Question

Consider an economy with two sectors: manufacturing and services. Demand for labor in manufacturing and services are described by these equations: Lm=1301–21Wm Ls=1221–23Ws where L is labor (in number of workers), W is the wage (in pesos), and the subscripts denote the sector. The economy has 505 workers who are willing and able to work in either sector. a. If workers are free to move between sectors what relationship will there be between Wm and Ws
b. Suppose that the condition in part a holds and wages adjust to equilibrate labor supply and labor demand. Calculate the wage and employment in each sector.

c. Suppose a union establishes itself in manufacturing and pushes manufacturing wage to 25. Calculate employment in manufacturing.

d. In the aftermath of the unionization of manufacturing, all workers who cannot get the highly paid union jobs move to the service sector. Calculate the wage and employment in services

e. Now suppose that workers have a reservation wage of 15 dollars= that is, rather than taking a job at a wage below 15 dollars, they would rather wait for a 25 dollar union job to open up. Calculate the wage and employment in each sector. What is the economy’s unemployment rate?

Answer 1

Answer:

a) Wm=Ws

b) W= 45.85pesos

Ls= 167, Lm=338

c) Lm= 776

d) Ls= 505, Ws= 31.13

e) zero unemployment rate

Explanation:

In parts e the currency mentioned in dollars. Lets assume dollars=pesos

a) if workers are free to move between sectors then there must be equal wages in each sector

b) Let W=Wm=Ws

Lm=1301-21W  -------- eq 1

Ls+Lm=505  --------- eq 2

Ls=1221 -23W -------- eq 3

Substitute eq 1 ans eq 3 in eq 2

1301-21W+ 1221-23W=505

W= 45.84 pesos

Ls= 167

Lm= 338

c) Lm= 1301-21Wm

Lm= 1301-21(25)

Lm= 776

There is a capacity for 271 excess labor at 25 pesos wage

d) suppose all of 505 workers couldn't get highly paid union jobs and have to move to services sector

Ls= 1221-23Ws

505= 1221-23Ws

Ws= 31.13 pesos

e) Since labor could get wages of above 15dollars or pesos in both the sectors, there is zero unemployment in the economy