DiS CUSSiO n O F PrOS anD CO nS

The central question here is whether an employer's reaction to higher labor costs differs from a consumer's reaction to increased shirt prices? In general they should not be different: In both cases we are looking at how somebody's demand for something reacts to an increase in its price. With shirts, we expect that higher prices will lead customers to buy fewer shirts and to wear the shirts that they do buy for longer. With workers, higher costs will lead employers to use fewer employees and to use them more productively. In a few labor markets where one employer dominates or is the sole employer, the employer might respond differently; but such markets are rare, and increasingly so as labor forces grow and transportation improves. In fact the only important question is by how much employment falls when labor costs increase. It is not a question of whether it will fall, but rather one of how big the reduction will be. It is a more important question in the case of workers than of shirts because about 60% of all income in a modern economy is generated by employment.