Question

Please describe how an union may behave by strategically exploiting Marshall’s 4 rules.

Marshall rules for the elasticity of labor demand Alfred Marshall (1842-1924) described the “rules of derived demand”: Labor demand is more elastic the greater...

1 ... the elasticity of substitution; - the more capital and labor are substitutes, the more easily the firm can replace capital for labor when w increases;

2 ... the price elasticity of output; - w ?? p ?, so the more output responds to p the more the firm wants to reduce labor when w increases;

3 ... the labor share in total cost of production; - w ? increases total costs more when production is labor intensive; when w ? firms reduce labor more in sectors where labor share of costs large. (note: true if elast. product demand > elast. substitution)

4 ... the supply elasticity of the other inputs; - if the supply of factors that can replace labor is large, the firm will substitute away from labor more easily when w increases;

Answer 1