Question

Suppose there are two occupations: tech and service. The demand and supply of labor in the service occupations are (D): w= 100−5E; (S): w= 20 +3E, where w is wage and E is employment. In the tech occupations, the demand and supply of labor are (D): w= 200−2E; (S): w= 20 +7E

a) What are the equilibrium wages and employments in the two occupations?

b) Suppose the demand in tech occupation has increased from w= 200−2E to w= 218−2E and service occupations can switch to tech occupations, what are the changes in wage and employment of the two occupations?

Answer 1

a) In service occupation, equilibrium occurs when D = S

100 - 5E = 20 + 3E

E = 10

At this E, w = 50

Equilibrium wage in service sector is 50 and employment is 10.

In tech occupation, equilibrium occurs when D = S

200 - 2E = 20 + 7E

E = 20

At this E, w = 160

Equilibrium wage in tech sector is 160 and employment is 20.

b) If tech demand have increased from 200 - 2E to 218 - 2E, equilibrium change:

218 - 2E = 20 + 7E

E = 22

At this E, w= 174

Equilibrium wage in tech sector is 174 and employment is 22.

As wage as well as employment in tech industry have increased, labor class from service occupation will shift to tech sector. It will raise supply in tech industry which will drive down the wage and raise employment level while it reduce supply in service sector which raise wage and reduce employment there.