UNIVERSITY OF SOUTH AFRICA
College of Economic and Management Sciences
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
ECS2604: Labour Economics
Assessment 4 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
ECS2604
Module Code:
Labour Economics
Module Name:
Assessment 4
Assessment:
Semester 1, 2026
Semester:
2026
Due Date:
Submitted in partial fulfilment of the requirements
for ECS2604: Labour Economics — UNISA 2026
,UNISA | ECS2604 Assessment 4 – Semester 1, 2026
Question 1: The Impact of Labour Demand Elasticity on Employment Follow-
ing a Wage Increase in the Unionised Sector
The relationship between wage changes and employment outcomes in unionised sectors turns
entirely on how responsive employers are to changes in the price of labour. When a trade
union secures a wage increase, the size of the resulting job losses depends fundamentally on
the wage elasticity of labour demand, which measures the percentage change in employment
relative to a one percent change in the wage rate (Ehrenberg and Smith, 2011).
1.1 The Impact of Labour Demand Elasticity on Employment Following a Wage In-
crease in the Unionised Sector
Defining the Wage Elasticity of Labour Demand
The own-wage elasticity of labour demand captures how sensitively firms adjust their work-
force in response to wage movements. Formally, it is expressed as:
%∆inquantityof labourdemanded
η=
%∆inwagerate
Because wages and employment move in opposite directions along a downward-sloping de-
mand curve, the elasticity coefficient is always negative. When the absolute value exceeds one,
demand is elastic; when it is less than one, demand is inelastic (Vaia, 2023). A useful empir-
ical anchor comes from a comprehensive meta-analysis of 705 estimates across 105 studies,
which placed the average own-wage elasticity at approximately −0.43, though the figure varies
considerably with firm size, skill level, and the time horizon of adjustment (Lichter, 2023).
Marshall’s Rules and the Determinants of Elasticity
John Hicks, building on Alfred Marshall’s foundational work, identified four conditions that
determine how elastic labour demand will be. These remain the standard analytical frame-
work in labour economics (Ehrenberg and Smith, 2011).
• Substitutability of capital for labour: Where machinery or technology can readily
replace workers, demand is more elastic. A wage increase makes substitution attractive,
and employment falls sharply. In sectors with limited automation potential, the reverse
Page 2 of 25
, UNISA | ECS2604 Assessment 4 – Semester 1, 2026
applies.
• Elasticity of product demand: If consumers are relatively insensitive to price changes
in the final good, firms can absorb higher wage costs and pass them on without losing
much business. Labour demand in such sectors is more inelastic. Where product demand
is price-sensitive, firms must cut costs aggressively (Tutor2u, 2021).
• Labour’s share of total costs: When wages represent a large portion of operating
expenses, as in labour-intensive industries like catering and domestic services, any wage
increase has a pronounced effect on the cost base. Firms respond by cutting headcount,
making demand more elastic. In capital-intensive industries, labour is a smaller share of
costs, so demand tends to be more inelastic (Tutor2u, 2023).
• Supply elasticity of cooperating inputs: If other inputs used alongside labour are
readily available at stable prices, substitution is easier and demand becomes more elastic.
Elastic Labour Demand: Employment Consequences in the Unionised Sector
When labour demand in the unionised sector is elastic, a union-negotiated wage increase
triggers a proportionally larger fall in employment. Consider a union that wins a 10% wage
increase in a context where the elasticity is −1.5. Employment in that sector falls by 15%.
Firms respond in several ways: some automate, some reduce working hours, some relocate
production, and some simply close marginal operations. The workers who lose their jobs may
shift to non-unionised or informal sectors, driving down wages there while increasing employ-
ment in those segments (Mpakaniye, 2016).
Inelastic Labour Demand: A Buffer Against Job Losses
Where labour demand is inelastic, the same union wage increase causes a proportionally
smaller employment decline. Airline pilots are a classic example. Their skills are difficult to
replicate with machinery, they represent a modest share of total airline operating costs, and
the product they help produce faces relatively inelastic passenger demand. A union securing
higher wages for pilots is unlikely to trigger large-scale redundancies (Ehrenberg and Smith,
2011). Unions operating in sectors with these characteristics tend to push for steeper wage
gains, knowing that employment will not crater in response.
