Question

In recent decades the real wages of U.S. college educated workers have increased while the real wages earned by high school graduates and dropouts have fallen considerably. Are the income and substitution effects of a wage change different for these two groups? Explain. Be sure to include the definition of the income and substitution effects from a wage change in your answer.

Answer 1

There will be change in the substitution effecf because pf the wage change but income will be the same.

Here income refers to the money a person is earning from his job.

And substitution effect refers to the change in demand of good due to change in price of another good. But here the substitution will act as the change in demand with the change in real wage of the consumer.

Now , in the statement the real wage of the consumer is changing which means - the income is the same but because of the inflation there is difference in their real wage.

The high school or dropout workers may be consuming the product on which the inflation rate is quite high because of whuch their real wage has been decreased. On the other hand the educated workers would be consuming product whose inflation rate has not increased as such , hence their real wage increasing.