Posted: October 17th, 2013
Elasticity of demand is the response to a change in the wage compared to labor demand. When there is a small change in wage and the response results in a bigger percentage change of labor demanded by employers, it means that it is elastic. When the change in wages is relatively bigger than the percentage change in labor demanded, it is considered inelastic. The idea here is that employees are the goods, while the employers are the consumers. Therefore, just like law of demand states that demand goes down when price goes up, it is the same way with labor (Valladares, 2010).
Unions represent workers, by bargaining the amount of wages they can receive from the employers. When it comes to wages, demanded labor elasticity plays a crucial role in determining the bargaining power. When the employers know that a little change in labor would cause a big expense for the company depending on the product under question, they will reduce the amount of labor in order to compensate the extra cost. In addition, when wage is raised, there will be more employees competing for the jobs, forcing the employer to select the most skilled leaving others behind. Therefore, if the demand for labor is elastic, union will have a better bargaining power since employers know a slight change in wage would affect the company in a big way. Unions can restrict supply of workers so that wages can be raised (Addison & Welfens, 2003).
To illustrate, when the wage of a certain labor is at $8 with 100 employees, when wage goes up by $2, and the change in employee demand goes down to 50 employees, it is considered elastic. The wage changes by 25% percentage while the labor demanded goes down by 50%, meaning it is two times elastic.
Addison, J. T., & Welfens, P. J. (2003). Labor markets and social security: issues and policy options in the U.S. and Europe. New York, NY: Springer.
Valladares, I. P. (2010). Industrial Relations After Pinochet: Firm Level Unionism and Collective Bargaining Outcomes in Chile. London: Peter Lang
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