5 along it the elasticity of labor supply,n,is defined as the percentage change in the quantity of labor supplied by workers in response to a one-percent increase in the price of labor.Higher wages typically induce a greater quantity of labor supplied. The labor-demand curve is aggregated across firms,and at each point along it the elasticity of labor demand,nD,is defined as the percentage decline (in absolute value)in the quantity of labor demanded in response to a one-percent increase in the price of labor.This elasticity consists of two parts.The substitution effect tells,for a given level of output,how much firms substitute away from labor towards other factors of production when wages rise.The scale effect tells how much labor demand falls after a wage increase thanks to the rise in the firms'costs and thus the fall in their output and so demand for labor and all other factors.When wages rise,both the substitution and scale effects reduce the quantity of labor demanded. In accord with a wide range of empirical evidence,we introduce volatility into the labor market by assuming that the labor-demand schedule is stochastic.To see what forces drive this volatility,note that each firm's labor-demand schedule traces out the marginal revenue product of its workers as the wage rate varies.A profit-maximizing firm hires workers until the revenue generated by the last worker hired equals the market wage that firm must pay that last worker. For each firm,its product prices and technology are two key determinants of marginal revenue products.Aggregated across firms,then,the position of the labor-demand schedule depends crucially on all relevant product prices and production technologies.Define mrp as the percentage shift in the labor-demand schedule due to shocks to prices and/or technologies.It is straightforward to then show that the resulting percentage change in wages(w)and employment5 along it the elasticity of labor supply, ηS, is defined as the percentage change in the quantity of labor supplied by workers in response to a one-percent increase in the price of labor. Higher wages typically induce a greater quantity of labor supplied. The labor-demand curve is aggregated across firms, and at each point along it the elasticity of labor demand, ηD, is defined as the percentage decline (in absolute value) in the quantity of labor demanded in response to a one-percent increase in the price of labor. This elasticity consists of two parts. The substitution effect tells, for a given level of output, how much firms substitute away from labor towards other factors of production when wages rise. The scale effect tells how much labor demand falls after a wage increase thanks to the rise in the firms’ costs and thus the fall in their output and so demand for labor and all other factors. When wages rise, both the substitution and scale effects reduce the quantity of labor demanded. In accord with a wide range of empirical evidence, we introduce volatility into the labor market by assuming that the labor-demand schedule is stochastic. To see what forces drive this volatility, note that each firm’s labor-demand schedule traces out the marginal revenue product of its workers as the wage rate varies. A profit-maximizing firm hires workers until the revenue generated by the last worker hired equals the market wage that firm must pay that last worker. For each firm, its product prices and technology are two key determinants of marginal revenue products. Aggregated across firms, then, the position of the labor-demand schedule depends crucially on all relevant product prices and production technologies. Define ∧ mrp as the percentage shift in the labor-demand schedule due to shocks to prices and/or technologies. It is straightforward to then show that the resulting percentage change in wages ( ∧ w ) and employment