Question

Suppose that the government raises the minimum wage by 20 percent. Thinking of the four Marshall’s laws of derived demand as they apply to a particular industry, analyze the conditions under which job loss among teenage workers in that industry would be smallest. (Hint: Job loss would be low if the labor demand is inelastic as there would be a small response in employment following a wage change)

Answer 1

Derived demand is the demand for factor inputs that are used for production process. The demand is secondary to the primary demand or ‘want ‘ for a commodity. For instance, when there is a lot of construction activity being undertaken then the demand for steel, cement and so on is considered derived demand.

According to Marshall, 1. A product that has many substitutes will have an elastic demand , in such cases, a rise in the wages of workers producing such products will be reflected in the form of higher market price of the commodity, in such cases total revenue from sales falls since elasticity of demand is more and the firms will face falling sales. Thus if the workers are unskilled labourers then the firm may reduce the costs by resorting to reducing the number of workers.

2. In certain cases , mechanisation may lead to greater efficiency. This is the case of farms in the developed countries where large tracts of land are tilled with the help of few labourers and a large number of machines. In such cases the if capital is more productive than labour then it lead to potential loss of jobs for the workers.

3. In some cases, the elasticity of supply of inputs used, factor and non factor inputs used is so high such that any change in the labour in proportion to other inputs used causes a major change in the total variable costs of production.

4. High labour costs could also be a reason for elastic demand for labour, if recruiting labour means more costs then the producers could delay or avoid recruitment.

In this case due to a 20% hike in the minimum wage rate by the government, the industry employing teenage workers would likely seek to employ less of the workers are postpone the recruitment of more workers. Since teenage workers are less in proportion to the total labour force, yet their productivity levels are high due to their ‘young age ‘ and agility to adapt to newer techniques of production much easily than the others, employers may prefer to use more machines and teen workers . Moreover, the wages of teen workers would be low and hence would not make a major cost change for the firms.