Question

Factor price insensitivity and Rybzcynski Theorems: Effect of better schooling

Suppose that the government of a small country improves the schooling system and makes education mandatory, which leads to a 20% increase in the supply of skilled workers and a 10% decrease in the supply of unskilled workers. There are two industries: computers and shoes, and we assume that the computer industry is more intensive in skilled labor.

a) For a small open economy taking international prices as given, does the change in the schooling system affect the skill premium?

b) Does the shoe industry shrink? By more or less than 10%?

c) Does the computer industry expand? By more or less than 20%?

Answer 1

Answer:

a) The schooling system does change the skill premium. Due to schooling now more of skilled labor will be produced in the economy. Earlier when schooling was not made compulsory, the percentage of unskilled labor were more.

b) According to Rybzcynski theroems, if one factor endowment has incrased it will decrease the output of other industry. With an increase in skilled labor, the unskilled labor has decreased. This will lead to shrink the shoe industry. The shoe industry will shrink less than 10 percent.

c) With the demand of skilled labor in computer industry, the industry will expand as more and more labor are availble. It will expand more than 20 percent.