why is demand for labor more elastic at low wage rates. i would think that if a company pays very little for labor then they wouldn’t employ fewer workers if they had to pay just a little bit more. e.g. if a company pays 1$ for an employee and they make $1,000,000 in profit. they would still employ the same amount of workers if they had to pay double that ($2) for an employeee.
If labor cost is 90% of the firm’s cost, then any increase in labor will cause the firm to cut down on its use of labors…agreed? But why would that matter at low wage rates more than at high wage rates? hmm
i would guess low wage rates means low % of firm costs
i take that back
don’t take it back. An increase in price of labor, at lower costs of labor reflects less in the price of the product than an equivalent increase in price of the product when labor cost increases with the same percentage, but the labor rate is higher.
map1, if labor cost is currently 90% of the firm’s cost, then any increase in labor will cause the firm to cut down on its use of labors, but why would that matter at low wage rates versus higher. They still make up 90% of your cost. If rate rises by 10%, your total cost is the same, no? Say you have 1000 workers paying them $5/hr each, that’s $5000/hr. Lets say that this is 90% of your total cost. If wage rises by 10% to $5.50, you will payan additional $0.50 * 1000 = $500 /hr. Say you have 1000 workers paying them $50/hr each, that’s $50,000/hr. Lets say that this is 90% of your total cost. If wage rises by 10% to $55, you will pay an additional $5 * 1000 = $5000 /hr. I think I just answered my own question…
Yes Dreary, here comes the 2X4 CFAI, that throws at you the fact that the product is labor intensive!