Question

A firm uses skilled labor, unskilled labor, and capital, and is initially in equilibrium. Suppose that the wage paid to unskilled labor falls, and that unskilled labor is a substitute in production with both skilled labor and capital. Depict in separate graphs of (a) capital and unskilled labor and (b) capital and skilled labor how the original equilibrium choices change in response to the decline in wages paid to unskilled workers. What are the expected impacts on the wage and employment level for each group of worker, and why? How does this factor into the growth of inequality in recent decades in the United States?

Answer 1

Let us start with wages and demand for unskilled labor. Refer fig. a As wage rates go down from W1 to W2, more unskilled labor is demanded and quantity shifts from Q1 to Q2. Unskilled labor is available in plenty and hence even without wage rise more labour is available. Unskilled labor is still paid less and can hardly improv income and standard of living.

Now, refer fig b which shows demand-supply of unskilled labor. As unskilled labor is demanded more, demand for skilled labor shifts left from D1 to D2, resulting in less being employed. With improved education and immigration of skilled labor, supply curve for labor has shifted right and wage rates further go down to W3. This results in skilled labor being paid less and find difficult to maintain good standard of living resulting into social unrest.

It is also true that technology is replacing men and employers always threaten job seekers with potential machines.

This has resulted in increase in corporate profits but less incomes with common people and poor living conditions for unskilled and unrest in educated.