Suppose that wages in a given industry are significantly higher in California than in Texas. Assume...
Suppose that wages in a given industry are significantly higher in California than in Texas. Assume that workers in the two states are identical.
a. Show, using labor supply and demand, the current situation
b. Using labor supply and demand, show what one would expect to happen over time. Explain what is going on, if anything.
Homework Answers
Current situation is shown by equilibrium A in both markets
In California, Labor supply LSC1 and labor demand LDC determine the wage rate wC.
In Texas, Labor supply LST1 and labor demand LDT determine the wage rate wT
Since wC > wT workers will move from Texas to California till they are able to receive a higher wage differential.
This reduces the number of workers in Texas and raises the same in California.
This shifts the labor supply curve in Texas to the left to LST2 and in California to the right to LSC2.
These shifts will continue till both regions have a common wage rate w* and this stabilizes the equilibrium at B.
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