Question

Continue to consider the development discussed in Problem 1.

a) If the wage and employment in the shoe industry are determined by the intersection of labor supply and demand, how, if at all, will the fall in the world price of shoes affect the wage and employment of workers in the shoe industry?

b) Suppose that both before and after the price change there is a negotiated wage that is above the equilibrium wage. In this case, how, if at all, will the fall in the world price of shoes affect employment, the wage, and unemployment among workers in the shoe industry?

Answer 1

a) Due to fall in world price of shoe, there is decline in profit earned by producers which will induce them to cut their cost and reducing wage of labor would be one of them or there is decrease in labor demand at the same wage rate which will shift demand curve of labor to its left which result in fall in wage rate and fall in labor hired.

b) If there is wage that is above the equilibrium wage, it will result in surplus of labor where labor supplied is more than labor demanded which create unemployment. Due to rise in unemployment when demand of labor falls, labor would be willing to work at lower wages which reduce wage rate till it is again in equilibrium.