31E00700 Labor Economics:: Matti Sarvimäki 8 Nov 2012
31E00700 Labor Economics:: Matti Sarvimäki 8 Nov 2012
31E00700 Labor Economics:: Matti Sarvimäki 8 Nov 2012
Lecture 4
Matti Sarvimäki
8 Nov 2012
Introduction Short-Run Long-Run Does Work-Sharing Work?
1 Supply of labor
Introduction
Labor demand is derived demand
Introduction
Labor demand is derived demand
Introduction
Labor demand is derived demand
The total product curve gives the relationship between output and the number
of workers hired by the rm (holding capital xed). The marginal product curve
shows the output produced by each additional worker, and the average product
curve shows output per worker.
First-Order-Condition
pfE E , K =w
i.e. value of the marginal product of labor, VMPE = pfe (), equals the
price of the unit of labor.
Labor Demand in the Short-Run
Firm's problem
pf E , K − wE − rK
max
{E }
First-Order-Condition
pfE E , K =w
i.e. value of the marginal product of labor, VMPE = pfe (), equals the
price of the unit of labor.
This yields the short-run labor demand curve for the rm
Esrd =E w , p, K
Introduction Short-Run Long-Run Does Work-Sharing Work?
38
VAPE
22
VMPE
Number of Workers
1 4 8
A prot-maximizing rm hires workers up to the point where the wage rate
equals the value of marginal product of labor (left panel). This corresponds to
the marginal cost of production being equal to the output price (right panel).
38
VAPE
22
VMPE
Number of Workers
1 4 8
A prot-maximizing rm hires workers up to the point where the wage rate
equals the value of marginal product of labor (left panel). This corresponds to
the marginal cost of production being equal to the output price (right panel).
For example, if the wage is $22, the rm hires eight workers. However, if the
wage is $38, the value of average product of labor would be less than the wage
→ the rm does not hire anyone
D
20
20
10
10
D
15 28 30 Employment 30 56 60 Employment
If the wage rate falls, all the rms in the industry will increase their output. As a
result, the price of the output will decrease and labor demand will adjust downwards
31E00700 Labor Economics: Lecture 4 Matti Sarvimäki
Labor Demand in the Long-Run
Firm's problem
max pf (E , K ) − wE − rK
{E ,K }
[as before, but now the rm chooses the level of labor and capital]
Labor Demand in the Long-Run
Firm's problem
max pf (E , K ) − wE − rK
{E ,K }
[as before, but now the rm chooses the level of labor and capital]
Equilibrium
The FOCs are pfE (E ∗ , K ∗ ) = w and pfK (E ∗ , K ∗ ) = r , hence
fE (E ∗ , K ∗ ) w
=
fK (E ∗ , K ∗ ) r
i.e. the slope of the isoquant curve equals the slope of the isocost line
Labor Demand in the Long-Run
Firm's problem
max pf (E , K ) − wE − rK
{E ,K }
[as before, but now the rm chooses the level of labor and capital]
Equilibrium
The FOCs are pfE (E ∗ , K ∗ ) = w and pfK (E ∗ , K ∗ ) = r , hence
fE (E ∗ , K ∗ ) w
=
fK (E ∗ , K ∗ ) r
i.e. the slope of the isoquant curve equals the slope of the isocost line
Isoquant Curves
Capital
X
ΔK
Y
q1
q0
ΔE Employment
All capital-labor combinations that lie on a single isoquant produce the same
level of output. The input combinations at points X and Y produce q9 units of
output. Combinations of input bundles that lie on higher isoquants must
produce more output. The slope of the isoquant curve corresponds to the
marginal rate of technical substitution
31E00700 Labor Economics: Lecture 4 Matti Sarvimäki
Introduction Short-Run Long-Run Does Work-Sharing Work?
Isocost Lines
Capital
C1/r
All capital-labor combinations that lie on a single isocost curve are equally
costly. Capital-labor combinations that lie on a higher isocost curve are more
costly. The slope of an isoquant equals the ratio of input prices − wr .
31E00700 Labor Economics: Lecture 4 Matti Sarvimäki
Introduction Short-Run Long-Run Does Work-Sharing Work?
C1/r
A
C0/r
P
175
B
q0
100 Employment
Capital
C0/r
R
75 P
ʹ′
q0
Wage is w1
Wage is w0
25 40
A wage reduction attens the isocost curve. If the rm were to hold the initial
cost outlay constant at C0 , the isocost would rotate around C0 and the rm
would move from point P to point R. A prot-maximizing rm, however, will
not generally want to hold the cost outlay constant when the wage changes.
