Elasticity: It’s for More than Just Socks

Have you ever been at a wedding and they started playing the Electric Slide? You know when it goes “It’s Electric! Boogie Woogie Woogie”? Well, I like to change the words and sing “It’s Elastic!” And then I get down with my bad self. Usually alone. Because no one likes someone singing about economic terminology.

Why am I so enthusiastic about elasticity? Because, labor supply elasticity is a really important concept to help understand some recent economic phenomena. But, before we get there, let’s start with defining labor supply elasticity. Then, we’ll use the concept to evaluate a bit of a puzzle. Why have food delivery worker earnings been stagnant despite a huge increase in demand?

What is Labor Supply Elasticity?

When economists talk about elasticity, they aren’t talking about the thing that holds up your socks or underwear. Instead, they mean how responsive the quantity of something is to a price. Labor supply elasticity refers to how many more workers enter a market in response to a wage increase.

Usually, a higher wage brings more workers into a labor market. But how many more varies across markets. If a 10 percent increase in the wage increases the number of available workers by less than 10 percent, supply is inelastic. If it is more than 10 percent, then supply is said to be elastic.

Industries that are easy to enter have elastic supply. For example, the industry for delivery drivers is easy to enter — you need a driver’s license and a phone. So, if demand increased drastically in the delivery driver industry, we might expect more workers to enter the market. To be clear, it’s not that the work is easy — the thought of driving around Boston roads delivering food strikes fear in my heart. But, it’s an easy industry to get into.

On the other hand, industries with inelastic supply tend to be hard to enter. Think about the labor market for nuclear physicists. If, all the sudden, demand increased dramatically, we wouldn’t immediately have more nuclear physicists. After all, it takes a long time to become one. And, this difference between the two sorts of industries has large implications for wages.

Elasticity: An Illustration

The old-school drawing below shows labor supply and demand in two cases — with elastic and inelastic labor supply. On the graph, the supply curve is the upward sloping line — more wages, more workers who want to work. The demand curve is the downward sloping one — more wages, fewer workers that employers want to hire. The intersection of the two curves is the “market wage.” It’s the wage where employers demand the same number of workers as are willing to work.

The drawing also shows what happens when all of the sudden more workers are demanded. With an elastic supply curve (on the left) wages don’t go up much. The increase in demand is met by more workers entering the industry. Employers don’t need to raise wages. In the inelastic case (on the right), wages increase considerably. The increase in demand cannot be met with more workers, so employers bid up wages.

Figure 1. An Old-Fashioned Drawing of the Effect of Demand Change with Differing Elasticity

Which gets us to the point of today’s post — why labor supply elasticity determines who sees the gains to increased demand for products.

Why Elasticity Matters: Wages of Delivery Drivers

To see why elasticity matters, consider a group of workers you might think won out during the pandemic — food delivery drivers. After all, dine-in was largely precluded during the early days of the pandemic. Plus, the technology was in place through Apps like DoorDash or GrubHub to really allow drivers to meet this new demand. Indeed, a McKinsey & Company report produced the figure below, showing how the use of these Apps more than doubled in the U.S. during the pandemic.

So demand seems to have gone up considerably. Did wages? To answer this question, I identified restaurant workers in the Current Population Survey who claimed their occupation was as a delivery driver. I then compared these workers’ median weekly earnings before and during the pandemic to a comparison group — other hourly (i.e., not salaried) workers. The figure below shows earnings for delivery drivers went up just 1.7 percent over this period compared to 5 percent for hourly workers.

Figure 3. Weekly Earnings for Delivery Workers versus Other Hourly Workers, October 2021 Dollars

Source: Author’s calculation from University of Minnesota IPUMS-CPS.

So, it seems demand up…but pay not so much. Other hourly workers — who presumably didn’t see quite the surge in demand as food delivery — saw larger increases. So, is this an example of elastic supply, i.e., a large number of workers surging into the industry?

Here, the evidence is a bit shaky. Keeping track of non-traditional workers (like those on delivery apps) is notoriously difficult. But, some evidence exists that the labor response to the pandemic for food delivery apps was huge. Doordash alone added over 1.9 million drivers in the first six months of the pandemic. And, new dashers were still at record levels in 2021. So, it definitely seems the increase in demand for delivery was met with a surge in workers, not wages.

Another Example of Skill-biased Tech Change?

In a lot of ways, the story of delivery drivers during the pandemic is another story of skill-biased technological change. The existence of apps like DoorDash and GrubHub allow boosts in demand for two kinds of people: those that can develop the apps and those that serve as the deliverers themselves.

The labor supply for app development is pretty inelastic — it takes a while to learn how to code. And, App Developer wages have increased fairly dramatically over the last several decades. The labor supply of those that use the apps as drivers is quite elastic. And, as we saw, their wages hardly responded to a dramatic increase in demand. Technology thus increases demand for both types of workers, but only for one type is this increase met with dramatically higher wages. Elasticity matters.

All of this is not necessarily to criticize DoorDash or GrubHub, although evidence exists some of their workers are unhappy. Instead, I view this article as a reminder that in some industries, the market alone isn’t enough to raise wages. Sometimes, no matter how much demand increases, workers aren’t going to see much of the benefit.

In industries like these, minimum wage protections may make sense. But, Gig workers like those using food-delivery Apps are labeled as independent contractors, and don’t have these protections. Given these workers newfound importance in the economy, it may be time to start thinking about how to at least guarantee some minimum earnings standard.

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