Wage determination in competitive and non-competitive markets — Edexcel A-Level Economics A
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Wage determination in competitive and non-competitive markets explained
Elasticity measures how responsive one variable is to a change in another.
Read the full explanation
The elasticity of demand for labour (wage elasticity of demand) is the percentage change in quantity of labour demanded divided by the percentage change in the wage rate. Demand is more elastic when labour costs are a large share of total costs, when substitutes such as capital are readily available, when the product demand is elastic, and over longer time periods. The elasticity of supply of labour is the percentage change in quantity of labour supplied divided by the percentage change in the wage rate; supply is more elastic when workers have transferable skills, when there is time to retrain or relocate, and when geographical mobility is high.
Your focus
- Define and calculate the elasticity of demand for labour and the elasticity of supply of labour.
- Explain the factors that make demand for labour and supply of labour more or less elastic.
- Assess how these elasticities affect wage and employment outcomes and the impact of labour market policies.
Wage determination in competitive and non-competitive markets exam tips
Marking Points
- Elasticity of demand for labour = percentage change in quantity of labour demanded ÷ percentage change in the wage rate.
- Elasticity of supply of labour = percentage change in quantity of labour supplied ÷ percentage change in the wage rate.
- Demand for labour is more elastic when labour is a large proportion of total costs, when capital can substitute for labour, when the demand for the final product is elastic, and in the long run.
- Supply of labour is more elastic when workers have transferable skills, when there is time to retrain or relocate, and when geographical mobility is high.
- If demand for labour is inelastic, a rise in the wage rate causes only a small fall in employment, so workers may bear less of the adjustment.
- If supply of labour is inelastic, a rise in demand for labour leads mainly to higher wages rather than higher employment.
- Elasticity affects the incidence of a minimum wage or payroll tax and the speed of adjustment after a labour market shock.
Examiner Tips
- 💡Write the formula clearly before substituting numbers, and state whether the result is elastic (greater than 1), inelastic (less than 1) or unit elastic (equal to 1).
- 💡Use diagrams to show how a given wage change produces a larger or smaller employment change depending on the slope of the relevant curve.
- 💡Link elasticity to a real policy: for example, explain why a minimum wage has a smaller employment effect when demand for labour is inelastic.
- 💡In evaluation, consider that elasticities change over time, so short-run and long-run effects may differ.
Common Mistakes
- Confusing the elasticity of demand for labour with the elasticity of demand for the product: they are related but distinct, and the product elasticity is only one determinant of labour demand elasticity.
- Reversing the formula: elasticity of demand for labour divides the percentage change in quantity of labour demanded by the percentage change in the wage rate, not the other way round.
- Assuming all labour supply is inelastic: supply becomes more elastic over time as workers retrain or relocate.
- Treating elasticity as a fixed number: it varies with the time period, the availability of substitutes and the share of labour in total costs.