3 - Empirical and policy
aspects of demand for labour
Professor Christine Greenhalgh
P Cahuc and A Zylberberg (2004) Labor Economics, Chapter
4: Labor Demand, part 2.
Griliches, Z., 1969. Capital–skill complementarity. Review of
Economics and Statistics 51, pp. 465–468.
T Boeri and J van Ours (2008) The Economics of Imperfect
Labor Markets, Chapter 2: Minimum Wages. A Manning
(2003) Monopsony in Motion, Chapter 12: The Minimum
Wage and Trade Unions.
H Robinson (2002) ‘Wrong side of the track? The impact of
the minimum wage on gender pay gaps in Britain’, Oxford
Bulletin of Economics and Statistics, Vol. 64 (5), December.
Demand for labour input – maximising
profit by minimising costs of production
π(Y) = P(Y).Y - C( W, R, Y)
P = price of output (can vary with output if not perfectly
competitive output market);
Y = level of output chosen to maximise profit;
W = wage per unit of employment;
R = cost per unit of capital K
Profit maximising output is where price equals a markup factor times marginal cost of production
Size of mark-up depends on output price elasticity
Mark-up = 1 if product market is perfect competition
Mark-up is > 1 if imperfect competition
Optimal combination of inputs is when each factor is
used so that its marginal productivity equals the
profit mark-up times its factor cost
Derivation of an empirical demand
function for labour (1)
• Decide on production function (summary of
technological possibilities) against which firms
have to maximise profits
• Specify nature of product and factor markets to
decide whether prices are seen as constant
(competitive) or changing with quantities (not
competitive)
• Write down conditions for max. profits and derive
the demand for labour
• Examples of production functions are
Cobb-Douglas (considered restrictive as σ = 1)
CES (constant elasticity of factor substitution
but with values of σ other than 1)
• This approach permits estimation of unconditional
demand for labour (any output may be chosen)
Derivation of an empirical demand
function for labour (2)
• Alternative approach avoids choice of specific
production function and specifies directly a cost
function
• Cost function has to have properties considered
reasonable for case of cost minimisation in
choice of inputs for a given output
• Examples given in Cahuc and Zylberberg are
Leontief & Translog functions
• These cost functions permit the elasticity of
substitution to vary with wages and with share of
input in total costs
• The cost function approach permits estimation of
the conditional demand for labour, given a
known level of desired output
Elasticity of demand for labour
L = f (W, R) or L = f (W, R, Y)
ηLW = unconditional elasticity:
how much does demand vary if wage rate changes
and choice of profit maximising output also changes?
ηLW|Y = conditional elasticity:
how much does demand vary if wage rate changes
but output is kept constant?
Conditional elasticity reflects the possibility of factor
substitution between inputs of capital and labour
ηLW = ηLW|Y + ηLY.ηYW
Unconditional ηLW is sum of substitution and scale
effects
Scale effect is multiple of output elasticity of demand
for labour and elasticity of output w.r.t. the wage rise
Empirical values for demand elasticities
Cahuc & Zylberberg quote Hamermesh (1993)
Unconditional
ηLW = 1.0
Conditional
ηLW|Y = 0.3
It can also be shown that:
ηLW|Y = - (1- s) σ
where s is share of labour in total cost and σ is the
elasticity of substitution of labour and capital
Given conditional elasticity of 0.3 and known share
of labour of 0.7 in most advanced countries then
