Labour Demand Elasticities - Chapter 3b

Question 1

What is Elasticity?

Answer 1

Elasticity is the measure of the sensitivity of one variable to another
- it explains the shape of demand and supply curves
- measured as % change

Question 2

What is the equation for own-wage elasticity of demand?

Answer 2

nii = % change in Employment / % change in wages

Question 3

Is own-wage elasticity of demand positive/ negative? and why?

Answer 3

nii is negative, because of the inverse relationship between wages and employment

Question 4

Price elastic labour demand when

Answer 4

|nii| > 1

Question 5

Price inelastic labour demand when:

Answer 5

|nii| < 1

Question 6

Unit elastic labour demand

Answer 6

|nii| = 1

Question 7

What does cross wage elasticity of demand measure?

Answer 7

measures the percentage change in the quantity demanded of one input that results from a one per cent change in the price of another input
- different types of jobs, it can be unrelated jobs

Question 8

Own-price elasticity of demand deals with what types of jobs?

Answer 8

same type of jobs

Question 9

Cross-price elasticity of demand deals with what types of jobs?

Answer 9

different types of jobs

Question 10

Can cross wage elasticity of demand be positive / negative or both?

Answer 10

It can be both positive and negative

Question 11

What type of goods is cross wage elasticity of demand positive for?

Answer 11

Positive for gross substitutes

Question 12

What type of goods is cross wage elasticity of demand is negative for?

Answer 12

Negative for gross complements

Question 13

What is the equation for cross wage elasticity of demand?

Answer 13

njk = % change in employment of job j / % change in wages in job k

Question 14

What is the difference between own-wage elasticity of demand and cross wage elasticity of demand?

Answer 14

own = comparing employment and wage of some factor (nii)
cross = comparing employer and wage (price) of different factors (njk)

Question 15

If the minimum wage is binding (set above the equilibrium wage in the labour market) what does it lead to?

Answer 15

it should lead to an increase in wages and a fall in employment
- mainly affects those whose wages are below the minimum wage

Question 16

What does it mean to say the minimum wage is binding?

Answer 16

the minimum wage is set above the equilibrium wage in the labour market

Question 17

What is a covered industry?

Answer 17

an industry that is included under minimum wage laws

Question 18

What is an uncovered industry?

Answer 18

industry that is not included under minimum wage laws

Question 19

What are the estimated effects of minimum wage?

Answer 19

need to have a measure of elasticity of demand to measure the effect of minimum wage
- best estimate is that 10% minimum wage increase leads to 3% to 5% decline in teenage employment - inelastic

Question 20

If a curve is steep is it elastic/inelastic?

Answer 20

inelastic

Question 21

If a curve is flat is it elastic/inelastic?

Answer 21

Elastic

Question 22

Estimates of Own-Wage Labour Demand Elasticities

Answer 22

• does appear that less skilled workers have a more elastic demand
  -> true for blue collar workers in general and sales workers relative to managers
• Unions appear to decrease the elasticity of demand for both white and blue collar workers
  Blue Collar worker - physical labour in farms, factories, construction sites
  White Collar worker - desk jobs, managerial roles, professions requiring higher education

Question 23

Estimates of Cross Wage Labour Demand Elasticities

Answer 23

Likely that skilled labour and capital are gross complements.
Unskilled labour and capital are gross substitutes.
- this implies that the own price elasticity for unskilled labour should be larger - which seems to be true

Question 24

What is the effect of an increase in the minimum wage in a covered sector?

Answer 24

wage increases
employment decreases
True effect depends on the elasticity of labour supply and demand

Question 25

What is the effect of an increase in the minimum wage in an uncovered sector?

Answer 25

wage decreases
employment increases
True effect depends on the elasticity of labour
Inflow of workers - if the covered sector reduces hiring (because of higher wages), displaced workers might flow into the uncovered sector, increasing competition for jobs and possibly driving wages down

Question 26

Uncovered industry examples

Answer 26

• agriculture,
• cash in hand jobs - non registered workers,
• domestic workers (e.g., housekeepers, nannies, caregivers),
• entrepreneurs

Question 27

Covered industry examples

Answer 27

• retail
• hospitality
• health care
• education
• public sector

Question 28

On a linear demand curve, elasticity varies by where you are on the demand curve

Answer 28

The lower portion of a downward sloping labour demand curve is less elastic than the upper portion