Revisiting Marshall’s Third Law: Why Does Labor’s Share Interact with the Elasticity of Substitution to Decrease the Elasticity of Labor Demand?

Saul Hoffman ()

No 08-01, Working Papers from University of Delaware, Department of Economics

Abstract: The third Marshall-Hicks-Allen rule of elasticity of derived demand purports to show that labor demand is less elastic when labor is a smaller share of total costs. As Hicks, Allen, and then Bronfenbrenner showed, this rule is not quite correct, and actually is complicated by an unexpected negative relationship involving labor’s share of total costs and the elasticity of substitution. The standard intuitive explanation for the exception to the rule, due to Stigler, describes a situation rather different than the one described in the rule. In this paper, I present an example that illustrates the peculiar negative impact of labor’s share, operating via the elasticity of substitution. I then explain why the unexpected relationship between labor’s share of total cost, the elasticity of substitution, and the elasticity of labor demand holds.

Keywords: Labor Demand; Hicks-Marshall Rules (search for similar items in EconPapers)
JEL-codes: J01 J20 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008
References: Add references at CitEc
Citations:

Forthcoming in Journal of Economic Education.

Downloads: (external link)
http://graduate.lerner.udel.edu/sites/default/file ... 2008/UDWP2008-01.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2008/UDWP2008-01.pdf [301 Moved Permanently]--> https://lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2008/UDWP2008-01.pdf)

Related works:
Journal Article: Revisiting Marshall's Third Law: Why Does Labor's Share Interact with the Elasticity of Substitution to Decrease the Elasticity of Labor Demand? (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dlw:wpaper:08-01.

Access Statistics for this paper

More papers in Working Papers from University of Delaware, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Saul Hoffman ().