The market wage increases from $9 to $11and the firm responds by reducing its labor force by 16%.The wage elasticity coefficient is:

Question

Quizplus · Accepted Answer

The wage elasticity of demand for labor is calculated as the percentage change in quantity of labor demanded divided by the percentage change in wage. Here, the wage increases by 22.22% (from $9 to $11 is a $2 increase on $9, which is 2/9 = 0.2222 or 22.22%), and the labor force is reduced by 16%. Thus, the elasticity coefficient = -16% / 22.22% = -0.72 (approximately -0.8 when rounded), indicating inelastic demand since the absolute value is less than 1. The negative sign is often omitted when discussing elasticity, focusing on the magnitude.

The Market Wage Increases from $9 to $11and the Firm