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The Elasticity of Demand for Labour

The Elasticity of Demand for Labour

  • While a change in MP or MR will move the demand curve, a change in wage rate will cause a movement along the demand curve
    • The extent to which demand changes as a result of the change in wage rate is measured by the elasticity of demand for labour
  • Elasticity of demand for labour = (%change in qty of labour demanded)/(%change in wage rate)
  • Factors that influence the elasticity of demand for labour are:
    • The price elasticity of demand for the product produced
      • If demand for the product is inelastic, the demand for the labour that produces it is also likely to be inelastic
      • This is because the rise in the price of product that results from the rise in the wage rate won’t effect output much, so employment will not fall much
    • The proportion of wage costs in total costs
      • If wages take up a high proportion of total costs, then labour will be elastic, as a change in wage costs will have a large impact on total costs.
    • The ease at which labour can be substituted by other factors
      • If it’s easy to substitute labour with capital, then demand for labour will be elastic
    • The elasticity of supply of other factors
      • If it is easy to obtain more of the factors that are used alongside labour, demand for labour will be elastic
    • The time period
      • Demand for labour is more elastic in the long run, when there is time for firms to reorganise their production methods.

Degrees of Elasticity of Demand for Labour

  • The more flexible a country’s labour market is, the more elastic demand for labour will be
    • In the USA, firms have met 2/3rds of the fall in employment by reducing their output, and 1/3rd by substituting labour with capital.
  • In capital-intensive industries, such as the chemical industry, demand for labour tends to be inelastic, as labour forms a small part of the industry’s total cost.
  • To contrast, in labour-intensive industries, such as building, labour takes up a high proportion of total costs, so demand is elastic – an increase in wage-rate will lead to a greater decrease in quantity demanded.
  • For younger and unskilled workers, elasticity of demand for labour tends to be higher, as if the wage rate decreases, firms will be willing to hire younger, unskilled workers, but if the wage-rate rises, they’d want more skilled and experienced workers (possibly due to a higher MRP)
  • The demand for low-skilled workers isn’t always elastic.
    • This is because some jobs cannot be replaced by capital or filled by unemployed workers
    • g., if there is full employment, demand for catering staff may be relatively inelastic

The Significance of Elasticity of Demand for Labour

  • Elasticity of demand for labour influences a union’s bargaining strength, the more inelastic the labour force is, the more power the union has.
  • The government, when considering raising the minimum wage or providing employment subsidies will take into account elasticity of demand
    • Altering a minimum wage will affect unskilled works
      • if demand for such workers is elastic, increasing the minimum wage will have a negative effect on employment
    • Conversely, employment subsidies could be paid to business who employ unskilled workers
      • This time, elastic demand for such labour will have a positive effect on employment