ECON 390 – Labor Economics

Labor Elasticity Concepts

Remember:  The concept of elasticity in general is how responsive or sensitive (elastic) something is to a change in something else. 

The most common elasticity is the price elasticity of demand.  This asks:  How responsive are consumers of X to a change in the price of X? 

The formula:      % Change in the Demand for X

                               % Change in the Price of X     

If the Elasticity is greater than one, economists call that elastic. 

If the elasticity is less than one, economists call that inelastic.

If the elasticity is equal to one, economists call that unitary (or unit) elastic.

This is true of all elasticities.

The Four Elasticities we have discussed are:

1.  Wage Elasticity of Labor Supply

        Concept:  How responsive are workers to a change in the wage?  If the wage increases by 10%, will that create a small or large change in how much labor workers want to supply?

        Formula:          % Change in the Supply of Labor in X Occupation

                                % Change in the Wage of Occupation X

2.  Cross Wage Elasticity of Labor Supply

        Concept:  How responsive are workers in one category (such as sex or age or occupation) to a change in the wage of workers in another category?  For example, if the wage of the husbands of married female workers increases, how much will married female workers decrease their hours of work (if at all)?

        Formula:          % Change in the Supply of Labor in Category of Labor One

                                % Change in the Wage of Category of Labor Two

3.  Wage Elasticity of Labor Demand

        Concept:  How responsive are employers to a change in the wage?  If the wage increases by 10%, will that create a small or large change in how much employers of labor will demand?

        Formula:            % Change in the Demand of Labor in X Industry

                                 % Change in the Wage Paid in Industry X  

4.  Cross Wage Elasticity of Labor Demand

        Concept:  How responsive are employers of a given category of labor to a change in the wage or price of a substitute or complement to labor (as an input in the production process)?  If the wage of skilled labor goes down, how will that change the demand for unskilled labor?  Or if the price of capital goes down, how will that change the demand for skilled labor that will complement the capital (if the price of computers goes down, how much would that change the demand for skilled labor that works with computers)?

        Formula:            % Change in the Demand of Labor in Category of Labor One

                                 % Change in the Wage/Price of Category of Input Two (Which could be labor or capital)

    If positive -- then this means the two inputs are substitutes.  If the price/wage of one increases, the firm buys less of it and substitutes into the other input (buying more of it).

    If negative -- then this means the two inputs are complements.  If the price/wage of one increases, the firm buys less of it and also buys less of the other input.