The employment elasticity of total employment with respect to real GDP is 0.3. If real GDP expands by 5 % in a year, what is the expected percentage change in total employment? Show all steps.
Answer
The expected increase in total employment = 0.3 × 5 % = 1.5 %.
The correct answer is The expected increase in total employment = 0.3 × 5 % = 1.5 %. — State that total employment is expected to rise by 1.5 %.
Step-by-step solution
- Write the formula for employment elasticity: ε = (%ΔE) / (%ΔY).
- Substitute ε = 0.3 and %ΔY = 5 % into the formula.
- Re‑arrange to find %ΔE = ε × %ΔY.
- Calculate %ΔE = 0.3 × 5 % = 1.5 %.
- State that total employment is expected to rise by 1.5 %.
Common mistake: Multiplying the 5 % growth by 100 again or forgetting that elasticity is a multiplier, not a percentage.
Concept tested: Employment elasticity calculation
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