Question

7. Work It Out. Consider an economy with two sectors: manufacturing and services. Demand for labor in manufacturing and services are described by these equations: L = 200 – 6Wm L = 100 – 4W where L is labor (in number of workers), W is the wage (in dollars), and the subscripts denote the sectors. The economy has 100 workers who are willing and able to work in either sector. a. If workers are free to move between sectors, what relationship will there be between Wm and W? b. Suppose that the condition in part (a) holds, and wages adjust to equilibrate labor supply and labor demand. Calculate the wage and employment in each sector. c. Suppose a union establishes itself in manufacturing and pushes the manufacturing

Answer 1

A). If workers are free to move between sectors ,the wage of manufacturing labour and service sector labour would be equal.if a sector have higher wage than other then labour would move to higher wage sector .higher labour supply in higher wage sector would drop the wage and lower supply in lower wage sector will rise the wage ,and this process continue untill both sectors have an equal wage,then no labour has an incentive to move another sector,thus it will equilibrium.

B. Because it is already given that labour supply is 100 and they are willing to work . Because labour are free to move and wage will be equal in both sector then both sector demand will make market labour demand . And equilibrium wage and labour quantity will be at ,where market demand and supply of labour will equal.

So by adding both sector demand we get market labour demand

300-10w

And putting it equal to Market labour supply which is 100

300-10w=100

W=20

Labour quantity in manufacturing sector

200-10*20=80

Labour quantity in service sector

100-4*20=20

C. If union set wage to 25,then firms in manufacturing sector would reduce labour to maximize their profit.

To know what employment,we need to know what demand will be of manufacturing sector at wage= 25,

200-6*25=50

D. If the unemployed labour from manufacturing sector move to service sector ,there will increase in labour supply in service sector which leads to wage fall.

There was 30 persons unemployed from manufacturing sector and they will get job in service sector and supply in service sector will be 50,and putting service sector labour demand to service sector labour supply

100-4*Ws=50

Ws=12.5

,Thus by movement of unemployed labour from manufacturing sector to service sector decrease the wage from 20 to 12.5 and quantity increase from 20 to 50.