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

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Author Info

  • Saul D. Hoffman

    ()
    (Department of Economics,University of Delaware)

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.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2008/UDWP2008-01.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 08-01.

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Length: 15 pages
Date of creation: 2008
Date of revision:
Publication status: Forthcoming in Journal of Economic Education.
Handle: RePEc:dlw:wpaper:08-01.

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Postal: Purnell Hall, Newark, Delaware 19716
Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Keywords: Labor Demand; Hicks-Marshall Rules;

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