Elasticities_6

Elasticities_6 - Labor Demand Elasticities What is the...

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1 Labor Demand Elasticities Ch4 pp.93-112 Labor Demand Elasticities What is the magnitude of the employment response to a change in the wage rate? This responsiveness will be measured using the concept of elasticity. Own-wage Elasticity of Demand The own-wage elasticity of demand is the % change in employment (E) induced by a 1% increase in the wage rate (W). % Δ indicates percentage change. Since employment will decrease following an increase in wages, this number will be negative. The larger its absolute value, the greater the percentage decline in employment from an increase in wages. % % i ii i E W Own-wage Elasticity of Demand If elasticity is greater than 1, - Demand curve is elastic . - A 1% increase in wages leads to a proportionately smaller decline in employment If elasticity is less than 1, - Demand curve is inelastic . - A 1% increase in wages leads to a proportionately smaller decline in employment If elasticity is equal to 1, - Demand curve is unit elastic . - A 1% increase in wages leads to a 1% decline in employment. Elasticities along a Demand Curve Factors that determine own-wage elasticity Demand for the final product Substitutability of other factors The supply of other factors The share of labor in total costs Also called Hicks-Marshall Laws of Derived Demand.
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2 Factors that determine own-wage elasticity 1) Demand for the final product The greater the price elasticity of the final product, the greater the elasticity of demand for labor. Price elasticity of demand ... % in price
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This note was uploaded on 10/22/2008 for the course ECON 470 taught by Professor Yeonsookim during the Fall '08 term at Maryland.

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Elasticities_6 - Labor Demand Elasticities What is the...

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