Question

In: Economics

The City of Wichita announces that a major aircraft employer will move to the area. This...

The City of Wichita announces that a major aircraft employer will move to the area. This will cause the creation of jobs amounting to 2% of the current labor force. Using the formulas for analyzing the effects of an increase in labor demand, estimate the following:
1. What will happen to the equilibrium wage and employment in the region if the wage elasticity of supply is 1.5 and the wage elasticity of demand is 1.0?
2. What would be the jobs multiplier in that case, if the initial direct change in employment is 2%?
3. What would be the effects on equilibrium wage and employment if the wage elasticity of supply were higher, at 2.0?

Solutions

Expert Solution

a) The elasticity of labor demand, Ed = %change in labor demand/%change in wage

Given, Ed = 1.0

Ed = 2% / %change in wage

1 = 2% / %change in wage

therefore, %change in wage = 2%

Equlibrium wage will increase by 2%.

The elasticity of labor supply, Es = %change in labor supply / %change in wage

Given, Es = 1.5

Es = %change in labor supply / 2%

1.5 = %change in labor supply / 2%

therefore, %change in labor supply = 3%

Labor supply will increase by 3%.

Since both labor demand and labor supply will increase in the area, the equilibrium level of employment will increase in the City of Wichita.

b) Job Multiplier = (direct effect + indirect effect) / direct effect

direct effect = 2%

Indirect effect = 0

Job multiplier = 2/2 = 1

Therefore, the job multiplier is equal to 1.

c) The elasticity of labor demand, Ed = %change in labor demand/%change in wage

Given, Ed = 1.0

Ed = 2% / %change in wage

1 = 2% / %change in wage

therefore, %change in wage = 2%

Equlibrium wage will increase by 2%.

The elasticity of labor supply, Es = %change in labor supply / %change in wage

Given, Es = 2

Es = %change in labor supply / 2%

2 = %change in labor supply / 2%

therefore, %change in labor supply = 4%

Labor supply will increase by 4%.

Since both labor demand and labor supply will increase in the area, the equilibrium level of employment will increase in the City of Wichita.

Rahul Sunny answered 2 years ago

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