【精品】PPT课件 Long run effects of a change in wages.ppt

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
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 plements
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
Complements and substitutes
Two inputs x and y are plements 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
If plements, 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
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
High wage
Low wage
H0
l0
Cost bination of H, l
MPH P*MPH wH
MPl P*MPl wl
wH wl
P*MPH P*MPl
=
=
=
Long-Run Demand for Labor and relative unit labor costs
Cost bination 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
=
=
Judith Banister. “Manufacturing earnings pensation in China.” Monthly Labor Review August 2005
Source: Bureau of Labor Statistics