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Elasticity of Labor Supply: A Special Application

25 April, 2016 - 09:12

The concept of price elasticity of supply can be applied to labor to show how the quantity of labor supplied responds to changes in wages or salaries. What makes this case interesting is that it has sometimes been found that the measured elasticity is negative, that is, that an increase in the wage rate is associated with a reduction in the quantity of labor supplied.

In most cases, labor supply curves have their normal upward slope: higher wages induce people to work more. For them, having the additional income from working more is preferable to having more leisure time. However, wage increases may lead some people in very highly paid jobs to cut back on the number of hours they work because their incomes are already high and they would rather have more time for leisure activities. In this case, the labor supply curve would have a negative slope. The reasons for this phenomenon are explained more fully in a later chapter.

This chapter has covered a variety of elasticity measures. All report the degree to which a dependent variable responds to a change in an independent variable. As we have seen, the degree of this response can play a critically important role in determining the outcomes of a wide range of economic events. Table 5.2 provides examples of some estimates of elasticities.

Table 5.2 Selected Estimates

Product Elasticity

Elasticity

Product

Elasticity

Product

Elasticity

Price Elasticity of Demand

 

Cross Price Elasticity of Demand

 

Income Elasticity of Demand

 

Crude oil (U.S.)*

−0.06

Alcohol with respect to price of heroin

−0.05

Speeding citations

−0.26 to −0.33

Gasoline

−0.1

Fuel with respect to price of transport

−0.48

Urban Public Trust in France and Madrid (respectively)

−0.23; −0.26

Speeding citations

−0.21

Alcohol with respect to price of food

−0.16

Ground beef

 

Cabbage

-0.25

Marijuana with respect to rice of heroin (similar for cocacine)

-0.01

Lottery instant game sales in Colorado

-0.06

Cocaine (two estimates)

−0.28; −1.0

Beer with respect to price of wine distilled liquor (young drinkers)

0.0

Heroin

−0.00

Alcohol

−0.30

Beer with respect to price of distilled liquor (young drinkers)

0.0

Marijuana, alcohol, cocaine

+0.00

Peaches

−0.38

Pork with respect to price of poultry

0.06

Potatoes

0.15

Marijuana

−0.4

Pork with respect to price of ground beef

0.23

Food**

0.2

Cigarettes (all smokers; two estimates)

−0.4; −0.32

Ground beef with respect to price of poultry

0.24

Clothing

0.3

Crude oil (U.S.)**

−0.45

Ground beef with respect to price of pork

0.35

Beer

0.4

Milk (two estimates)

−0.49; −0.63

Coke with respect to price of Pepsi

0.61

Eggs

0.57

Gasoline (intermediate term)

−0.5

Pepsi with respect to price of coke

0.80

Coke

0.60

Soft drinks

−0.55

Local television advertising with respect to price of radio advertising

1.0

Shelter**

 

Transportation*

−0.6

Smokeless tobacco with respect to price of cigarettes (young males)

1.2

Beef (table cuts—not ground)

 

Food

−0.7

Price Elasticity of Supply

 

Oranges

 

Beer

−0.7 to −0.9

Physicians (Specialist)

−0.3

Apples

 

Cigarettes

         

(teenagers; two estimates)

−0.9 to

Physicians

0.0

   
   

(Primary Care)

 

Leisure**

 
 

−1.5

       

Heroin

−0.94

Physicians (Young male)

0.2

Peaches

 

Ground beef

 

Physicians (Young female)

0.5

Health care**

 

Cottage cheese

-1.1

Milk*

0.36

Higher education

1.67

Gasoline**

-1.5

Milk**

0.5

   

Coke

-1.71

Child care labor

2

   

Transportation

-1.9

       

Pepsi

-2.08

       

Fresh tomatoes

-2.22

       

Food**

         

Lettuce

-2.58

       

Note: * = short-run; ** = long-run

 

