Consider a small open economy with two industries, IT and medical service. Each industry must hire...

Consider a small open economy with two industries, IT and medical service. Each industry must hire both skilled labour and unskilled labour for production. In the short run, the skilled labour in both industries are specific factor while the unskilled labour is mobile between the two industries. (Please assume that the price of IT and medical service remain the same.)

a. Why the skilled labour should be considered as industry-specific?

b. In this country, how many (different) wage rates are there?

c. If there are large number of unskilled labour immigrating into this country, how will the wage rates change? Briefly explain.

d. If there are large number of skilled IT workers immigrating into this country, how will all the wage rates change? Briefly explain.

e. In the previous discussion you have assumed the price of the output from both industries have remained the same. How likely do you think this assumption holds true in situations such as question c and d? Briefly explain.

Expert Solution

a) Skilled labors are industry specific because of differences in skill sets and their application. Skills that get utilized in medical industry can not applied into IT industry. Similarly, the skills which are in use in IT sector can not be applied into medical services. For example a dermatologist would have skill to treat skin related problems of patients but such skills would not be useful in any of the services of IT industry such as cloud computing etc. Hence, skilled labors are industry specific.

b) There will be three different wage rates in this country. First wage rate will be set for skilled labors of IT industry. Second will be wage rate for skilled labors of medical industry and the third one will be the wage rate for unskilled labors. As unskilled labors are not industry specific and can mobile from one to another, the wage rate for these workers will be one, that would get derived through demand from both (IT and medical sectors) and supply of all unskilled labors. On the other hand, the wage rate for industry specific skilled labors will get determined through demand and supply of these labors from their specific industry only.

c) The wage rate related to unskilled workers will change. The immigration would increase the supply of these labors, while keeping the demand from both industries constant, given that skilled and unskilled labors can not be substituted. The supply increase will shift the supply curve towards left side and hence the equilibrium wage rate will reduce.

d) There are two situations that may take place. IN one it is considered that skilled IT workers can be substituted for unskilled IT workers. If more IT skilled workers will come in to the country, the supply curve will shift right side and hence the wage rate for IT skilled workers will also reduce. And as IT skilled workers can be substituted for unskilled IT workers, more IT skilled workers will be demanded because of lower wage. Reduction in demand of unskilled IT workers will make the unskilled workers shift to medical industry. And in total there will be reduction in the total demand, thus reducing the wage rate for unskilled workers as well.

Rahul Sunny answered 2 years ago

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