Question

Consider the labor market for garment workers. This work used to be done largely by hand. As new machines were developed to help in the making of clothes, what do you predict happened to the demand for labor? The invention of new technology can be thought as the price of capital as falling.

1) Consider the scale effect. Do you expect this to be small or large? Consider the two factors that determine the size of the scale effect.

2) Consider the substitution effect. Do you expect this to be small or large? Consider the two factors that determine the size of the substitution effect.

3) Can you guess whether the substitution or scale effect might dominate?

4) Suppose capital and labor are gross substitutes. Would you consider new technology in the sewing industry to be a good thing or bad thing? Why?

Answer 1

We know that demand for labour means an employer willing to hire the number of labour hours based on the various exogenous factors. The cost and efficiency can affect the demand for labour. If the firm aims to efficient production so the firm try to mixed factors of production. Here the garment store is introduced a new technology then the labour demand will be declined. If the new technology may well be cheaper and more reliable than garment workers then the cost of new equipment falls. So the new technological progress has not seen continues and unstoppable decline in demand for labour.

1. We know that the scale effect means that the extent to which the firms employment of labour increases with relative input price held constant at its new level which increases the firm long run equilibrium level of output that arises from the fall in wage rate. The scale effect of fall in wage will increase the level of employment.Here the scale effect of the reduced price of capital price is relatively weak. Then the capital and category of labour are gross substitutes and the new technology reduces the demand for workers. Suppose the categories of workers are not close substitutes for new technology then the scale effect will dominate.The important factors that determine the scale effect is wage rate and technological change.
2. We know that substitution effect means substitution of labour for capital that would result of reduction in the price labour relative to capital. The substitution effect for decline machinery would substitute machinery for labour. This allows firms to produce lower costs. The substitution effect will reduce the demand for labour.The factors that determine the substitution effect is technological change and increase the quality of variable factors.
3. Here we assume that the scale and substitution effect for technological advancement scale effect will dominate if the reduced price of capital price is relatively weak.
4. Suppose the capital and labour are gross substitutes when rise in the price of factors leads the firm to reduce the unconditional demand for this factor and increases that for another. Suppose the capital and labour in sewing industry is gross substitutes then drop in the price of technology decrease the demand for workers. So this harmful for textile industries.