Question

Does the United States’ labor supply tend to be more elastic or more inelastic? Explain the competing theories. Which seems more convincing to you? Explain your answer.

Answer 1

As we know in the In the United States, labor supply tends to be inelastic relative to labor demand, and according to law, payroll taxes are essentially assessed evenly between workers and firms.The supply curve is vertical at the specific quantity.This curve highlights that any change in price does not cause a change in the quantity supplied. It is very rare for firms to face an inelastic supply curve as traditionally firms will always supply more when the price of the good they are supplying increases. An example of this might be the UK property market as demand has been outstripping demand, forcing house prices up. This is particularly the case in areas such as London where it is almost impossible to find new land to build properties. Which is an explanation over why house prices are so much expensive in this area.

Labor supply elasticity refers to what happens to the supply of workers when the overall compensation for a job changes. If a job is very elastic, the number of people willing to work will increase if the compensation increases. If the compensation decreases, the number of people willing to work will decrease. On the other hand, an inelastic labor supply won't be affected by pay changes.

A very good example of an elastic labor supply is in the field of education. As pay and benefit packages either have been cut or have remained flat, many school districts are having a difficult time finding teachers to work in their schools. For various reasons, including flat or lower salaries and lower benefit packages, people are opting to do other jobs instead of working in the classroom. These people are showing their dissatisfaction by not taking open positions, not going into the profession, or leaving the profession. If compensation and benefit packages improved, the supply of teachers should increase.

The three competing theories for economic contractions are: 1) the Keynesian, 2) the Friedmanite, and 3) the Fisherian. The Keynesian view is that normal economic contractions are caused by an insufficiency of aggregate demand (or total spending). This problem is to be solved by deficit spending. The Friedmanite view, one shared by our current Federal Reserve Chairman, is that protracted economic slumps are also caused by an insufficiency of aggregate demand, but are preventable or ameliorated by increasing the money stock. Both economic theories are consistent with the widely-held view that the economy experiences three to seven years of growth, followed by one to two years of decline. The slumps are worrisome, but not too daunting since two years lapse fairly quickly and then the economy is off to the races again. This normal business cycle framework has been the standard since World War II until now.

The Fisherian theory is that an excessive buildup of debt relative to GDP is the key factor in causing major contractions, as opposed to the typical business cycle slumps . Only a time consuming and difficult process of deleveraging corrects this economic circumstance. Symptoms of the excessive indebtedness are: weakness in aggregate demand; slow money growth; falling velocity; sustained underperformance of the labor markets; low levels of confidence; and possibly even a decline in the birth rate and household formation. In other words, the normal business cycle models of the Keynesian and Friedman's theories are overwhelmed in such extreme, over indebted situations.

Economists are aware of Fisher's views, but until the onset of the present economic circumstances they have been largely ignored, even though Friedman called Irving Fisher "America's greatest economist." Part of that oversight results from the fact that Fisher's position was not spelled out in one complete work. The bulk of his ideas are reflected in an article and book written in 1933, but he made important revisions in a series of letters later written to FDR, which currently reside in the Presidential Library at Hyde Park.

The Keynesian view is that normal economic contractions are caused by an insufficiency of aggregate demand (or total spending). This problem is to be solved by deficit spending. This view is the most convincing.