micro labour market notes

labour market elasticities

substitutes

  • how easy it is to substitute workers when their wages go up. for example McDonald’s workers are considered unskilled therefore if they request a higher pay, they can just be replaced with another unskilled worker or with capital (self-service checkout), so the demand is responsive → elastic demand → lots of substitutes

the elasticity in demand means the equilibrium point is the real wages -> lowwhen demand is inelastic so the equilibrium shows the high wages

percentage of total cost

  • what percentage of total cost is made up of workers’ wages?

  • for example, the company Ford’s total costs are mostly made up of machinery costs so wages make up a small percent. so even if the workers wages increase a lot, firms won’t care as much because wages are such a small percentage of their costs. so demand will be unresponsive to changes in wage suggesting inelastic demand

  • wages are a small % → inelastic demand

  • wages are a large % → elastic demand

Time (LED)

  • if wages increase in the short run, demand will be inelastic because there’s not enough time to find substitutes → unresponsive

  • in the long run however, if wages increase, demand will be elastic because there is enough time to find substitutes