The supply of college graduates to the labor market has increased dramatically over the last few...
The supply of college graduates to the labor market has increased dramatically over the last few decades, while the supply of high school (no college) graduates shrunk. At the same time, the average real wage of college graduates stayed relatively stable, while the average real wage of high school graduates fell. Using graphical supply and demand analysis, show how these wage patterns can be explained.
Homework Answers
In both graphs, wage rate (P) and employment/quantity of labor (Q) are shown along vertical and horizontal axis respectively. D0 and S0 are initial demand and supply curve for labor, intersecting at point A with initial wage rate P0 and initial quantity of labor Q0.
(a) Market for college graduates
As result of higher labor supply, the Labor supply curve will shift rightward, decreasing wage rate and increasing quantity of labor. A stable wage rate implies an increase in demand for labor which has shifted labor demand curve rightward at the same time, increasing both wage rate and quantity of labor. The net effect is an increase in employment at same wage rate.
In following graph, D0 shifts right to D1, and S0 shifts right to S1, intersecting at point B with same wage rate P0 but higher employment Q1.
(b) Market for high-school graduates
As result of lower labor supply, the Labor supply curve will shift leftward, increasing wage rate and decreasing quantity of labor. A lower wage rate implies a decrease in demand for labor which has shifted labor demand curve leftward at the same time, decreasing both wage rate and quantity of labor. In this case, leftward shift in demand curve is higher in magnitude than the leftward shift in supply curve, so the net effect is a decrease in wage rate with lower employment.
In following graph, D0 shifts left to D1, and S0 shifts left to S1, intersecting at point B with lower wage rate P0 and lower employment Q1.
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The supply of college graduates to the labor market has
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