Question

Consider the markets for low-skilled and high-skilled labor in the United States. Describe how each of the following developments is likely to affect the wages of low-skilled workers relative to high-skilled workers.

a) There is an increased demand for apps and smart appliances, which are produced by high-skilled workers.

b) The government pays employers a subsidy for each low-skilled worker they employ.

c) Some low-skilled workers get more education, and so become high-skilled workers.

Answer 1

(A) The apps and smart appliances are developed by skilled workers. An increase in demand for these products would result into an increase in demand for skilled workforce by the firms and the firms would decrease the demand for unskilled workers because they cannot develop smart apps and appliances. Therefore, the demand curve for skilled workers shift to right and demand curve for unskilled worker shift to left. Hence, the wages of skilled worker rises and wages of unskilled workers would fall.

(B) This would increase the demand for low skilled workers and demand for low skilled workers would rise by the firms and the wages of low skilled workers would rise.

(C) This would change the composition of low and high skilled workers. The supply of high skilled workers increases because some low skilled workers have joined high skilled workers group by gaining education. So, the supply of skilled workers increases and the wage of skilled workers decreases. On the other hand, the labor supply of unskilled workers decreases and the wages for unskilled worker increases.