Labour elasticity of demand (LED)

Define the term ‘Labour elasticity of demand’

Measures the responsiveness of the demand for labour given a change in the wage rate

What does it mean by elastic LED

Very responsive: A small change in wages causes a more than proportionate change in labour demand

What does it mean by inelastic LED

Unresponsive: A large change in wages causes a less than proportionate change in labour demand

How do substitutes LED?

Substitutes: How easy it is to substitute workers when wages rise.

Labour demand is more elastic when a firm can substitute easily and cheaply between labour and capital inputs. As a result, this would result in a lower equilibrium wage rate as workers are essentially forced to accept lower wages.

Labour demand is Inelastic when a firm struggles to substitute between labour and capital inputs. As a result, this would result in a higher equilibrium wage rate as workers can bargain for higher wages without risk of being replaced.

How does labour costs as a % of total costs effect LED?

If wages make up a small % of a firms total costs, demand will be unresponsive to changes in the wage rate, suggesting Inelastic demand because firms will be more willing to absorb these costs.

If wages make up a large % of a firms total costs, than a small changes the wage rate will heavily impact the firm, so demand will be very responsive to changes in the wage rate, suggesting Inelastic demand.

How does the time period affect LED?

In the short run, if wages rise demand will be Inelastic because there is not enough time to switch between factor inputs.

In the long run, if wages rise demand will be elastic because there is enough time to switch between factor inputs.