Labour Market Elasticities

Question 1

Let’s start with elasticity of demand for labour, which tells us:

Answer 1

How responsive demand for labour is to changes in wage

Question 2

For instance, McDonalds workers are:

Answer 2

easy to substitute, so demand for McDonalds workers is elastic

Question 3

Given that wages make up a small % of Ford’s total cost, will demand for factory workers be elastic or inelastic? (2 marks)

Answer 3

Wages paid to factory workers are a small % of Ford’s total cost. So even if workers wages increase by a lot, firm’s won’t care much because wages are such a small % of their costs. So demand will be unresponsive to changes in wage, suggesting inelastic demand!

Question 4

If wages make up a large % of a firm’s total cost, will demand for workers be elastic or inelastic? (2 marks)

Answer 4

If wages paid to workers make up a large % of a firm’s total costs, any increase in wage will have a big impact on the firm. They will therefore be very responsive to any changes in wage, suggesting elastic demand!

Question 5

For instance, in the short run, if wages increase, demand will be:

Answer 5

inelastic because there’s not enough time to find substitutes

Question 6

In the long run, however, if wages increase, demand will be:

Answer 6

elastic because there is enough time to find substitutes

Question 7

Factors that affect elasticity of labour demand

Answer 7

There are three main factors:

Substitutes
% of Total Cost
Time

Question 8

Substitutes

Answer 8

If workers are easy to substitute/replace, demand will be elastic.

E.g. McDonald’s workers can easily be replaced by self-service checkouts, so if wages increase, McDonald’s will be responsive and switch to capital, suggesting elastic demand.

If workers are hard to substitute/replace, demand will be inelastic.

E.g. Superstar footballers cannot easily be replaced, so if wages increase, football clubs have no alternatives so they can’t respond, suggesting inelastic demand.

Question 9

3. % of Total Cost

Answer 9

If wages make up a small % of total cost, any increase in wage will have a small impact, so demand for labour will be unresponsive and therefore inelastic.

If wages make up a large % of total cost, an increase in wages will have a large impact, so demand for labour will be responsive and therefore elastic

Question 10

Time

Answer 10

In the short run, without enough time to search for substitutes, firms won’t be able to respond much so demand for labour will be inelastic. Demand will be steeper - so wages will be higher.

In the long run, there’ll be enough time to search for substitutes, firms will be able to respond more so demand for labour will be elastic. Demand will be flatter - so wages will be lower.

Question 11

What are the three key factors which affect labour elasticity of demand?

Answer 11

1. Substitutes
2. % of total cost
3. Time

Question 12

So, in summary, in markets where workers require few skills or qualifications, supply will be:

Answer 12

elastic

Question 13

In an economy, like Greece, with such a high unemployment rate, the supply of labour will be:

Answer 13

elastic

Question 14

In an economy, like Switzerland (low unemployment), with such a low unemployment rate, the supply of labour will be:

Answer 14

Inelastic

Question 15

1. Factors that affect elasticity of labour supply

Answer 15

There are three main factors:

Skills & Qualifications
Unemployment
Time

Question 16

Skills & Qualifications

Answer 16

In markets where workers require few skills or qualifications, supply will be elastic.

E.g Becoming a McDonald’s worker. If McDonald’s offers higher wages, it’ll be super easy for new workers to become McDonald’s employees - so quantity supplied will increase a lot, supply will be very responsive to changes in wage, suggesting elastic supply!

In markets where workers require lots skills or qualifications, supply will be inelastic.

E.g Becoming a heart surgeon. If the NHS increased salaries for heart surgeons massively, potential new surgeons would need to go through 15 years of training, and develop incredible surgical skills! So in the short run at least, the number of heart surgeons really isn’t going to increase by much, suggesting unresponsive inelastic labour supply!

Question 17

Unemployment

Answer 17

When unemployment is high, there are lots of people looking for work, so workers will be very responsive, suggesting labour supply is elastic.

When unemployment is low, there are very few people looking for work, so workers will be unresponsive, suggesting labour supply is inelastic.

Question 18

Time

Answer 18

In the short run, without enough time to apply or train for jobs, workers won’t be able to respond much so supply of labour will be inelastic.

In the long run, there’ll be more time apply and train for jobs, so workers will be able to respond more so supply for labour will be elastic.

Question 19

So, in summary, derived demand is:

Answer 19

Derived demand is demand for a factor of production (like labour) that is derived from the demand of another good/service.

E.g. demand for builders is derived from demand for houses

Question 20

So, how will an increase in non-pecuniary benefits affect our labour market diagram?

Answer 20

Supply will increase to the right and decrease wages

Question 21

Non-pecuniary benefits

Answer 21

Non-pecuniary benefits are benefits of a job other than the wage received.

Question 22

Income inequality is when…

Answer 22

Income inequality is when the best paid workers take home more income than the rest of a country’s workers.