Elasticity of Labour Supply & Demand
Economics: Edexcel A A Level, topic 6.2.7
The Elasticity of Labour Supply
Supply curves for low-skilled jobs are often elastic, while those for high-skilled jobs are usually inelastic.
Elastic supply of labour
- Supply of labour is often elastic in low-skilled jobs.
- So small wage rate increases will result in large increases in quantity supplied.
- This is because wages are often similar in low-skilled professions. Any wage rate increases will likely attract more low-skilled workers.
- There are also many low-skilled workers. So many will be out of work and job hunting (available to work).
- Supply is often more elastic if workers are mobile (if they can move between occupations and to different job locations easily). Wage increases will increase supply.
Inelastic supply of labour
- Supply of labour is often inelastic in skilled jobs.
- This is because it takes a long time to become skilled. If wages increase for engineers in response to a shortage, people may be more motivated to study engineering. But it will take years for them to train. So while supply may change in the long term, supply will not change in the short term.
Elasticity of Labour Demand
If the elasticity of labour demand is inelastic, then the labour demand curve is very steep. If labour demand is elastic, then the curve is closer to horizontal. Labour demand is inelastic when:
Wages are a low % of total costs
- If wages are a very small part of the total cost of production then wages will be less important to firms.
Capital cannot substitute for labour
- If machines could affordably replace workers, then the elasticity of demand for labour is likely to be high.
- A&E Doctors, who cannot be replaced by machines at all, face little threat of replacement. Demand for A&E doctors is inelastic.
Demand for the product produced is inelastic
- If demand for the final good or service is inelastic, then cost increases can just be passed on to consumers.
- Again, demand for healthcare is inelastic if treatment is needed.
- This would support there being inelastic demand for doctors.
Test yourself on Elasticity of Labour Supply & Demand
If only a few people can do a job (e.g. astronaut), what will the elasticity of labour supply be like?
If only a few people can do a job (e.g. replace Cristiano Ronaldo in his football team), what will the elasticity of labour supply be like?
What is the elasticity of labour supply likely to be like for a cafe worker?
What would improving the transport links in the UK do to labour supply?
What happens to the labour supply curve if labour supply gets more inelastic?