Question

Suppose a town's largest employers are its auto manufacturing plant and its airplane manufacturing plant. Airplane manufacturing jobs require familiarity with a technology that is not currently used in auto manufacturing. Assume workers are indifferent between the two types of manufacturing work. [LO 16.6] a. All else equal, which plant will pay its workers more? b. Suppose the auto industry adopts the same technology used by airplane manufacturers and trains its current workers in this technology. What will happen to the pay differential between auto manufacturing and airplane manufacturing work?

Short answer

a. Airplane manufacturing pays more. b. Pay differential decreases.

Step-by-step solution

Compare Skill Requirements

To determine which plant will pay its workers more, consider the unique skills required for airplane manufacturing that are not needed in auto manufacturing. Since familiarity with a new technology is required for airplane manufacturing jobs, these positions require more specialized skills.

Analyze Pay Based on Skill Demand

Workers who possess these specialized skills for working in airplane manufacturing are likely in lower supply. Due to the higher demand and the unique skill set required, the salary for airplane manufacturing workers will typically be higher than that of auto manufacturing.

Consider the Impact of Technology Adoption

If the auto manufacturing industry adopts the same technology as airplane manufacturers and current workers receive appropriate training, the specialized skills will become more common across both industries.

Evaluate Pay Differential After Technological Adoption

As the availability of workers skilled in this technology increases, the premium on the unique skills is likely to decrease. This would reduce the pay differential between auto and airplane manufacturing.

Key concepts

Skill Demand

In the context of labor economics, skill demand refers to how much employers need certain skills within the workforce. In our example, airplane manufacturing demands familiarity with a unique technology that is not used in the auto industry. This specificity in skill requirement results in a higher demand for workers who can navigate this technology.
This demand impacts the labor market significantly. When skills are not easily interchangeable or widely available, the workers who possess these skills become more valued. This, in essence, drives employers to offer higher compensation to attract and retain such talent. Formulating strategies to address skill demand becomes crucial for businesses aiming to maintain efficient operations and competitiveness.

Wage Differentials

Wage differentials occur when there is a difference in wages between workers due to several factors, such as skill level, job location, or industry type. In this town, the unique technology used in airplane manufacturing contributes to a higher wage for airplane plant employees compared to auto plant workers.
When examining wage differentials, one critical consideration is the supply and demand for specific skills. If there is a limited supply of workers who can meet a particular demand, wages tend to be higher. In our scenario, because airplane manufacturing workers need specialized skills in a scarce technology, they command higher pay. However, if the scarcity of these specialized skills changes, so too can wage differentials.

Technology Adoption

Technology adoption in an industry refers to the integration of new technologies into existing processes. The question arises: what happens when auto manufacturers adopt the same technology used by airplane manufacturers?
When an industry adopts new technology, it typically aims to enhance productivity and competitiveness. In our scenario, auto plants training their workers on airplane manufacturing technology increases the overall skill base. This can result in a decrease in wage differentials as the supply of skilled workers rises to meet the demand. Over time, this can lead to a more balanced wage structure, provided other factors remain constant.

Specialized Skills

Specialized skills are unique abilities or knowledge required for specific tasks or roles, often not widespread among the general workforce. In the airplane manufacturing industry discussed, specialized skills involve familiarity with a distinct technology that auto workers initially lack.
The scarcity and importance of these skills play a pivotal role in determining wages. Employees with specialized skills are in high demand, leading to higher wages due to their critical importance within their industry. If these skills become more common, as would happen with tech adoption in the auto industry, the value of maintaining such skills might diminish, affecting wages and pay differences across sectors.