Elasticity affects labour demand and minimum wages

Have you ever wondered why during this recent recession starting 2008, some groups of people such as teachers and CEO's of top firms have NOT lost their jobs? And the fact that a change in the government policy of minimum wages have different outcomes on different groups? This can all be explained using the economic concept of elasticity.

Firstly, what is elasticity? To those who have not done economics before, it may be a little bit confusing. Imagine a rubber band that is being stretched. Some rubber bands are easier to stretch than the others despite the fact that you are using the same amount of force, right? The economic concept of elasticity is similar, except that the force is now the price and the extention if the rubber band represents the change in quantity demanded for the good, illustrated by the gradient of the demand or supply curve. In economics, elasticity is defined as a measure of responsiveness of the quantity of a product to a change in other nominal factors such as price and income level, ceteris paribus.

Although there are many types of elasticities such as price elasticity of demand and income elasticity of supply, the basic formula used to calculate this value is general:
%change in quantity / %change in nominal factors.
Although these values are always negative as the demand curve is downwards sloping, we always assume that this value is postive.

Coming back to the topic of how elasticity affects labour demand and minimum wages, most measures of elasticity fall under the category of being inelastic or elastic instead of being perfectly inelastic, perfectly elastic or unitary elastic - products that have such elasticities are almost impossible to find although some may be close to it. Jobs are no exception when it comes to being in the category of elasticity - in my opinion, it would be so much better to choose a job that is inelastic. And how do you differentiate between an elastic and inelastic job? As labour is a derived demand, there are 3 simple ways to know.

Ask yourself: Is my job really that necessary in the economy? Or am I indispensible? Teachers and CEO's of top firms, despite the large difference between their average wage levels, have one thing in common - they are both relatively inelastic. In any country in the world, education is usually seen as a primary concern as it is a basic necessity. Without teachers, how would all the children in a country end up in, say, 10 years from now? We'd all be living in a dump and re-living the past with barter trade and deaths caused by the common cold. We wouldn't want that, would we? No. Hence, teachers are necessary. And CEO's you ask? They're just as important but in a different way - they contribute significantly to the economy's trade and economic growth through development and provision of jobs. Other jobs such as factory workers- do you really think that firing several workers is gonna affect the output severely when they can be easily replaced by technology known as the substitution effect? And they are also more likely to be hired due to the aim of a company to grow. So are they as important as teachers? Dont think so. Therefore the fact that they are necessary makes them inelastic. Labour demand for them is unlikely to be affected badly due to a change in price and hence the high demand for them. You didn't hear this from me but having an inelastic job makes it easier to ask for a raise in the minimum wages. Why? Because it is unlikely for a large number of people to be sacked because of a small increase in price and there is a high chance of income increasing and a desirable outcome as it may affects aggregate demand and economic growth in a positive way.

Now take a few moments to ponder about this question: Are teachers and CEO's easily replaced? Maybe, you might say. In my opinion, it isn't. Most people today have big aspirations to own a successful business and be influential and hence want to be a CEO or an entreprenuer, resulting in a large number of people majoring in economics or business studies. What they have forgotten is that this creates derived demand for teachers. Not everyone can be a CEO even though they may have the academic qualifications - its so much harder than that to be successful. Teachers on the other hand will always be demanded but there is a shortage as people do not see teachers in the way that they should be appreciated. After all, where would you be right now if not for your teachers? Governments are way more likely to cut their spending on subsidies rather than education and medical care as it is something irreplaceable in one's life, thus incresing labour demand for them.

The 2 points above show that individual demand for labour is more inelastic than aggregate industry demand for it and hence they have a higher minimum wage, accompanied by the fact that there is a smaller supply of people who have the right qualifications, leads to an even higher minimum wage as an incentive to return the increasing opportunity costs and attract more people. The greater the elasticity of product demand, the greater the elasticity of demand for labour.

Lastly, the elasticity of a worker's wages are determined by the share of labour in the total cost of production. A higher percentage labour is of the total cost, the greater the elasticity of demand. However, as teachers and CEO's are a necessity and have no close substitutes, they are more likely to be inelastic despite their high wages, depending on the changes in output levels and total costs - whether it is really significant and would affect their output greatly although output levels of teachers and CEO's cannot be measured accurately. This affects labour demand as the law of demand states that the higher the price, the lower the quantity demanded. On the contrary, this statement can only be as valid considering that all jobs are the same which is untrue and that is why there is a difference in labour demand and wage levels.

How is this relevant in the life of a working adult? Simple. Consider unionization. As a trade union, your aim would be to increase wages without affecting the level of employment. Assuming ceteris paribus, the more elastic the demand for labour, the lower the union's power to raise wages as they are more likely to be unemployed than receiving increased wage rates. Although this is irrelevant to the topic, it is just interesting to note that trade unions are more likely to organize workers in markets that have inelastic labour as they will get larger gains and be more powerful.

So now that we have talked in detail about labour demand, you ask: what about minimum wages? Government policies have put up a minimum wage so as to protect their workers from being exploited into forced labour. It has been argued that this minimum wage policy has created unemployment as their is a surplus of labour. However, minimal wages are not adjusted according to real terms - meaning taking into account inflation among other things. The unemployment caused by this factor is based on everything else remaining constant except the cost of living that keeps rising with inflation. On the other hand, demand may actually shift rightwards showing an increase in demand but the curve is skewed as although the minimum wage has increased over time with employment, it has been at a slower rate. This increases only the supply of workers, causing a further disequilibrium in the market for labour. In this case, the statement that it is better to have an inelastic job, meaning that quantity demanded does not shift as much as the change in price, is still applicable as you have a stable job and can even ask for a wage increase without actually risk getting fired like a factory worker. Hence, having an elastic job is a good thing - with higher minimum wages and a stable job during the recession.

In conclusion, elasticity plays a major role in our lives although we may fail to recognize this knowledge that has been implanted into our heads without us even noticing. I mean, relating to the concept of scarcity alone, would it be more likely for you to buy coke if the price of pepsi suddenly increased? Based on rationality, you would as the cross-elasticity of demand of pepsi can be calculated and is likely to be elastic due to the abundance of substitutes. Elasticity of jobs also depend upon whether it is a necessity and the percentage of total cost it takes up. Minimum wages are also more likely to be higher by having an inelastic job.

To what extent these factors affect elasticity and hence labour demand and minimum is indeterminable but all I know is that the elasticity of your job is important. Better to be safe than sorry during this recession, right? No, im not promoting teachers in any way but just to say, the next time you see or hear something, think about why it is like that - I can assure you that most of the time, it is related to elasticity. Choose your job wisely is all i can say.