Crosswage Elasticty Essay

1933 Words 8 Pages
Midlands State University
Faculty of Commerce
Economics Department

Name | Shingirirai | Nigel | Surname | Kadye | Kufakwatenzi | Registration number | R156777H | R157249W | Mode of entry | Visiting | Visiting | Level | 1.2 | 1.2 |

QUESTIONS : a) Define and explain the concept of cross wage elasticity (6) b) Using practical examples show how cross wage elasticity affects demand and supply of labour in a labour market (14) [25] a) Cahuc and Zylberberg (2009) define cross wage elasticity as the degree
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Njk = % ∆ in WK% ∆ in LJ
Applying the formula the decision on whether the labour types are substitutes or compliments rest in the sign of the final answer. If the answer is positive this implies a case of gross substitutes and if negative this is a case of compliments
When price of capital increases its either Scale effect or Substitution effect occurs. Scale effect is when output decreases resulting in labour demand decreasing. Substitution effect occurs when capital relatively more expensive either substitutes in production, where labour increases or complements in production where labour decreases and overall price capital increases resulting in labour demand increasing then gross substitutes labour demand decreases as well as gross complements.

b) Looking at how cross wage elasticity affects demand and supply of labour, we are faced with two effects that is the scale effect and the substitution effect. But then there is another case that is labour may have a complimentary kind of relationship with other labour types and or capital or they may be actually substitutes but what now comes into question is the degree of substitutability. Let us consider a case where unskilled and skilled are substitutes in production, and the skilled wage decreases, we are faced with two effects

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