tructural unemployment is sometimes said to result from a mismatch between the j

Question

tructural unemployment is sometimes said to result from a mismatch between the job skills that employers want and the job skills that workers have. To explore this idea, consider an economy with two industries: auto manufacturing and aircraft manufacturing.

1. If workers in these two industries require similar amounts of training, and if workers at the beginning of their careers could choose which industry to train for, what would you expect to happen to the wages in these two industries?

2. Suppose that one day the economy opens itself to international trade and, as a result, starts importing autos and exporting aircraft. What would happen to demand for labor in these two industries?

3. Suppose that workers in one industry cannot be quickly retrained for the other. How would these shifts in demand affect equilibrium wages in the short run?

4. If for some reason wages fail to adjust to the new equilibrium levels, what would occur?

Explanation / Answer

Question 1,2,3
As the country switch to importing autos and exporting aircraft. Demand for labour in the auto industry will fall while the demand for labour in the aircraft indutry will increase.

In the short run:

Demand for labour in the aircraft industry will rise. BUT as workers cannot switch from 1 industry to the other quickly, supply of labour would increase only by alittle or remain unchanged. In the short run there will be excess demand (shortage) for labour in the aircraft industry. Therefore, equilibrium wages in the aircraft industry will be higher than before the economy open itself to trade. On the other hand, the auto industry equilibrium wages will lower than before trade due to the influx on imported autos.

In the long run:

Labour will retrain and join the aircraft industry. Labour supply should increase to meet the labour demand. As labour supply increase, the equilibrium wages will fall.

In nutshell :

In SR, equilibrium wages in the aircraft industry will rise due to the increase in demand of aircraft. But in the LR as labour retrain from auto industry to the aircraft industry, the labour supply will increase, as a result equilibrium wage will decrease.

4. If for some reason wages fail to adjust to the new equilibrium levels, what would occur?

There will be excess demand of labour. I.e shortage of labour. OR excess supply of labour. I.e unemployment.

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