Question

(10 points) What is cross-wage elasticity of labor demand? What influence cross-wage elasticity of labor demand? Explain each fully. factors 6.

Answer 1

Cross wage elasticity of labor demand means the change in demand for a particular kind of labor when the price of another kind of labor changes. It is so because every firm employs different kinds of labor and the demand for one category might get affected by demand for another category of labor. For example if the wage of carpenter rose in an economy  more brick wall building will be demanded and this will increase the demand for masons. Let β be the cross wage elasticity of demand for a labor, the following expression will ease our understanding

β_{j, k}= (% change in E_j)/ (% change in W_k)

The above expression explains the elasticity of input j with respect to the price of input k. That is the percentage change in demand for input j with respect to 1% change in price of input k. If cross wage elasticity is positive, both labors are called gross substitutes and if negative then they are gross complements.

The cross wage elasticity depends on scale and substitution effects. Let us take an example in which a factory employs both teenage and adults to work. If the wage of teenagers fall, and substitution effect takes place, teenage workers will replace the adults. If scale effect is in place, the decrease in teenage wage leads to more hiring of teenagers and thus more hiring of other factors including adult workers.