Final answer:
The demand for labor is inelastic when a 10 percent wage increase results in a 5 percent decrease in employment. The calculated elasticity is -0.5, which is less than the modulus of 1, indicating an inelastic demand for labor in the market.
Step-by-step explanation:
If a 10 percent wage increase in a particular labor market results in a 5 percent decrease in employment, this indicates the demand for labor. To determine the elasticity, we calculate the percentage change in employment divided by the percentage change in wages. Using the information provided:
Percentage Change in Employment = -5%
Percentage Change in Wages = +10%
The wage elasticity of labor demand = (Percentage Change in Employment) / (Percentage Change in Wages) = -5% / +10% = -0.5. Since the modulus of this elasticity is less than 1, the demand for labor is classified as inelastic. This means that a percentage increase in wages leads to a smaller percentage decrease in quantity of labor demanded.
It's important to distinguish between labor demand and labor supply elasticity. In the provided context, we're discussing labor demand elasticity. According to economic principles, the equilibrium price and quantity in the labor market will change based on shifts in the demand and supply curves. An increase in demand or a decrease in supply typically raises the equilibrium wage and employment levels, while a decrease in demand or an increase in supply leads to lower equilibrium wages and employment.