- Wage elasticity of labour demand
- The wage elasticity of labour demand is the percentage change in the quantity of labour demanded divided by the percentage change in the wage.
- Wage elasticity of labour supply
- The wage elasticity of labour supply is the percentage change in the quantity of labour supplied divided by the percentage change in the wage.
What makes labour demand elastic
Can you name four things that set the wage elasticity of labour demand?
Each makes employers cut hiring by more when the wage rises.
The easier it is to replace workers with machines or other inputs, the more elastic the demand for labour.
Can you think of an example?
Supermarkets can swap cashiers for self-service tills, so a rise in cashiers' pay cuts jobs sharply.
Labour demand is derived demand, so the more elastic the demand for the product, the more elastic the demand for the workers who make it.
Can you think of an example?
A pay rise at one of many takeaways raises its prices, customers go elsewhere, and it needs fewer staff.
The larger the share of costs that goes on wages, the more a pay rise raises costs and prices, and the more elastic labour demand.
Can you think of an example?
Wages are most of a cleaning firm's costs but a small share of an oil refinery's.
Labour demand is more elastic in the long run, because firms need time to buy machines and change how they work.
Can you think of an example?
After a pay rise a warehouse keeps its staff at first, then installs automated picking and hires fewer.