Question

Consider an economy with two industries: auto manufacturing and aircraft manufacturing.

a. If workers in these two industries require similar amounts of training, and if workers at the beginning of their careers could choose which industry to train for, what would you expect to happen to the wages in these two industries? How long would this process take? Explain?

b. Suppose that one day the economy opens itself to international trade and as a result, starts importing autos and exporting aircraft. What would happen to demand for labor in these two industries? And as a result, what would happen to the wages in these two industries in the short run?

c. Do you think that the wage differential between these industries will continue over the longer time horizon? What would happen to the wages in these industries in the long term period? Explain.

Answer 1

a) In short run, the wages can be differeant in two industries. Suppose wages in aircraft manufacturing is more than in auto manufacturing. So, more number of people will choose aircraft manufacturing this will increase supply of labour in this industry and the wages will decrease on the contrary in auryo manufacturing the supply of labour will fall leading to increase in wages. This will occur till tohe point wages in both the industries is same. Hence, in long run both the industries will give same wage.

b) Importing autos leads to decrease the demand for domestically produced autos leading to reduced demand for labour which leads to decrease in wages in auto industry while aircrafts demand will increase as now it is selling in ither countries also. This will increase demand for labour in aircraft manufacturing, leading to increase in wages im this industry. Thus, in short run, wages in aircraft manufacturing will increase while in auto manufacturing, wages will decrease.

c) Again in long run, people will choose aircraft manufacturing job over auto manufacturing, this leads to increase supply of labour in aircraft industry and decrease supply of labour in auto industry causing wages to fall in former and rise in latter leading to convergence of wages.

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