KEY TAKEAWAYS

The price elasticity of supply measures the responsiveness of quantity supplied to changes in price. It is the percentage change in quantity supplied divided by the percentage change in price. It is usually positive. Supply is price inelastic if the price elasticity of supply is less than 1; it is unit price elastic if the price elasticity of supply is equal to 1; and it is price elastic if the price elasticity of supply is greater than 1. A vertical supply curve is said to be perfectly inelastic. A horizontal supply curve is said to be perfectly elastic. The price elasticity of supply is greater when the length of time under consideration is longer because over time producers have more options for adjusting to the change in price. When applied to labor supply, the price elasticity of supply is usually positive but can be negative. If higher wages induce people to work more, the labor supply curve is upward sloping and the price elasticity ofsupply is positive. In some very high-paying professions, the labor supply curve may have a negative slope, which leads to a negative price elasticity of supply.

TRY IT!

In the late 1990s, it was reported on the news that the high-tech industry was worried about being able tofind enough workers with computer-related expertise. Job offers for recent college graduates with degrees in computer science went with high salaries. It was also reported that more undergraduates than ever were majoringin computer science. Compare the price elasticity of supply of computer scientists at that point in timeto the price elasticity of supply of computer scientists over a longer period of, say, 1999 to 2009.

Case in Point: A Variety of Labor Supply Elasticities

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Studies support the idea that labor supply is less elastic in high-paying jobs than in lower-paying ones.For example, David M. Blau estimated the labor supply of child-care workers to be very price elastic, with estimated price elasticity of labor supply of about 2.0. This means that a 10% increase in wages leads to a 20% increased in the quantity of labor supplied. John Burkett estimated the labor supply of both nursing assistant and nurses to be price elastic, with that of nursing assistants to be 1.9 (very close to that of child-care workers)and of nurses to be 1.1. Note that the price elasticity of labor supply of the higher-paid nurses is a bit lowerthan that of lower-paid nursing assistants.

In contrast, John Rizzo and David Blumenthal estimated the price elasticity of labor supply for young physicians (under the age of 40) to be about 0.3. This means that a 10% increase in wages leads to an increase in the quantity of labor supplied of only about 3%. In addition, when Rizzo and Blumenthal looked at labor supplyelasticities by gender, they found the female physicians’ labor supply price elasticity to be a bit higher (a about 0.5) than that of the males (at about 0.2) in the sample. Because earnings of female physicians in thesample were lower than earnings of the male physicians in the sample, this difference in labor supply elasticitieswas expected. Moreover, since the sample consisted of physicians in the early phases of their careers, the positive, though small, price elasticities were also expected. Many of the individuals in the sample also had high debt levels, often from educational loans. Thus, the chance to earn more by working more is an opportunity to repay educational and other loans.

In another study of physicians’ labor supply that was not restricted to young physicians, Douglas M. Brown found the labor supply price elasticity for primary care physicians to be close to zero and that of specialists to be negative, at about −0.3. Thus, for this sample of physicians, increases in wages have little or no effect on the amount the primary care doctors work, while a 10% increase in wages for specialists reduces their quantity of labor supplied by about 3%. Because the earnings of specialists exceed those of primary care doctors, this elasticity differential also makes sense.

Sources: David M. Blau, “The Supply of Child Care Labor,” Journal of Labor Economics 11:2 (April 1993): 324–347; David M. Brown, “The Rising Cost of Physician’s Services: A Correction and Extension on Supply,” Review of Economics and Statistics 76 (2) (May 1994): 389–393; John P. Burkett, “The Labor Supply of Nurses and Nursing Assistants in the United States,” Eastern Economic Journal 31(4) (Fall 2005): 585–599; John A. Rizzo and Paul Blumenthal. “Physician Labor Supply: Do Income Effects Matter?” Journal of Health Economics 13:4 (December 1994): 433–453.

ANSWER TO TRY IT! PROBLEM

While at a point in time the supply of people with degrees in computer science is very price inelastic, over time the elasticity should rise. That more students were majoring in computer science lends credence to this prediction. As supply becomes more price elastic, salaries in this field should rise more slowly.