Labour elasticity of demand

%ΔQuantity of labour demanded/%ΔWages

Labour elasticity of demand (LED) is the responsiveness of demand for labour when there is a change in the wage rate.

It is affected by:

How easy/costly it is to substitute other factors of production for labour.

Labour is more elastic when it can easily be replaced by capital inputs. For example, if workers can easily/inexpensively be replaced by machines that do the same thing, then a rise in wages will result in a dramatic decline in workers needed. The demand curve in this case would be elastic.

The proportion of costs that is represented by labour expenses (wages) in a firm.

A higher percentage of the total costs means that labour is more elastic. This would be the case in firms that are more labour intensive. A restaurant is likely to be more elastic in terms of labour demand than a manufacturing firm, as if wages go up, it is hiring so many workers that its overall costs are likely to go up a lot, so it has to lay off workers to counter this.

The price elasticity of demand (PED) of the product itself.

If the PED of the product is elastic, the LED is also likely to be elastic.

Time horizon

The longer the time period the more likely it is that the firm has found substitutes for labour such as capital. So in the long run labour becomes more elastic.

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