Question

In the book, there was a skill-unskilled model of employment. Instead, suppose that

there are two types of workers: high-skilled and low-skilled workers. In addition, there

is capital being utilized to create goods. To make our lives easy, assume that production

is q = LL^1/4LH^1/4K^1/2. Once again assume that the market is perfectly competitive and HL

that the price is determined by the local market (as opposed to the world market).

1. (a) If LL = 8LH, what does this tell us about the relative wage wH/wL?

2. (b) Assume the amount of Capital and Labour are all perfectly inelastic, create a diagram for each factor market (i.e. for each type of labour and capital) and explain what the influence on wage would be if more low-skilled workers were allowed to immigrate.

3. (c) How does your answer to the previous question change if only high-skilled workers are allowed to immigrate.

4. (d) Does this suggest anything about what you would expect to be happening to wage gaps compared to the average worker? What about the gini coefficient or inequality?

Answer 1

a. workers would be paid as per their productivity hence relative wage wh/wl=8.

b. find the attached pdf. it is the demand of factors that influences the wage and since supply is inelastic so they will not change hence not influence the wages.

c. if high skilled workers allowed to migrate then the supply of high skill workers too influence the wages, thwy would have a high bargaining power then.

d. the wage gap between high skill workers and low skill workers will increase as high skill workers have more bargaining power so they can influence the wage and will demand for higher wage. As far as inequality is concerned it will increase as high skill worker will be paid more and hence gini coefficent will increase.