Question

I need to answer a question about International Economic( text book by Robert Carbaugh). At least 200 words.

What do these patterns imply for Labor (skilled and unskilled) for Capital (e.g., is mobile capital 'good' or 'bad'?)?

Answer 1

As a result of increase in international trade the relative efficiency of skilled & unskilled labor varies substantially between countries. We know that comparative advantages in capital & labor applies to the trade patterns of countries. According to factor endowment theory which considers the relative difference in resource endowments (capital & labor) as the ultimate determinant of comparative advantage in trade. Countries that have abundant capital can specialize in capital intensive products & labor abundant countries can specialize in labor intensive products. The wage gap between skilled & unskilled workers has increased significantly in last few decades. If there is an increased demand for skilled labor relative to unskilled workers expanding trade or technological advances increases inequality between skilled & unskilled labors. Immigration of unskilled labors also results in increasing wage inequality due to increased supply of skilled labors. Education also results in increasing the supply of skilled labors which helps in reducing wage inequality.

There are some factors which affect the demand & supply patterns of skilled & unskilled labors in the economy which we will discuss below.

International trade & technological advancement: international trade & technology hugely affects supply patterns of skilled & unskilled labor. Increase in international trade decreasing costs of transportation & communication results in increased demand for skilled labor relative to unskilled labor. Skill based technological improvements lead to an increase in the demand for skilled workers compared to unskilled workers.

Immigration: immigration is a key reason behind changing patterns in supply of skilled & unskilled workers. Increased immigration of unskilled labors decreases supply of skilled labors in the economy. Migration tends to equalize wage rates between different countries. Immigration can put fiscal drain & can create wider gulf between skilled & unskilled workers.

Education & training: Education & training changes the ration of availability of skilled & unskilled labors in the economy. Education increases the supply of skilled labors & if the demand increases the wages also increase for skilled labors.