elas. of substitution
σ = 1.0
Implications of these estimates
• Unit value of unconditional elasticity implies the
wage bill is constant along the demand curve
• This suggests a fairly large rate of trade-off
between jobs and wage rises for union bargaining
(in right to manage model)
• Large trade-off for government with imposition of
minimum wages in competitive markets
• Large difference between conditional and
unconditional elasticity means that the scale effect
is a significantly big component of the adjustment
to any wage cost increase
• Unitary elasticity of substitution means that CobbDouglas production function is an acceptable
approximation for analysing aggregate production
Adjustments in the short and long
run with asymmetric costs
Distinguish between no. of workers and hours per
worker in labour demand
• Changing employment incurs hiring or firing
costs (which are not equal, thus asymmetric)
• Changing hours of work incurs payment of
overtime hours or compensation for short time
Distinguish between workers on permanent
contracts and those on temporary contracts
• Temporary workers generally have lower claims
to redundancy pay
• Some temporary workers are hired at higher
hourly rates e.g. agency staff
Empirical evidence on adjustment
• Over the business cycle hours per worker adjust
more than no. of workers => labour hoarding
• This phenomenon reflects higher adjustment
costs for workers than for hours
• In the US: hiring costs > firing costs
• In France: firing costs > hiring costs
• Net impact on jobs/unemployment of rise in
hiring and firing costs is difficult to estimate:
– Rise in hiring costs is expected to reduce
demand for workers
– Rise in firing cost encourages labour hoarding
– Expected profit per worker is reduced by
increase in firing costs so this reduces hiring
Relative adjustment rates for
temporary and permanent staff
Evidence for Spain: Benito and Hernando in Oxford
Bulletin Econ. Stat. 70(3) June 2008
Data 1985-2001 - rapid rise in share of temp. staff
from 9% mid 80s to 20% by 2001
• Wage elasticity of demand all workers = - 0.4
• Wage elasticity for permanent workers = - 0.0
• Wage elasticity for temporary workers = - 2.1
• Output elasticity of demand all workers = 0.18
• Output elasticity for permanent workers = 0.11
• Output elasticity for temporary workers = 0.63
Capital-skill complementarity
Source: Griliches 1969
Divide workers into two types –
skilled S and unskilled N
As before capital K has price of R
Wage of skilled worker is Z, unskilled is W
How do relative demands for skilled and unskilled
change if W, Z or R change?
Hypotheses: σNK > σSK as the unskilled are
more easily substituted for capital than skilled
and
σKN> σSN as capital is more easily substitutable
than is skilled labour with unskilled
Empirics of capital-skill complementarity
Griliches shows that the relative demands for
factors can be expressed by the following two
functions:
(1)
S/N = f (W/Z, R/Z)
with signs of coefficients +ve and –ve
Rise in W/Z causes normal relative price effect
(switch to cheaper substitute)
Rise in R/Z shows bigger switch from K to N than
from K to S, so S/N falls
(2)
S/K = f (W/Z, R/Z)
with signs of coefficients –ve and +ve
Rise in W/Z causes bigger switch between K and
N than between S and N, so S/K falls
Rise in R/Z gives normal relative price effect
Estimates and implications of
capital-skill complementarity
• Griliches’ estimates using two databases for the
US in 1950s and 1960s confirm the signs of all
four coefficients
What are the implications?
