Question

1. In each of the following cases, a city is given together with an event that will affect the city’s labor market. For each case, discuss whether the event will affect labor demand or labor supply and explain why. How does the event affect the equilibrium wage and employment level in the city?

(a) City: A “Motor City” where most people work in the automobile manufacturing industry. Event: Petroleum-exporting countries agreed to cut crude oil production, which has increased gasoline price substantially all over the world.

(b) City: A “Furniture City” where most people work in the home furniture manufacturing industry. Event: The number of new homes sold has reached a record high for two consecutive years during a housing market boom.

(c) City: A “Smog City” that is most infamous for its air pollution. Event: The federal government has committed billions of dollars to clean up the air in the Smog City, which won’t cost the city a penny

Answer 1

(a) Higher gasoline price will decrease the demand for cars, which will make car producers lower production. Labor demand will fall, shifting labor demand curve leftward, decreasing wage rate and decreasing employment.

(b) Increase in number of new houses will increase the demand for furniture, which will make furniture producers increase production. Labor demand will rise, shifting labor demand curve rightward, increasing wage rate and increasing employment.

(c) Government's cleansing program will attract more people to relocate to the city, which will increase labor supply. This will shift labor supply curve rightward, decreasing wage rate and increasing employment.