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A) Firms and government organizations employ labour and other recourses to produce goods and services. The demand for labour is therefore derived from the fact that people and other organizations want and need goods and services. It follows that the more goods and services demanded, the more the demand for labour is likely to be. The demand for labour is closely related to the wage rate workers receive from their employment and hoe productive they are. Elasticity of labour demand measures the reaction of demand for labour when there is a change in the ruling market wage rate. The diagram below shows the elasticity of demand for labour (http://tutor2u.net/economics/revision-notes/a2-micro-demand-for-labour.html , Date of access:01/04/2010)
However, there are some factors that influence the elasticity of demand. First of all, when the relevant wage cost forms only a small part of total production cost. The proportion of labour cost to total cost has two effects. First, if the labour cost forms only a small percentage of total cost, demand for labour will tend to be inelastic, for there is less urgency in seeking substitutes. But, Harvey suggests that the second effect is “if the labour cost forms a small percentage of total cost, as in the steel production, a rise in wages will produce only a small movement of the supply curve of the product to the left” (Harvey, 1998, page 256).Powell refers to it as “the importance of being unimportant” (Powell, 2009, page 181).Another factor that affects the elasticity of demand is the availability of substitutes. Under conditions of perfect competition, the cost of labour to an individual firm will not rise as the firm’s demand for that increase. However, when a rise in the wage rate occurs with in the whole industry, then the firms will be demanding the alternative factors to substitute the current labour. Hence, the firms will increase their prices in order to buy the alternative factors. The diagram below shows two labour demand curves with different elasticity for the two above factors that affect the elasticity. (http://tutor2u.net/economics/revision-notes/a2-micro-demand-for-labour.html , Date of access:01/04/2010)
Moreover, the product and the pricing of the product play a big role for the elasticity. If a firm is functioning in a highly competitive market where final demand for the product is price elastic, they may have small market power to pass on higher wage costs to consumers through a higher price. The demand for labour therefore may be more elastic as a result. In contrast, a firm that sells a product where final demand is inelastic will be better placed to pass on higher costs to consumers.((http://tutor2u.net/economics/revision-notes/a2-micro-demand-for-labour.html , Date of access:01/04/2010).Finally, the technological change affects the elasticity. Technological change can affect the demand for labor in two ways. Technological change involving the introduction of new or improved products causes demand shifts in the product markets, an outward shift for the newly created product, an inward shift for the product that is superseded, which in turn translates into shifts in labor demand. Labor demand will increase in the sectors producing the new product, and decrease in the sectors producing the outdated product. New and improved products also tend to increase competition in the product markets as consumers have more substitution possibilities. Increased competition means each firm faces a more elastic product demand.
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B) In recent years, a number of reasons have been given for the incidence of earnings differentials between lecturers and bus drivers. Firstly, to become a lecturer, people must undergo a five year university course and after that probably spent another two years in a different course so that in the end they have a complete lecturer degree, resulting to their demand to be inelastic. As for the bus drivers, people who want to become a driver just need probably one month training. Their demand is elastic. In the diagrams below it shows the inelastic and elastic demand of the lectures and bus drivers.
As a result, demand and supply conditions are important on wage rates. In this case, because lecturers are more needed rather than bus drivers and they can not be replaced by any other factor their wage is higher from the bus drivers. According to Grand, the elasticity of demand for labour depends upon the elasticity of demand of the product, if the workforce can easily be substituted by other factors and finally the ratio of labour costs in total cost. (Grand, 2000, page 171). In addiction, the wage differential between the two is also depending upon their qualifications and skills. Because lecturers are very important in the production, for example they pass on their knowledge to the future workforce, their demand is high. As for their supply, because they need high qualifications and training is low and inelastic. In contrast, the demand for bus drivers is low and elastic because they can easily be replaced by new drivers if the company things that their wages are high. As for their supply is high and elastic because of their lower qualifications and small amount of training they need. Thus the wage differences in the levels and elasticities of demand and supply in the current market, the lecturers are paid more than the bus drivers.
One factor that can cause this wage differential to narrow, is to lower the qualifications that a person need to became a lecturer so that their supply increases and their wage get lower; as more and more people will try to be lecturers because they can spent fewer years and less training to get a high paid job. On the other hand, because the supply of the bus drivers is high, the government can cut the supply by making some restrictions on how a person can get driving licences. They can do that by changing the age that someone can have a licence, resulting to a lower supply and a rise in the wages of the current bus drivers.
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