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Economists argue that temporary factor-price differentials tend to be eroded by factor 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 2 separate diagrams showing the supply and demand for labour in each of the two markets - sheet-iron market and steep-pipe market. (8 marks total - 4 marks each)
b. Now suppose there is a sharp increase in the demand for steel pipes. Explain in words and also illustrate on your graph in part (a) 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? Explain your answer in words and illustrate on your graph drawn in part (a).
e. What is the long-run effect of the shock on the relative wages in the two types of jobs?
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