Question

The decline in washing machine prices in the $1950\mathrm{s}$ led to an increase in the employment of women because the ( LO5) a) output effect outweighed the substitution effect b) substitution effect outweighed the output effect c) substitution and output effects offset each other

Short answer

The correct answer is (a): the output effect outweighed the substitution effect. This implies that despite more jobs being done by machines due to the decline in washing machine prices, the increase in labor for producing more washing machines led to an overall increase in employment.

Step-by-step solution

Understanding the Output Effect

The output effect refers to how a decrease in the price of an input (in this case, washing machines) leads to an increase in production as it is now cheaper to produce. This, in turn, can lead to increased employment as more labor is needed for the higher level of production.

Understanding the Substitution Effect

The substitution effect refers to the scenario where, as the price of an input decreases, it becomes more enticing for consumers who then begin to "substitute" it for more expensive alternatives. In this instance, the substitution may refer to jobs which women opted to do instead of washing by hand, now being replaced by the use of washing machines.

Analyzing the Possible Impact on Employment

If the substitution effect outweighed the output effect, it would imply that the increase in jobs done by washing machines (due to decreased prices) offset the increase in labour for making washing machines, leading to no net increase in employment (Choice c). However, if the output effect outweighed the substitution effect, it would imply that despite more jobs being done by machines, the increase in labour for producing more washing machines led to an overall increase in employment (Choice a).

Identify the Correct Answer

In this case, the decline in washing machine prices led to an increase in employment, implying that the output effect of increased production and consequent need for more labour outweighed any job losses from the substitution effect. Therefore, the correct answer is option (a): output effect outweighed the substitution effect.

Key concepts

Output Effect

In microeconomics, the output effect plays a crucial role in understanding how changes in the market can influence production levels and employment. When the price of an input, such as washing machines, decreases, it directly lowers the cost of production for businesses.
Lower production costs allow businesses to increase their output, meaning they produce more goods.

• This heightened production usually requires more workers, thereby increasing employment.
• In the 1950s, the cost of washing machines dropped, making it cheaper for companies to produce and sell them.
• This led to higher demand, prompting manufacturers to expand, hence hiring more labor.

The output effect demonstrates that a price drop in production inputs can stimulate company growth, which then creates job opportunities. This effect was significant during the 1950s as it overshadowed the substitution effect, increasing the employment rate, particularly among women.

Substitution Effect

The substitution effect helps explain how consumers and businesses alter their behavior in reaction to price changes, influencing job dynamics in the process. When washing machines became cheaper in the 1950s:

• Households found them affordable, gradually replacing manual labor, like hand washing, with machine usage.
• This shift allowed women, who traditionally performed these tasks, to seek employment outside the home due to the time saved by using washing machines.

While more jobs were automating, leading to fewer positions in manual washing, the substitution effect in this context also offered new opportunities for employment in other areas because individuals could free up their time for different kinds of work. However, in this historical context, it did not surpass the output effect's influence on job creation in manufacturing.

Labor Economics

Labor economics examines the dynamics of labor markets, including how various factors interact to influence employment and wages. The interplay between the output and substitution effects highlights important insights in labor economics:

• Technological advancements and declining input costs can boost employment despite automation potentially reducing the number of some specific jobs.
• In the 1950s, technological innovations, such as washing machines, reshaped household work and labor markets.
• The increased efficiency from machines led to a higher demand for labor to produce these goods, thus expanding the labor force.

Understanding labor economics in this context aids in recognizing how employment trends respond to technological changes and cost adjustments. The experiences from the 1950s demonstrate an evolving economy, where technology and market dynamics facilitated greater employment opportunities.