1. (25%)At the outset of chapter X of Book I of Adam Smith’s The Wealth of Natio
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Question
1. (25%)At the outset of chapter X of Book I of Adam Smith’s The Wealth of Nations, Smith begins with the statement that “The whole of the advantages and the disadvantages of the different employments of labor and stock, must, in the same neighborhood, be either perfectly equal or continually tending to equality.”However, if we look at “different employments of labor” (e.g., different occupations, industries, or sectors of employment), we see that money wages vary across occupations and other aspects of work, and often quite substantially.
a. (15%)Write an essay in which you reconcile Smith’s statement about “the whole of the advantages and disadvantages of the different employments of labor… must… be either perfectly equal or continually tending toward equality” with the observed variation in wages across occupations.Your essay should identify two different factors that facilitate this reconciliation.
b. (10%)Suppose that two adjacent labor markets are in equilibrium as described in the quote from Smith above, but now assume that a positive shock occurs in one of those markets (e.g., gold is discovered) and the demand for labor increases.What happens initially, and what happens in the long run to get back to the situation described in the quote?
Explanation / Answer
“The whole of the advantages and the disadvantages of the different employments of labor and stock, must, in the same neighborhood, be either perfectly equal or continually tending to equality.”
Ans:
The statement in modern terms actually means that an employer will use labor to produce goods and services up to the point where the benefits accrued from employment equals the cost of such employment.
When the Gold is discovered , the owner of capital with means to employ labor will immediately demand more labor, because he will gain immensely if the gold is mined and sold in the gold-market. In the short-run, the additional demand for labor pushes up the wages so that more workers are attracted to the mining job, as compared to other jobs. Workers will begin to leave other sectors and migrate to the mining job because of rise in wages.
In the long-run however, since more and more workers and willing to take the mining job because of the rise in wages in that job, eventually the demand for labor will get satisfied . Then the wages will have a downward pressure, and the capitalist will pickand choose workers according their capabilities and strength etc. Wages will tend to fall back to the equilibrium position where the demand for mining labor equals the benefits of mining and selling gold. We are almost sure that this equilibrium price in the gold-mining labor market, will match those of the wages in other sectors, due to the mobility of lbor from one sector to the other. However, if the mobility has barriers of any type , including regulations by government etc, then gold-ming wages tend to settle at a higher level than other manual labor sectors. Adam Smith’s statement can be reconciled thus, he id nto assume any barriers to mobility of labor between sectors. Therefore he statement that wages will settle at the equilibrium level is valid.
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