I am working on a problem where we are basically told, there is a certain govern
ID: 1248824 • Letter: I
Question
I am working on a problem where we are basically told, there is a certain government which is planning on eliminating barriars so as to allow women to enter the work force. we are told that one person fells that the wage rate will decrease and stay at that decreased level and that labor supply will be increased. we are told that another person agrees with the increase in labor supply but feels that, in the sense of the solow model, wages will at first decrease but will eventually rise back to their original levels. we are asked to evaluate this discussion and see if the second person is correct.My approach to this was to first explain the argument of the first person using the cobb-douglass production function. then explain the second persons arguement by use of the solow model. then compare the two and see if the second person is in fact correct or not. I have explained the first persons view but I am having trouble with explaiing the second persons view? could you please help me and tell me how wages are affected when there is an increase in labor supply, using the solow model?
Explanation / Answer
I believe the second person is correct in saying that the wages will at first decrease, because the additional workers will impact the money set aside for labor. So more workers with the same labor budget would mean more payroll is needed. Therefore, the wages would initially go down because of this. The wages might not "drop" per se (obviously you wouldn't want to cut someone's pay,) however, people just wouldn't get as big of a raise in order to cover the pay needed for the other workers. So in that sense, it would be a pay "cut." However, the wages would eventually increase again over time because the additional workers would increase the amount of capital being produced and the capital growth rate in a booming economy always grows faster than the overall labor rate. It's basically a cycle. I hope that helps. If not then everything I learned while getting my MBA was useless. lol
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