Page 3 of 25
College of Economic and Management Sciences
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
ECS2604: Labour Economics
Assessment 4 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
ECS2604
Module Code:
Labour Economics
Module Name:
Assessment 4
Assessment:
Semester 1, 2026
Semester:
2026
Due Date:
Submitted in partial fulfilment of the requirements
for ECS2604: Labour Economics — UNISA 2026
,UNISA | ECS2604 Assessment 4 – Semester 1, 2026
Question 1: The Impact of Labour Demand Elasticity on Employment Follow-
ing a Wage Increase in the Unionised Sector
The relationship between wage changes and employment outcomes in unionised sectors turns
entirely on how responsive employers are to changes in the price of labour. When a trade
union secures a wage increase, the size of the resulting job losses depends fundamentally on
the wage elasticity of labour demand, which measures the percentage change in employment
relative to a one percent change in the wage rate (Ehrenberg and Smith, 2011).
1.1 The Impact of Labour Demand Elasticity on Employment Following a Wage In-
crease in the Unionised Sector
Defining the Wage Elasticity of Labour Demand
The own-wage elasticity of labour demand captures how sensitively firms adjust their work-
force in response to wage movements. Formally, it is expressed as:
%∆inquantityof labourdemanded
η=
%∆inwagerate
Because wages and employment move in opposite directions along a downward-sloping de-
mand curve, the elasticity coefficient is always negative. When the absolute value exceeds one,
demand is elastic; when it is less than one, demand is inelastic (Vaia, 2023). A useful empir-
ical anchor comes from a comprehensive meta-analysis of 705 estimates across 105 studies,
which placed the average own-wage elasticity at approximately −0.43, though the figure varies
considerably with firm size, skill level, and the time horizon of adjustment (Lichter, 2023).
Marshall’s Rules and the Determinants of Elasticity
John Hicks, building on Alfred Marshall’s foundational work, identified four conditions that
determine how elastic labour demand will be. These remain the standard analytical frame-
work in labour economics (Ehrenberg and Smith, 2011).
• Substitutability of capital for labour: Where machinery or technology can readily
replace workers, demand is more elastic. A wage increase makes substitution attractive,
and employment falls sharply. In sectors with limited automation potential, the reverse
Page 2 of 25
, UNISA | ECS2604 Assessment 4 – Semester 1, 2026
applies.
• Elasticity of product demand: If consumers are relatively insensitive to price changes
in the final good, firms can absorb higher wage costs and pass them on without losing
much business. Labour demand in such sectors is more inelastic. Where product demand
is price-sensitive, firms must cut costs aggressively (Tutor2u, 2021).
• Labour’s share of total costs: When wages represent a large portion of operating
expenses, as in labour-intensive industries like catering and domestic services, any wage
increase has a pronounced effect on the cost base. Firms respond by cutting headcount,
making demand more elastic. In capital-intensive industries, labour is a smaller share of
costs, so demand tends to be more inelastic (Tutor2u, 2023).
• Supply elasticity of cooperating inputs: If other inputs used alongside labour are
readily available at stable prices, substitution is easier and demand becomes more elastic.
Elastic Labour Demand: Employment Consequences in the Unionised Sector
When labour demand in the unionised sector is elastic, a union-negotiated wage increase
triggers a proportionally larger fall in employment. Consider a union that wins a 10% wage
increase in a context where the elasticity is −1.5. Employment in that sector falls by 15%.
Firms respond in several ways: some automate, some reduce working hours, some relocate
production, and some simply close marginal operations. The workers who lose their jobs may
shift to non-unionised or informal sectors, driving down wages there while increasing employ-
ment in those segments (Mpakaniye, 2016).
Inelastic Labour Demand: A Buffer Against Job Losses
Where labour demand is inelastic, the same union wage increase causes a proportionally
smaller employment decline. Airline pilots are a classic example. Their skills are difficult to
replicate with machinery, they represent a modest share of total airline operating costs, and
the product they help produce faces relatively inelastic passenger demand. A union securing
higher wages for pilots is unlikely to trigger large-scale redundancies (Ehrenberg and Smith,
2011). Unions operating in sectors with these characteristics tend to push for steeper wage
gains, knowing that employment will not crater in response.
Page 3 of 25
