Question

Suppose a country has two specific factors, skilled and unskilled labor. Unskilled labor is an input in the production of toys. Skilled labor is used only in the production of rockets. A third factor, capital, is mobile between the two sectors. Holding all else constant, what is the effect of an increase in the amount of available capital on real wages for both types of workers?

Answer 1

For unskilled labor: So for an increase in capital for production of toys, the firm would go for automation of the production process which would again require skilled labor to operate the machines. This would reduce the need for unskilled labors and would reduce the real wages for them

Whereas for skilled labors, with the increase in capital, the production of rockets would increase and increase the demand for skilled which would further increase the demand for skilled labor thereby increasing the real wage.