Video Transcript: Elasticity of Labor

Hello, welcome back. In this video, we'll discuss elasticity of labor. Look at the  supply and demand of the labor market and the elasticity of the labor market.  So, just keep in mind that elasticity is nothing to get all you know up in a fuss  about it's just talking about the reaction when prices change. You know what is  the reaction of the market, and think about it like rubber band, right? Elasticity,  like when you stretch out a rubber band, it'll snap back. So that's the reaction of  you stretching out the rubber band, right? And then when you let it go, it snaps  back. So essentially, it's just the reaction of changes in the market based on  price, right? So that's all elasticity is talking about, right? It's just basically  another word for change or reaction to, right? Or reaction to a change, right? So  elasticity of labor demand measures the responsiveness of demand when there  is a change in the wage rate. It depends on what? Depends on labor costs as a  percentage of total costs, right? So when labor expenses are a high percentage  of total cost, then labor demand is more elastic, right? So we'll show how that's  demonstrated in upcoming slides. So the ease and cost of factor substitution,  labor demand is more elastic when a firm can substitute easily between labor  and capital inputs. Right. So so it's more elastic when a firm can substitute  easily between labor and capital inputs, right? So, so there'll be more of a  reaction if we can reduce the amount of labor and substitute that out with capital inputs, right? So maybe we can add more machinery, right? Than than hire more labor, right? So we can have machines come in and do it at a cheaper fixed cost over time than we would have to worry about all of the benefits, wages, and then taxes that come along with hiring more labor. So if we we will see employment  shift dramatically if we substitute out labor with capital inputs, right? So price  elasticity of demand for the final output. This determines whether a firm can  pass on higher labor costs to consumers in the form of increased prices, right?  So, so if we have a high percentage of labor costs, we obviously are going to  have to absorb those costs somewhere, right? Someone is going to have to  absorb those costs, right? So we're going to try to we're going to try to price in  those factors of production into our price. Our factors of production in this case  being labor costs, right? We're going to try to put that into the price, bake it in,  right? Input our increased labor costs into the price, and then we'll see how the  demand for this product changes. Right? Is there much demand change? Right? Can we increase prices by 15%? And how much will demand change for this  product if we increase by 15-20%? Right? So that'll measure. So the elasticity of demand for the final output will measure the change or reaction to the change in price, right? So, how sensitive will the price change be on demand, right? So,  elasticity of labor demand measures the responsiveness of demand when there  is a change in the wage rate, and it depends on this-the same thing we just  discussed, right? So, we can see it's graphically illustrated here, right? So, so as so we can see as wages rise, right? So now there will be less demand for  quantity of labor, right? So, so companies will want to hire less people as wages 

increase, right? So employment is sensitive to wage changes, so you can see  the shift in employment demand-the demand for labor, right? You can see how  that changes. It decreases. It tightens. It shrinks. Right? When wages increase.  Now elasticity. Okay. So now let's look at this next part, right? So now let's look  at what happens when wages really increase, right? We have to have a whole  new demand curve, right? So we'll have labor demand too because it's went  really parabolic. It's went straight up almost, right? So you can see that with this  third wage increase, that the elasticity of demand really really impacted the  market right there was a big swift change right so what was the reason for the  driver what was the driver for you know the wage increase number three  because look obviously it is in is actually helped the the wager the employment  rate go back up, right? So, so obviously, this company has shifted away from  lower-skilled labor jobs, right? So, so maybe we have sophisticated our  operation, or maybe we've diversified our operation into something that is more  technologically bound, right? Something that that we need more skilled  employees to develop our products, to research and develop and produce them, right? So, so maybe this has been this is the reason why the demand for labor  has went up, right? Because the need for skilled labor has increased the  demand for that labor, right? Because if you have a skill and you can exploit that skill, you can get high. You can be you can be paid higher wages, right? So this  is the reason why the employment demand increased, even though the wage  rate increased, right? So all of those are factors that have to be you know  thought about whenever we're discussing elasticity of labor demand. Why? So,  so we can see that the sensitivity to this change was very strong. It was so  strong, in fact, that we had to create a new demand curve. Okay. So, so  obviously we have increased our operation, and we have a need for higher  skilled labor. Right. So that is why you've seen such a shift or reaction to the  change in the demand curve. So, so elasticity of labor supply right measures the extent to which labor supply responds to a change in the wage rate in any given  time. So, in lower skilled jobs, the labor supply is elastic because a pool of labor  is available at a fairly consistent market wage rate. Right, so so here you can  see that. So, so at at one at wage one, right, workers are not really wanting to  work for wage one, right? They really they're saying, oh, it's too baseline. I can  do better. I don't want to go to work for this company because they are paying  me, you know, wage one. So so then they go into the market and they say, hey,  well look, I can work for a similar company, right? And they do this approximately the same thing, but they're going to pay me much more money. So now you can  see that the shift in the employment demand, right, and the supply of labor. I'm  going to supply my labor to the to the work to the industry, right, in the  workforce. I'm going to supply my labor at this at this higher wage rate, notice  that this is this is a very elastic graph, right? This is very elastic because there  was a sharp change or a sharp response in the supply of labor relative to a 

small incremental change in wage rate, right? So so we can see in wage one  and wage two. There's a small incremental change, but just because that  incremental change, that little bit of change, expanded out the demand or the  supply, the supply of labor into the market. Right. So, so I'm much more willing  to supply my labor to a company at wage rate two, than wage rate wage wage  wage rate one, right? So at this point, we can see that this is a very elastic  graph because it was a sharp change in the supply of labor versus an  incremental change in wages. So so here, where jobs require specific skills and  training, the labor supply will be more in elastic. Right. So look. So because  there's higher skilled labor, right? Because now I have much more opportunity to go diversify, or I have more options in the market than I would have would have  had I not had these skills, and or because I've acquired these skills and because I've acquired this training, right? And there are many people out there that have  also required that have acquired these skills and training, right? At these price  points, wage one and wage two, you can see it's different than the lower skilled,  right? So, so, so in the lower skilled, there was a wage rate, a small incremental  wage rate increase. But because it was a small incremental wage rate increase,  I am much more willing at w2 at wage two, wage rate two, to supply my labor in  the market, and you can see that's a large jump. So it's very elastic. It was very  very responsive, right? It was a big jump, a big change. Now on the flip side of  jobs that require more specific skills and training, the labor supply will be a little  more inelastic, which means. A little less reactionary, right? Nor not as strong of  a reaction, right? As the wage change in the unskilled labor market, right? So,  so look, there's a big, there's a there's a much greater wage rate increase  between wage wage rate one and wage rate two, right? But if you'll notice, the  supply of labor did not jump as much as it did in the lower skilled labor market,  right? Because here in the skills-oriented market, right, that you had skilled work staff, there a lot of more opportunities, right, for people with skilled labor, right.  So now, so now at this wage rate two, they may not be willing. They're not as  willing to go somewhere else and and in the market. So it's more inelastic. So  you can see the change in the wage rate between skilled workers and the  change in the wage rate between unskilled workers is drastically different, right?  But the response to the wage change from skilled to unskilled, right? You can  see unskilled has got a very high reaction. It really pushed out on the  employment scale, right on the horizontal axis, but here is a much wider change  in the wage rate, but with not as much of a reaction, right between E1 and E2 on the skilled labor side. So that is known as being a little more inelastic. It does not change. Its reaction is not as sharp as it was as as the other price increase.