Question

2.       Economists argued that temporary labor wage differentials tend to be eroded by labor mobility. Consider the two markets for sheet-iron workers and steel-pipe workers in the same region. Suppose both markets are competitive. We begin in a situation in which both sheet-iron workers and steel-pipe workers earn $20 per hour. Assume that workers can switch easily between the two jobs.

a.       Draw diagrams showing the supply and demand for labor in each market.

b.      Now suppose there is a sharp increase in the demand for steel pipe. Explain what happens in the market for steel-pipe workers.

c.       If the employment of steel-pipe workers increased in part (b), explain where the extra workers came from.

d.      What effect does the event in part (b) have on the market for sheet-iron workers?

e.      What is the long-run effect of the shock on the relative wages in the two types of jobs?

Answer 1

A.

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B.

Sharp increase in the demand for steel pipe, requires firms to produce more of steel pipes. It will make firms hire more of workers. so, demand curve for steel pipe workers will shift to the right due increase in demand of workers in steel pipe labor market.  It will cause increase in wage rate of the workers in the steel pipe labor market.

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C.

Extra workers will come from sheet iron labor market as these workers observe that there is a higher wage rate in steel pipe labor market.

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D.

Labors will move from sheet iron market to steel pipe market. As a result, supply curve will shift to the left, in the sheet iron labor market.

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E.

Relative wage rate will not change in the long run.