Question

Economists argued that temporary labor wage differentials tend to be eroded by labor mobility. Consider the two markets for sheet-iron workers and steel-pipe workers in the same region. Suppose both markets are competitive. We begin in a situation in which both sheet-iron workers and steel-pipe workers earn $20 per hour. Assume that workers can switch easily between the two jobs.

a. Draw diagrams showing the supply and demand for labor in each market.

b. Now suppose there is a sharp increase in the demand for steel pipe. Explain what happens in the market for steel-pipe workers.

c. If the employment of steel-pipe workers increased in part (b), explain where the extra workers came from.

d. What effect does the event in part (b) have on the market for sheet-iron workers?

e. What is the long-run effect of the shock on the relative wages in the two types of jobs?

It is common to hear comments like “Why do baseball players earn millions of dollars a year for their negligible contribution to society while major contributors—such as schoolteachers, police officers, firefighters, and ambulance drivers—earn barely enough to survive?” Can you offer an answer based on what was discussed in efficiency of factor markets?

Answer 1

Answer:

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