A labor market has a wage elasticity of labor demand equal t

A labor market has a wage elasticity of labor demand equal to -0.4. If wages increase by five (5) percent, what will be the percentage decrease in employment?

(b) In part (a), are firms in this market most likely producing a product that is price elastic or price inelastic?

(c) Another labor market has a wage elasticity of labor demand equal to -1.20. If wages increase by 5 percent, what will be the percentage decrease in employment?

(d) In part (c), in this industry, are workers most likely skilled or

Solution

(a) Elasticity = percentage change in employment/percent change in the wage rate

0.4 = percentage change in employment/5

percentage change in employment = 2%

(b) firms in this market most likely producing a product that is price inelastic?

(c) 1.20 = percentage change in employment/5

percentage change in employment = 6%

(d) Yes, workers are most likely skilled