Question

As the text suggests, the demand and supply model predicts that the new computer and communications technologies will raise the pay of high-skill labor but reduce the pay of low-skill labor. Explain how this works using the four-step process.

Answer 1

The demand and supply model predicts that the new computer and communications technologies will raise the pay of high-skill labor but reduce the pay of low-skill labor.

Using the four-step process, this is explained.

(1) Initially, before any change, there were two sets of equilibrium in this market. One, was the equilibrium for the demand and supply of labor for the low-skill labor market and the other one was the equilibrium for the demand and supply of labor for the high-skill labor market.

(2) After the change in technology in new computer and communications, the demand for labor for both the high-skilled and low-skilled would change.

(3) The demand high-skill labor would raise and the demand for low-skill labor would fall because now employers would need more high-skill labor with better technology and less low-skill labor with the better technology since good machines with improved technology would do the work for low-skilled people.

(4) So, the final equilibrium and the wage for the high-skilled people would raise with higher demand and same supply of labor as before and the final equilibrium and the wage for the low-skilled people would fall with lesser demand and same supply of labor as before.