Question

Using the cobweb model, explain cycles of employment for computer programmers?

Answer 1

Cobweb model basically deals with cyclical fluctuations caused by time lag in the economy . Now employment equlibrium in the market is an adjustment which primarily depends on labour supply and demand . This model brings in the phenomenon of time lag . It tells us that labour supply will adjust one period after the alteration in labour demand . This is because skill development is a time consuming factor, hence current period supply cannot adjust very fast as per firm requirement of skilled labour . Hence automatically wage rate rises to clear the market . So smaller adjustments in employment when the rate os adjustment is very fast is associated with inelastic supply . Larger adjustments on other hand , with adjustment rate very slow is associated with elastic supply . This is because due to ample time required skill has been acquired . So these labourers are willing to serve at a high wage rate . But as the firm has already employed in the previous period workers of similar skill set , so new workers accept current wage rate . So here market clears by raising supply of employed workers