UNIVERSITY OF SOUTH AFRICA (UNISA)
College of Economic and Management Sciences
⋄
LABOUR ECONOMICS
ECS2604
Assessment 4 — Semester 1, 2026
⋄
Module Code: ECS2604
Module Name: Labour Economics
Assessment No.: Assessment 4
Due Date: 2026
Semester: Semester 1, 2026
Submitted in partial fulfilment of the requirements for ECS2604: Labour Economics
at the University of South Africa.
,UNISA | ECS2604 – Labour Economics Assessment 4, Semester 1, 2026
Question 1: The Impact of Labour Demand Elasticity on Employment Follow-
ing a Wage Increase in the Unionised Sector
When a trade union successfully negotiates a wage increase in a unionised sector, the resulting
impact on employment is shaped largely by how responsive the demand for labour is to that
wage change (Ehrenberg and Smith, 2017). This responsiveness is captured by the wage elas-
ticity of labour demand, and understanding it is central to evaluating the employment trade-
offs associated with union wage gains.
1.1 Labour Demand Elasticity and Employment in the Unionised Sector
Defining the Wage Elasticity of Labour Demand
The wage elasticity of labour demand measures the percentage change in the quantity of labour
demanded resulting from a one percent change in the wage rate, with all other factors held
constant (McConnell, Brue and Macpherson, 2021). The formula is:
% ∆ Quantityof LabourDemanded
Ed =
% ∆ W ageRate
Because labour demand curves slope downward, this elasticity value is negative. In practice it
is expressed in absolute terms. When |Ed | > 1, demand is elastic; when |Ed | < 1, demand is
inelastic; and when |Ed | = 1, it is unitary elastic.
The Hicks-Marshall Laws of Derived Demand
Four conditions, formalised by Hicks (1932) and attributed originally to Marshall, determine
how elastic labour demand will be. Labour demand becomes more elastic when: (1) the price
elasticity of demand for the final product is high; (2) other factors can substitute for labour
easily; (3) the supply of substitute inputs is highly elastic; and (4) labour costs constitute
a large proportion of total production costs (Ehrenberg and Smith, 2017). In South Africa’s
unionised mining and manufacturing sectors, capital-labour substitution is technically feasible,
which means a union-secured wage increase can trigger significant job reductions.
Page 1 of 20
, UNISA | ECS2604 – Labour Economics Assessment 4, Semester 1, 2026
Diagrammatic Explanation
The diagram below shows the employment impact of a union wage increase under two dif-
ferent demand scenarios. Starting from the market-clearing equilibrium wage W0 , the union
pushes the wage up to W1 .
Wage (W )
B
D
W1
W0
C A
Small drop (inelastic)
DI (Inelastic)DE (Elastic)
Labour (L)
Large drop in L (elastic)
Figure 1: Employment impact of a union wage increase under elastic versus inelastic labour
demand
With an elastic demand curve DE , a wage rise from W0 to W1 shifts the equilibrium from
point A to point B, causing a large reduction in employment. With the inelastic curve DI ,
the same wage increase shifts equilibrium from C to D, producing only a small employment
loss (Boeri and Van Ours, 2013).
Factors Determining Elasticity in the Unionised Sector
Several structural features affect how elastic labour demand is in South Africa’s unionised
industries. In capital-intensive sectors such as mining, firms have a relatively high capacity
to substitute machinery for workers when wages rise, making demand more elastic (Statis-
tics South Africa, 2024). In contrast, sectors requiring specialised skills, such as healthcare or
skilled artisan work, tend to have inelastic labour demand because replacement is difficult and
costly. The share of labour costs in total costs also matters: where wages form a large part of
total operating expenses, firms are more sensitive to wage increases, and demand is more elas-
tic (Ehrenberg and Smith, 2017).
Page 2 of 20
College of Economic and Management Sciences
⋄
LABOUR ECONOMICS
ECS2604
Assessment 4 — Semester 1, 2026
⋄
Module Code: ECS2604
Module Name: Labour Economics
Assessment No.: Assessment 4
Due Date: 2026
Semester: Semester 1, 2026
Submitted in partial fulfilment of the requirements for ECS2604: Labour Economics
at the University of South Africa.
,UNISA | ECS2604 – Labour Economics Assessment 4, Semester 1, 2026
Question 1: The Impact of Labour Demand Elasticity on Employment Follow-
ing a Wage Increase in the Unionised Sector
When a trade union successfully negotiates a wage increase in a unionised sector, the resulting
impact on employment is shaped largely by how responsive the demand for labour is to that
wage change (Ehrenberg and Smith, 2017). This responsiveness is captured by the wage elas-
ticity of labour demand, and understanding it is central to evaluating the employment trade-
offs associated with union wage gains.
1.1 Labour Demand Elasticity and Employment in the Unionised Sector
Defining the Wage Elasticity of Labour Demand
The wage elasticity of labour demand measures the percentage change in the quantity of labour
demanded resulting from a one percent change in the wage rate, with all other factors held
constant (McConnell, Brue and Macpherson, 2021). The formula is:
% ∆ Quantityof LabourDemanded
Ed =
% ∆ W ageRate
Because labour demand curves slope downward, this elasticity value is negative. In practice it
is expressed in absolute terms. When |Ed | > 1, demand is elastic; when |Ed | < 1, demand is
inelastic; and when |Ed | = 1, it is unitary elastic.
The Hicks-Marshall Laws of Derived Demand
Four conditions, formalised by Hicks (1932) and attributed originally to Marshall, determine
how elastic labour demand will be. Labour demand becomes more elastic when: (1) the price
elasticity of demand for the final product is high; (2) other factors can substitute for labour
easily; (3) the supply of substitute inputs is highly elastic; and (4) labour costs constitute
a large proportion of total production costs (Ehrenberg and Smith, 2017). In South Africa’s
unionised mining and manufacturing sectors, capital-labour substitution is technically feasible,
which means a union-secured wage increase can trigger significant job reductions.
Page 1 of 20
, UNISA | ECS2604 – Labour Economics Assessment 4, Semester 1, 2026
Diagrammatic Explanation
The diagram below shows the employment impact of a union wage increase under two dif-
ferent demand scenarios. Starting from the market-clearing equilibrium wage W0 , the union
pushes the wage up to W1 .
Wage (W )
B
D
W1
W0
C A
Small drop (inelastic)
DI (Inelastic)DE (Elastic)
Labour (L)
Large drop in L (elastic)
Figure 1: Employment impact of a union wage increase under elastic versus inelastic labour
demand
With an elastic demand curve DE , a wage rise from W0 to W1 shifts the equilibrium from
point A to point B, causing a large reduction in employment. With the inelastic curve DI ,
the same wage increase shifts equilibrium from C to D, producing only a small employment
loss (Boeri and Van Ours, 2013).
Factors Determining Elasticity in the Unionised Sector
Several structural features affect how elastic labour demand is in South Africa’s unionised
industries. In capital-intensive sectors such as mining, firms have a relatively high capacity
to substitute machinery for workers when wages rise, making demand more elastic (Statis-
tics South Africa, 2024). In contrast, sectors requiring specialised skills, such as healthcare or
skilled artisan work, tend to have inelastic labour demand because replacement is difficult and
costly. The share of labour costs in total costs also matters: where wages form a large part of
total operating expenses, firms are more sensitive to wage increases, and demand is more elas-
tic (Ehrenberg and Smith, 2017).
Page 2 of 20
