10 Main Determinants of Elasticity of Demand for Labour

Some of the main determinants of elasticity of demand for labour are as follows:

i. The proportion of labour costs in total costs:

If labour costs form a large proportion of total costs, a change in wages would have a significant impact on costs and hence demand would be elastic.

ii. The ease with which labour can be substituted by capital:

If it is easy to replace workers with machines, demand would again be elastic.

iii. The elasticity of demand for the product produced:

A rise in wages increases costs of production which, in turn, raise the price of the product. This causes demand for the product to contract and demand for labour to fall. The more elastic the demand for the product is, the greater the fall in demand for it and hence for workers – making demand for labour elastic.

iv. The time period:

Demand for labour is usually more elastic in the long run as there is more time for firms to change their methods of production.

v. The qualifications and skills required:

The more qualifications and skills needed, the more inelastic supply will be. For instance, a large increase in the wage paid to brain surgeons will not have much effect on the supply of labour. This is especially true in the short run, as it will take years to gain the requisite qualifications and experience.

vi. The length of training period:

A long period of training may put some people off the occupation. It will also mean that there will be a delay before those who are willing to take it up are fully qualified to join the labour force. Both effects make the supply of labour inelastic.

vii. The level of employment:

If most workers are employed already, the supply of labour to any particular occupation is likely to be inelastic. An employer may have to raise the wage rate quite significantly to attract more workers and encourage the workers employed in other occupations to switch jobs.

viii. The mobility of labour:

The easier workers find it to change jobs or to move from one area to another, the easier it will be for an employer to recruit more labour by raising the wage rate. Thus, higher mobility makes the supply elastic.

ix. The degree of vocation:

The stronger the attachment of workers to their jobs, the more inelastic supply tends to be in case of a decrease in wage rate.

x. The time period:

As with demand, supply of labour tends to become more elastic over time. This is because it gives workers more time to notice wage changes and to gain any qualifications or undertake any training needed for a new job.

Submitted by : Professor Alex, Category : Elasticity as Demand, Tag : Elasticity of Demand