A Short Note on Marshall's Third Law of Derived Demand: Why Does Labor's Share Interact with the Elasticity of Substitution to Decrease the Elasticity of Labor Demand?

14 Pages Posted: 11 Jun 2008

See all articles by Saul D. Hoffman

Saul D. Hoffman

University of Delaware - Economics

Date Written: May 7, 2008

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.

JEL Classification: J01, J20

Suggested Citation

Hoffman, Saul D., A Short Note on Marshall's Third Law of Derived Demand: Why Does Labor's Share Interact with the Elasticity of Substitution to Decrease the Elasticity of Labor Demand? (May 7, 2008). Available at SSRN: https://ssrn.com/abstract=1144053 or http://dx.doi.org/10.2139/ssrn.1144053

Saul D. Hoffman (Contact Author)

University of Delaware - Economics ( email )

413 Purnell Hall
Newark, DE 19716
United States

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