Elasticity of Demand for Labour

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There are several factors which determine the elasticity of demand for labour which are demonstrated below: The first one is the elasticity of demand for the product. Labour is a derived demand. It means that the elasticity of demand for labour would be affected by the elasticity of demand for the goods that the labour is producing. If the elasticity of demand for the product is inelastic, then demand for labour would also be inelastic. This is because demand for product is unlikely to change. Thus, there is no need to change the amount of labour for that product. Second factor is the proportion of wage costs in total costs. For instance, the wages of labour is the majority of the firm’s costs. In this case, if the wages increase, so will the price of the product. Thus, demand is elastic. If there is a small proportion of labour cost compared to the total costs, the demand for labour would be inelastic. The third factor of the elasticity of demand for labour is the availability of substitutes. If labour could easily be substituted, the demand for labour is sensitive to a change in wage rates. If wage goes up, demand falls. The fourth factor is the elasticity of supply for complementary factors. If there is a factor of production which could help labour works more efficiently, and this factor is elasticity, then labour is elastic. The final factor is the time period. In this case, the longer the time period, the labour is easier to be substituted. Furthermore, in the short term, employers may be limited by some contracts. Therefore, it is difficult for the company to change its number of workers. It means that demand for labour would be inelastic in short term. What alternative policies might be used to increase the wages of these workers? Answer: 1. Subsidy • R&D Subsidy: The government may subsidise R&D directly by funding to the firms or industries

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