The following points highlight the four major determinants of the elasticity of labour demand. The determinants are: 1. The Availability of Good Substitutes 2. Elasticity of Demand for the Products of Unionized Firms 3. The Proportion of Labour Cost in Total Cost 4. The Elasticity of Supply of Substitute Inputs.
Determinant # 1. The Availability of Good Substitutes:
When it is difficult to substitute other factors such as capital for unionized labour to produce a commodity, the bargaining power of union is strengthened.
As Grawtney and Stroup have put it, “Since non-union labour is a good substitute for union labour, the power of unions to exclude non union labour is an important determinant of union strength. Unless a union can prevent non-union employees from entering an occupation and cutting wages below the union level, it will be unable to raise wages significantly above the free-entry level.”
However, availability of capital in the form of machines that are close substitutes for labour will reduce the bargaining power of trade unions considerably. A rise in wages will induce employers to mechanize. A substantial wage increase can thus lead to a shortfall in the demand for unionized labour.
While highlighting the importance of substitute inputs economists often make a comparison of the experiences of elevator operators and airline pilots. It is normally observed that when elevator operators of many multi-storeyed buildings form unions and negotiate substantial wage increases, their gains are short-lived.
Residents of such houses turn to automated elevators and the employment of elevator operators fall suddenly. In contrast, airplane pilots are able to maintain wages above the free-market levels without much substitution in production. While people do not normally object to riding an automated elevator, they are unlikely to tolerate an automated aircraft.
Determinant # 2. Elasticity of Demand for the Products of Unionized Firms:
If the demand for the good produced by union labour is inelastic, the output produced by unionized firm will not fall much if the union pushes up wages (and costs). Thus if a union is going to have a significant impact on wages, its workers must produce a good for which demand is inelastic (such as bread).
Determinant # 3. The Proportion of Labour Cost in Total Cost:
If the wage bill of the unionized labour is a very small proportion of total production cost, demand for minimised labour will tend to be relatively inelastic.
For example, since the wages of carpenters and airplane pilots are a very small proportion of the total cost of production in the housing and air travel industries, respectively, a doubling or even tripling of the wages of carpenters or airline pilots would result in only a 1% or 2% increase in the cost of housing or air travel.
Thus a substantial increase in the price of such factors is likely to have little, if any, impact on product price, output, and employment. This factor has been called by Milton Friedman ‘the importance of being unimportant’ because it is an important determinant of the strength of the union.
Determinant # 4. The Elasticity of Supply of Substitute Inputs:
We have just noted that if wage rates in the unionized sector are pushed upward, firms will look for substitute inputs. Consequently the demand for such inputs will increase. If the supply of such substitutes (such as non-union labour) is inelastic, however, their price will rise sharply in response to an increase in demand.
The higher price will reduce the attractiveness of the substitutes. An inelastic supply of substitutes will thus strengthen the bargaining power of the union by making the demand for union labour more inelastic.