Introduction Short-Run Long-Run Does Work-Sharing Work?
Dollars Capital
MC0 MC1
p R
P
150
100
100 150 Output 25 50 Employment
A wage cut reduces the marginal cost of production and encourages the rm to
expand (from producing 100 to 150 units). The rm moves from point P to
point R, increasing the number of workers hired from 25 to 50.
C1/r
Q
C0/r
R
P
200
D
100
Wage is w1
Wage is w0
25 40 50 Employment
A wage cut generates substitution and scale eects. The scale eect (from P
to Q) encourages the rm to expand, increasing the rm's employment. The
substitution eect (from Q to R) encourages the rm to use a more
labor-intensive method of production, further increasing employment.
31E00700 Labor Economics: Lecture 4 Matti Sarvimäki
Introduction Short-Run Long-Run Does Work-Sharing Work?
Short-Run
Demand Curve
Long-Run
Demand Curve
Employment
In the long run, the rm can take full advantage of the economic opportunities
introduced by a change in the wage. As a result, the long-run demand curve is
more elastic than the short-run demand curve.
31E00700 Labor Economics: Lecture 4 Matti Sarvimäki
Introduction Short-Run Long-Run Does Work-Sharing Work?
Elasticity of Substitution
Elasticity of Substitution
Capital and labor are perfect substitutes (σ = ∞) if the isoquant is linear (two
workers can always be substituted for one machine). The two inputs are perfect
complements (σ = 0) if the isoquant is right-angled (the rm then gets the
same output when it hires 5 machines and 20 workers as when it hires 5
machines and 25 workers)
Skilled and unskilled labor, old and young workers, old and
new machines...
Skilled and unskilled labor, old and young workers, old and
new machines...
Price of Price of
input i input i
D1 D0
D0 D1
Employment of Employment of
input i input i
The labor demand curve for input i shifts up if the price of a substitutable input
rises (left panel) and down if the price of a complement rises (right panel)
Work-Sharing
Work-Sharing
Work-Sharing
Work-Sharing
Background
where g () is the production funtion, h hours per worker, N number of workers, K
capital, w wages, f a xed-cost of hiring a worker, p overtime premium, hs standard
hours (anything above this is overtime) and r rental rate of capital.
Model
Firm's problem
max g (h, N , K ) − whN − fN − pw (h − hs ) N − rK
{h,N ,K }
where g () is the production funtion, h hours per worker, N number of workers, K
capital, w wages, f a xed-cost of hiring a worker, p overtime premium, hs standard
hours (anything above this is overtime) and r rental rate of capital.
where g () is the production funtion, h hours per worker, N number of workers, K
capital, w wages, f a xed-cost of hiring a worker, p overtime premium, hs standard
hours (anything above this is overtime) and r rental rate of capital.
y
ln it = β2 hsit + β3 hsit −1 + ui + vt + it
ln yit = β2 hsit + β3 hsit −1 + ui + vt + β1 t + it
ln yit = β2 hsit + β3 hsit −1 + ui + vt + β1 t + β4 wit −1 + it
y
ln it = β2 hsit + β3 hsit −1 + ui + vt + it (1)
Spec. 1: timing
of standard hours reduction independent of
time-specic unobservables → deviations from common time-eects (after
conditioning on time-invariant industry-eects) caused by the treatment
Spec. 2: as 1, but allowing for industry-specic trends
Spec. 3: as 2, but also conditioning on industry-level bargained
wages (probably should not do this as wages likely aected by standard hours)
Impact on Employment (Table V)
Col 1, last row
point estimate: one hour decrease in standard hours decreases
employment by 3.8 percent
however, standard error is 3.6 percent → no statistically signicant
eect
Cols 2 and 3: similar results
IV is used here to correct for attenuation bias due to measurement
error (not selection)
note that measurement error always leads to a bias towards zero
but this can be corrected if one has two independent measures of
the same thing (one measure used as an instrument for the other)
Cols 4 and 5: weighting by industry size reduces the estimates
not clear why to weight (treatment is at industry-level)
the dierence between unweighted and weighted results simply tells
you that less was going on in larger industries
.... and the dierence between the results from alternative
specications are not statistically signicant anyways
Introduction Short-Run Long-Run Does Work-Sharing Work?
Benchmarks
Conclusions
Hours
Wages
Conclusions
Hours
Wages
Employment
This study does not have enough data to really tell what
happens
Nevertheless, a reasonable working hypothesis is that
work-sharing does not increase employment
Additional evidence: Crépon, Kramarz (2002, JPE) conclude
that an one-hour reduction of the workweek decreases
employment by 24%