Question

Discuss the likely economic incidence of a reduction in teacher salaries in Fairfax County. Discuss both the short-run and the long-run.

Answer 1

A reduction in teacher salary would have a direct impact on supply of teachers as teachers would not be willing to supply their services at such low rates and also less students would want to get into teaching as the relative payoff from this profession has declined.

Thus, in the short run, there would be a leftward shift in the supply of teachers in the industry. This would lead to a fall in the employment of teachers and an increase in the wage rate.

However, in the long run, an increase in wage rate would reduce demand for teachers as schools would not wish to hire teachers st such high wage rates as it would increase their input cost.

Thus, demand curve would shift to the left. Keeping supply unchanged, this leads to a fall in the wage rate to the original level, while employment falls even more.

Thus, overall net wages remain unchanged while employment falls.