Hi there, I am having a tough time with elasticity of labor. It’s obviously not a huge topic on the exam, but it might show up. Is there an example someone could throw out from real life that shows what inelastic and elastic supplies of labor looks like?
Part of my problem in understanding this is that the equation for price elasticity of supply is %change in Quantity supplied/ %change in price. It seems like this says that if price goes up or down, will the quantity supplied go up or down. However, elasticity of demand for labor appears to be %change in price/ %change in Quant. supplied.
To be honest I have studied from some old books and not incountered to much about this but this is how i see things. we are talking about price elasticity of supply not demand. so there is not a negative relationship but a positive one. take the example of an employee. at the begining you need him to work 25 hours/week his supply will be elastic- the more you pay him the more hours he will work as he needs money. if he works now 60 hours his supply becomes inelastic. you have to pay him overtime to make him come to work since he does not need the money as much. as hours increase you need to pay him more and more - change in price creates a smaller change in quantity of work offered Am i talking bull?
Great example! Yes, that actually helps. I just read a tidbit in the CFA text, and your example definitely makes it click. They call it the substitution effect- people would rather enjoy life than work 80 hours per week. Dude, thanks. I’ll be back in a few with more stupid questions- I’m sure.