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Labor Economics

ECON 315

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Elasticity of Labor Demand

Elasticity is a means of measuring responsiveness.  If the price of a good changes, how responsive is the change in quantity demanded?  A relatively large change in Qd suggests that demand is quite responsive, or elastic.  A relatively small change in Qd indicates that demand is less responsive, or inelastic.

In the realm of labor economics, we are interested in how responsive an employer's demand for labor is to the price (wage) of labor.  More specifically, we look for the relative change in employment level for a relative change in the wage:

Notice that because demand curves are downward-sloping, this calculation will always be negative.  If the wage goes up, employment will go down (all else constant.)  If the wage goes down, employment will go up (all else constant.)

The terms elastic and inelastic, as used above, have both technical and relative uses.  The technical use depends on the absolute value of the elasticity calculation above.

If the absolute value of the elasticity of labor demand is > 1, that portion of demand curve is considered ELASTIC
If the absolute value of the elasticity of labor demand is < 1, that portion of demand curve is considered INELASTIC.
(If the absolute value of the elasticity of labor demand is = 1, that portion of demand curve is considered UNIT ELASTIC.)

In the relative sense, we say that a demand is more elastic than something else if it is more responsive to price.  We similarly might say that a particular demand is less elastic [or more inelastic] than another if it is less responsive to price.  This has more to do with a rank ordering of the absolute values of the elasticity calculation than comparison with a fixed classification point.  For example suppose that a point on Labor Demand A has an elasticity of -3 and a point on Labor Demand B has an elasticity of -7.  They would both be technically classified as elastic, but we could also say that B is more elastic that A.

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