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

Answer 1

You're told that the markets are competitive. That means that there is free entry and exit. If the relative wages are different, say sheet-iron workers earn more- then in the long run more workers are going to move from the steel-pipe market to the sheet-iron market. This will result in a drop in the supply of workers in the steel-pipe market and an increase in the supply of workers in the sheet iron market. Wages in the former market will drop as a result while those in the latter market would increase. This will happen whenever the relative wages are different.

So, labour movement will equalize the relative wages in the long run.