Suppose there exist two labour markets — one for low-skilled, and one for high-skilled workers. Any...

Suppose there exist two labour markets — one for low-skilled, and one for high-skilled workers. Any low-skilled worker can become a high-skilled worker by investing in education, the cost of which is c. (a) What, if any, wage gap would exist between low- and high-skilled workers in equilibrium? Explain. (b) Now suppose that an improvement in technology raises the productivity of low-skilled workers. Explain the process by which the markets would adjust to a new equilibrium.

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Expert Solution

a]Equilibrium market wage rate is the situation wherein the supply and the demand for the labor meet at the same point of intersection.This means cost of hiring one extra employee will be equal to the cost of revenue made by selling their output.The equilibrium wage is high for a skilled worker and low for an unskilled because it depends on the job criteriae and the level of skills required as per the specification of the jobs.In addition to it there is also wage discrimination for women and the minority group.The demand for a skilled worker exceeds when compared to the unskilled because the value of the commodity produced by the skilled worker is comparitively higher and can bid a higher pice. The combined effect of the higher demand and lower supply is that wages for skilled workers are often much higher that for unskilled workers. This is why there often exists an wage gap between low and high skilled worker in equilibrium conditions.Because there is higher demand for the human capital, the skilled expect and higher wage rate inorber to increase the efficiency of supply of commodities.

b]When there is a technological revolution arises then there will be an improvement in the productivity of the low skilled labours which in turn will change the rate of wage and also the equilibrium situation. In that case the market must follow certain strategies to adjust with the new equilibrium.A technological improvement can increase the level of output with the given level of inputs through the process of invention innovation an diffusion. Achange in the technology can increase the demand and supply for the products. However when there are changes in the demand and supply there will also be a defenite change in the equilibrium. In that case, the equilibrium price for that commodity falls because there will be a huge demand for that particular commoditiy at lower or cheaper prices.So the market has to increase its supply in order to cope with the demand and also to maintain a rapport an dadjust to the newer equilibrium.

Rahul Sunny answered 1 year ago

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