How to read this
With constant returns, industry supply is flat at and demand decides the output. When the wage rises, the industry uses less labour for two reasons: firms substitute capital for labour (how easily: ), and the dearer product sells less (how strongly: ).
- Press ▶ Raise w₁: both channels respond at once.
- The industry's labour demand elasticity is a weighted average of the two, with labour's cost share as the weight on product demand. Changing or the prices moves the balance point of the lever.
- Choose Leontief: , and only product demand is left.
Technology (constant returns)
Prices and product demand
Raising changes labour's cost share (unless ).