Elasticity of Labour Demand (Labour Markets)

Elasticity of labour demand measures the responsiveness of demand when there is a change in the wage rate. This short topic video goes through the key factors affecting the elasticity of demand for labour.

Factors affecting the wage elasticity of demand for labour

1. Labour costs as a % of total costs: When labour expenses are a high % of total costs, then labour demand is more wage elastic.
2. Ease and cost of factor substitution: Labour demand is more elastic when a firm can substitute easily and cheaply between labour & capital inputs.
3. Price elasticity of demand for the final product: This determines whether a firm can pass on higher labour costs to consumers in higher prices. If demand is inelastic, higher costs can be passed on.
4. Time period – in the long run it is easier for firms to switch factor inputs e.g. bring more capital in perhaps replacing labour