• Suppose capital becomes cheaper through time,
for example due to innovation in producer
durables, then R/Z falls
• In (2) this will cause production to become more
capital intensive even relative to skilled workers
• But in (1) this will cause the demand for skilled
workers to rise relative to the demand for
unskilled workers
• See next lecture for more on this topic
Theory - Minimum wages, labour
demand and supply
Competition v. Monopsony
• Minimum wages (MW) in perfectly competitive labour markets face immediate trade-off of jobs and wages along the demand
curve
• Under Monopsony (or Oligopsony) standard model shows can
be some increase in employment instead
(MW creates horizontal supply curve with constant MC)
• To maximise employment under Monopsony MW is set at the
competitive market wage
• Any higher MW faces trade-off along demand curve
Additional theory relating to labour market frictions
• Reactions to rise in wage can be increased labour supply, more
intensive job search and a fall in turnover
• Also efficiency wage theory suggests rise in productivity of
those in work leading to higher employment
Employment as minimum wage rises
Employment
On Supply Curve
Minimum Wage = Minimum Wage =
Monopsony Wage Competitive Wage
On Demand Curve
Minimum Wage
Empirical studies of effects of minimum
wages (quoted in Boeri and van Ours)
• UK – Stewart Economic Journal (2004) found no adverse
effects on low wage employment
• Problem that his study was too early? (UK MW was set at
very low rates in 1999-2001)
• US – Card and Krueger AER (1994) compared workers in
fast food in New Jersey and Pennsylvania
• Found NJ employment in these establishments rose when
MW was increased in this state
• Suggests there was monopsony despite rapid turnover in
this sector (or efficiency wage effect reduced turnover)
• EU – Dolado et al. Economic Policy (1996)
• Mainly found negative effects on employment
• Effects in Europe worse for young people
Minimum wages in G5 countries (2005)
Note - Germany has no national minimum wage
Approx. 70% of its workers are covered by wages set in
collective bargaining agreements
In all four countries in table MW coverage is 100%
Country
Minimum Wage to
Average Production
Worker’s Wage (%)
France
52
Min Wage per
hour in Euros
(PPP exch. rates)
7.51
Japan
40
4.15
UK
39
6.40
US
31
3.48
UK National Minimum Wage
- rates since 1999
Age group 22+yrs
Apr-99
Jun-00
Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
£3.60
£3.70
£4.10
£4.20
£4.50
£4.85
£5.05
£5.35
£5.52
£5.73
18-21yrs
16-17yrs
£3.00
£3.20
£3.50
£3.60
£3.80
£4.10
£4.25
£4.45
£4.60
£4.77
none
none
none
none
none
£3.00
£3.00
£3.30
£3.40
£3.53
Changes in Minimum Wage rates
Age group
∆ 99-08
∆ 99-04
∆ 04-08
22+yrs
59%
18-21yrs
59%
35%
18%
37%
16%
16-17yrs
18%
Adjusting for inflation –
Real rise since 1999 in Adult Min Wage is +31%
Next increase is due 1st October 2009
Announcement expected in week of 11th May
Questions for policy now
• Having raised MW by > 30% in a decade should
its real rate remain constant now?
• Index linking could avoid MW rising above the
competitive wage for low-paid workers
• In the present severe recession has the
competitive real wage fallen? (Seems likely)
• If so should the real value of MW be reduced to
maximise employment?
• Might be sensible to keep nominal rates constant
or even reduce them given near zero inflation
• Implies trade-off between equity for the employed
and for the unemployed
Minimum wages and gender equality
Robinson article in Ox. Bull. Ec. & Stats. 2002
• Many women work in part-time jobs with low wages
• Expect MW to affect women more than men
• Can we observe Male-Female wage differential
falling when UK MW began?
Study by Robinson (2003) compares evidence for
period 1995 to 2000 (MW intro. was April 1998)
• Robinson uses data from UK Labour Force Survey
which is very large database
• Able to track changes at all points in wage
distribution
• Problem here (as with Stewart) that this was the
period of very low level of MW
Gender pay gaps in hourly wages –
raw and adjusted for characteristics
Men and women adults; characteristics include
region, industry, marital, education,union, temporary
Comparison hourly rates for adults in 3rd quarter
Robinson
Table 3
1997
Raw gap
-0.308
Adjusted
gap
-0.160
1998
-0.323
-0.177
1999
-0.303
-0.171
2000
-0.277
-0.145
Findings MW and gender wage gap
• Gender pay gap rose between 1997 and 1998
but fell again from 1998 to 1999
• No net change over two years in raw gap, but a
rise in gap adjusted for characteristics 1997-99
• Gender pay gaps (raw and adjusted) then fell
between 1999 and 2000 by 2.6 & 3.2 (log) points
respectively
• Simulation results show a rise in MW would
raise F/ M gender pay ratio by 3 points from 73.7
at £3.60 to 76.5 at £5.00
• This rise in MW has now happened so = good
news for low paid women?
• But what trade off with jobs? Back to labour
demand curve!