Q. 38 Explain a situation using the su... [FREE SOLUTION]

Chapter 15: Q. 38 (page 378)

Explain a situation using the supply and demand for skilled labor in which the increased number of college graduates leads to depressed wages. Given the rising cost of going to college, explain why a college education will or will not increase income inequality.

Short Answer

Expert verified

By shifting the supply curve for skilled employees to the right, an increase in the number of college graduates would lower salaries.

The expense of attending college would grow, widening the gap between the rich and the poor.

Step by step solution

Step1. (a) Introduction

College graduates result in the generation of skilled labor, i.e., they will contribute to the labor market's supply of skilled labor.

Step2. (b) Explanation

As the number of college graduates increases, so does the supply of skilled workers in the labour market. The supply curve swings to the right as the labor supply increases.

As a result, a new equilibrium point is created.

The new equilibrium so achieved will have a higher equilibrium quantity of labor, but equilibrium wages will decline as a result.

As a result of the rightward shift in the supply curve, an increase of college graduates leads to lower wages.

Step3. (b) Introduction

According to the scenario, the cost of attending college increases, meaning that college education becomes more expensive. This will result in fewer college-bound kids and, as a result, fewer college graduates.

Step4. Implication

As previously stated, the scenario results in a decrease in the supply of trained employees. As a result, the supply curve for skilled workers will move to the left.

This suggests a decrease in equilibrium labor supply but an increase in equilibrium wage rate. Hence the wage rate for unskilled work remains unchanged.

So, there is more income inequality.