2. JOHN HICKS
John Richards Hicks was a British economist.
He is considered one of the most important and influential economists of the
twentieth century.
The most familiar of his many contributions in the field of economics were his
statement of consumer demand theory in microeconomics, and the IS-LM
Model(1937).
In 1972 he received the Nobel prize in Economic Sciences (jointly) for his
pioneering contributions to general equilibrium theory and Welfare Theory.[1]
3. Alfred Marshall
Alfred Marshall was an English economist.
His book Principles of economics(1890) was the dominant economic textbook
in England for many years.
It brought the ideas of supply and demand, marginal utility and Cost of
Production.
He is known as one of the founders of Neoclassical economics.
4. Own wage elasticity of demand
The own-wage elasticity of demand for a category of labor is the percentage
change in its employment (E) induced by a 1 percent increase in its wage rate
(W).
= labour elasticity
= percentage change in employment
= percentage change in wages
5. The larger its absolute value of own wage elasticity (its magnitude,
ignoring its sign), the larger the percentage decline in employment
associated with any given per centage increase in wages.
If it is greater than 1, a 1 percent increase in wages will lead to an
employment decline of greater than 1 percent; this situation is referred
to as an Elastic demand curve.
6. If the absolute value of own wage elasticity is less than 1, the demand curve
is said to be Inelastic: a 1 percent increase in wages will lead to a
proportionately smaller decline in employment.
7. If the own wage elasticity just equals -1, the demand curve is said to be unitary
elastic. It means 1% percentage change in wages would result in same amount of
percentage change in employment level.
8. The Hicks–Marshall Laws of Derived Demand
The factors that influence own-wage elasticity can be summarized by the Hicks–
Marshall laws of derived demand—four laws. These laws assert that, other things
equal, the own-wage elasticity of demand for a category of labor is high under
the following conditions:
When the price elasticity of demand for the product being produced is high.
When other factors of production can be easily substituted for the category
of labor.
When the supply of other factors of production is highly elastic (that is,
usage of other factors of production can be increased without substantially
increasing their prices).
When the cost of employing the category of labor is a large share of the
total costs of production
9. 1. Demand for the Final Product:
The increase in wages causes production costs to rise and tend to result in
product price to increase.
The greater the price elasticity of demand for the final product, the larger
the percentage decline in output associated with a given percentage increase
in price—and the greater the percentage decrease in output, the greater the
percentage loss in employment (other things equal).
Thus, the greater the elasticity of demand for the product, the greater the
elasticity of demand for labor.
10. Other things equal, the demand for labor at the firm level will be more
elastic than the demand for labor at the industry level.
For example, the product demand curves facing individual carpet-
manufacturing companies are highly elastic because the carpet of company X
is a very close substitute for the carpet of company Y.
Compared with price increases at the firm level, however,
price increases at the industry level will not have as large an effect on
demand because the closest substitutes for carpeting are hardwood, ceramic,
or somekind of vinyl floor covering— none a very close substitute for
carpeting.
Wage elasticities will be higher in the long run than in the short run. The
reason for this is that price elasticities of demand in product markets are
higher in the long run. In the short run, there may be no good substitutes for
a product or consumers may be locked into their current stock of consumer
durables.
11. 2. Substitutability of Other Factors:
The easier it is to substitute other factors of production, the greater the
wage elasticity of labor demand.
As the wage rate of a category of labor increases, firms have an incentive to
try to substitute other, now relatively cheaper, inputs for the category.
Suppose, however, that there were no substitution possibilities; a given
number of units of the type of labor must be used to produce one unit of
output. In this case, there is no reduction in employment due to the
substitution effect.
In contrast, when substitution possibilities do present themselves, a
reduction in employment owing to the substitution effect will accompany
whatever reductions are caused by the scale effect.
12. as the wage rate increased and employers attempted to substitute other
factors of production for labor, the prices of these other factors were bid up.
For example, if we were trying to substitute capital equipment for labor. If
producers of capital equipment were already operating their plants near
capacity, so that taking on new orders would cause them substantial increases
in costs because they would have to work their employees overtime and pay
them a wage premium, they would accept new orders only if they could
charge a higher price for their equip ment. Such a price increase would
dampen firms’ “appetites” for capital and thus limit the substitution of
capital for labor.
