Question

Use a supply and demand model of the unskilled and skilled labor market to determine the effect of the following situation on inequality in the United States Suppose the interest rate on college loans increases. What would happen to inequality? I need a supply and demand graph!

Answer 1

If college education becomes costly, there will be a shortfall in skilled laborers in long run. The existing ones will also look for a higher salary in order to be able to pay off their debts. Wag e (W) S Skilled wage Equilibrium Wage Unskilled wage No of skilled and unskilled workers In the above diagram, the market represents equilibrium wage (average of skilled and unskilled wages) in labor market. In the same graph it can be seen that supply of skilled workers will decrease (upward shift in supply curve) and wages of skilled laborers will go up. Similarly the supply of unskilled workers will increase since college education is costlier and employers will try to balance out their extra pay to the skilled workers by paying lower wages to the unskilled group of laborers available in plenty now. So as revealed in the diagram itself there lies a wage gap between the wage of unskilled and skilled labor forces as there is upward and downward pressure on the equilibrium wage level. If one can see the shifts with respect to individual group of workers (skilled and unskilled) the increase in inequality becomes clear through the wage gap.