Question

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

Marshall's 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

SOLUTION:

For explaining how the rules of derived demand gives an effect on how an union may behave we need to study the equation which is:   

pQ = vK + wL

where p is the price of output Q, v is the price of capital K ,L is the labor with price w,

Hence according to the alfred marshall's rules it explains how labour demand changes with several factors

• When there are more  substitutes of the capital for labor it becomes easy for the union to replace capital K for labor in order to meet the output expectations. As the equation suggests,This is implied from the law of elasticity of substitution. Hence the union will hire less labor's or they will be replaced.
• If the price of the output increases hence according to the equation w will increase hence to compensate L will decrease which means Labor reduces. Hence there will be less requirements of the labor in the union.
•    According to this law when there are many labor's which have been hired hence there is increase in w this leads to the union to be labor intensive hence this leads to reduction of numbers as the number of labors are more then the recquirement hence the union will start layoffs.
• When there are more supply of other inputs which can give the same output and can reduce the price w which the union gives to the labor's this will save the cost of labor's w which is increased   and hence there will be reduction in the labors hence the union will substitute away the labors more easily with the inputs.

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