3. The Supply of other factors.
13. For another example, suppose an increase in the wages of unskilled workers caused
employers to attempt to substitute skilled employees for unskilled employees. If there
were only a fixed number of skilled workers in an area, their wages would be bid up by
employers.
The incentive to substitute alternative factors would be reduced, and the reduction in
unskilled employment due to the substitution effect would be smaller. In contrast, if
the prices of other inputs did not increase when employers attempted to increase
their use, other things equal, the substitution effect—and thus the wage elasticity of
labor demand—would be larger.
Prices of other inputs are less likely to be bid up in the long run than in the short run.
In the long run, existing producers of capital equipment can expand their capacity and
new producers can enter the market. Similarly, in the long run, more skilled workers
can be trained.
14. 4. The Share of Labor in Total Costs
If the category’s initial share were 20 percent, a 10 percent increase in the wage
rate, other things equal, would raise total costs by 2 percent.
In contrast, if initial share were 80 percent, a 10 percent increase in the wage
rate would increase total costs by 8 percent.
Since employers would have to increase their product prices by more in the
latter case, output and employment would fall more in that case. Thus, the
greater the category’s share in total costs, the greater the wage elasticity of
demand.
15. Application of Laws of Derived Demand
The Hicks-Marshall laws of derived demand is a powerful tool that can be used
to analyze a variety of economic phenomena, including:
• The impact of changes in the prices of final goods and services on the
demand for labor and other inputs.
• The impact of technological change on the demand for labor and other inputs.
• The impact of government policies on the demand for labor and other inputs.
• The Hicks-Marshall law of derived demand can also be used to develop business
strategies.
16. Here are some specific examples of how the Hicks-Marshall law of derived
demand is used in practice:
• Economists use the law to forecast employment trends. .
• Businesses use the law to develop hiring and investment strategies.
• Governments use the law to design economic policies.
Overall, the Hicks-Marshall law of derived demand is a valuable tool for
understanding the labor market and other economic phenomena. It can be
used by economists, businesses, and governments to make informed
decisions.
17. Application of Laws of Derived Demand
by Labour Union
A labor union is an organization formed by workers in a particular
trade, industry, or company for the purpose of improving pay,
benefits, and working conditions. Officially known as a “labor
organization,” and also called a “trade union” or a “workers
union’” a labor union selects representatives to negotiate with
employers
Most unions value both wage and employment opportunities for
their members.
This observation leads to the simple prediction that, other things
equal, the more elastic the demand for labor, the smaller the
wage gain that a union will succeed in winning for its members.
18. The reason for this prediction is that the more elastic the demand curve, the
greater the percentage employment decline associated with any given
percentage increase in wages.
So we can expect the following:
1. Unions would win larger wage gains for their members in markets with
inelastic labor demand curves.
2. Unions would strive to take actions that reduce the wage elasticity of
demand for their members’ services.
3. Unions might first seek to organize workers in markets in which labor
demand curves are inelastic (because the potential gains to unionization are
higher in these markets).
19. Here are some specific examples of how unions can affect the law of derived
demand:
• A union of coal miners may negotiate for a contract that includes high wages
and job security provisions.
• A union of nurses may negotiate for a contract that includes high wages and
better benefits.
• A union of teachers may negotiate for a contract that includes job security
provisions and restrictions on class sizes.
Overall, unions can play an important role in shaping the labor market. By increasing
the bargaining power of workers, unions can help to ensure that workers receive a
fair share of the benefits of economic growth.
20. REFERENCES
1. MODERN LABOUR ECONOMICS, THEORY AND PUBLIC POLICY – Ronald G
Ehrenberg and Robert S Smith
2. CONTEMORARY LABOUR ECONOMICS - McConnel, Brue and
Macpherson
https://en.wikipedia.org/wiki/Hicks%E2%80%93Marshall_laws_of_derived_dem
and
MARSHALL'S RULES FOR DERIVED DEMAND: A CRITIQUE and A GENERALISATION -
Pemberton - 1989 - Scottish Journal of Political Economy - Wiley Online Library
![JOHN HICKS
John Richards Hicks was a British economist.
He is considered one of the most important and influential economists of the
twentieth century.
The most familiar of his many contributions in the field of economics were his
statement of consumer demand theory in microeconomics, and the IS-LM
Model(1937).
In 1972 he received the Nobel prize in Economic Sciences (jointly) for his
pioneering contributions to general equilibrium theory and Welfare Theory.[1]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)