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

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… (More)

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