MODULE NAME : LABOUR ECONOMICS
MODULE CODE :
LECTURER :
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 of responsiveness of a firm to its demand for labour in a particular occupation in relation to the wages in another occupation. Ehrenberg and Smith (2009) also define cross wage elasticity as how the demand for labour is determined by wages in another occupation or sector or industry. Therefore, one may deduce that cross wage elasticity is how the demand or supply of labour in a given occupation is influenced by the change in wages in another occupation.
Cross wage elasticity refers to how a change in wage rate or cost of capital affects demand for labour (that is either skilled labour/unskilled labour) or capital. Capital and labour are usually assumed to have a positive relationship that is they compliment each other though in some circumstances they are regarded as gross substitutes. Cross-wage elasticity is the percentage change in demand for labour when the price of another input, usually wages in a different occupation changes. The three main inputs we consider are skilled labour, unskilled labour and capital.
Domestic labour and foreign labour can also be regarded as substitutes in economies where there is freedom of
