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1.1. Explain, with the aid of a figure, the impact of labour demand elasticity on employment
because of a wage increase in the unionised sector.
Labour demand elasticity refers to the responsiveness of employers to changes in the wage rate,
specifically how much the quantity of labour demanded changes in response to a change in wages. In
the context of a wage increase in the unionised sector, the elasticity of labour demand determines the
degree to which employers will reduce their demand for labour in response to higher wages. Here's
the breakdown:
Inelastic Labour Demand (Elasticity < 1): In cases where labour demand is inelastic, a wage
increase results in a smaller reduction in the quantity of labour demanded. This means that
even though wages increase, the employer is not significantly reducing the number of workers
employed. This situation is often seen in sectors where workers’ skills are highly specialised,
or where the cost of automation or substitution with non-labour inputs is high. The outcome is
that employment may not fall drastically despite the wage hike.
Elastic Labour Demand (Elasticity > 1): When labour demand is elastic, the response to a wage
increase is more significant. A wage increase in the unionised sector can cause a substantial
reduction in the quantity of labour demanded. Employers will likely substitute labour with
technology or reduce the number of workers employed, especially in sectors where there is
ease of automation or substitution. In this case, the higher wages lead to a significant reduction
in employment levels.
Unitary Elasticity (Elasticity = 1): When labour demand has unitary elasticity, the percentage
change in employment is equal to the percentage change in wages. In this case, the wage
increase would result in a proportional reduction in employment.
As illustrated in the figure below (Yu et al., 2023), when wages increase in the unionised sector, the
degree of employment reduction depends on the elasticity of labour demand. If labour demand is
elastic, a wage increase results in a significant reduction in employment, while inelastic demand
leads to a smaller decrease in employment.
1.1. Explain, with the aid of a figure, the impact of labour demand elasticity on employment
because of a wage increase in the unionised sector.
Labour demand elasticity refers to the responsiveness of employers to changes in the wage rate,
specifically how much the quantity of labour demanded changes in response to a change in wages. In
the context of a wage increase in the unionised sector, the elasticity of labour demand determines the
degree to which employers will reduce their demand for labour in response to higher wages. Here's
the breakdown:
Inelastic Labour Demand (Elasticity < 1): In cases where labour demand is inelastic, a wage
increase results in a smaller reduction in the quantity of labour demanded. This means that
even though wages increase, the employer is not significantly reducing the number of workers
employed. This situation is often seen in sectors where workers’ skills are highly specialised,
or where the cost of automation or substitution with non-labour inputs is high. The outcome is
that employment may not fall drastically despite the wage hike.
Elastic Labour Demand (Elasticity > 1): When labour demand is elastic, the response to a wage
increase is more significant. A wage increase in the unionised sector can cause a substantial
reduction in the quantity of labour demanded. Employers will likely substitute labour with
technology or reduce the number of workers employed, especially in sectors where there is
ease of automation or substitution. In this case, the higher wages lead to a significant reduction
in employment levels.
Unitary Elasticity (Elasticity = 1): When labour demand has unitary elasticity, the percentage
change in employment is equal to the percentage change in wages. In this case, the wage
increase would result in a proportional reduction in employment.
As illustrated in the figure below (Yu et al., 2023), when wages increase in the unionised sector, the
degree of employment reduction depends on the elasticity of labour demand. If labour demand is
elastic, a wage increase results in a significant reduction in employment, while inelastic demand
leads to a smaller decrease in employment.
