Question

Predict how each of the following events will raise or lower the equilibrium wage and quantity of oil workers in Texas. In each case, sketch a demand and supply diagram to illustrate your answer. a. The price of coal rises. b. New oil-drilling equipment is invented that is cheap and requires few workers to run. c. Several major companies that do not mine coal open factories in Texas, offering many well-paid jobs outside the oil industry. d. Government imposes costly new regulations to make oil-drilling a safer job.

Short answer

a. The rising price of coal leads to an increased demand for oil workers, resulting in a higher equilibrium wage and quantity of oil workers in Texas. \[ \text{Demand: } D1 \rightarrow D2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \] b. The invention of new oil-drilling equipment decreases the demand for oil workers, leading to a lower equilibrium wage and quantity of oil workers in Texas. \[ \text{Demand: } D1 \rightarrow D2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \] c. The opening of factories offering well-paid jobs in other industries decreases the supply of oil workers, resulting in a higher equilibrium wage and lower equilibrium quantity of oil workers in Texas. \[ \text{Supply: } S1 \rightarrow S2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \] d. Costly new regulations for oil-drilling decrease the demand for oil workers, leading to a lower equilibrium wage and quantity of oil workers in Texas. \[ \text{Demand: } D1 \rightarrow D2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \]

Step-by-step solution

Identify the effect on demand for oil workers

Since coal is an alternative source of energy, as the price of coal rises, the demand for oil will increase because consumers and industries will switch to using oil instead of coal. This increased demand for oil will in turn increase the demand for oil workers.

Illustrate the change on the demand and supply diagram

In the demand and supply diagram for oil workers, the increased demand for oil workers will shift the demand curve to the right (from D1 to D2). This will lead to a new equilibrium point with a higher equilibrium wage (W2) and a higher equilibrium quantity of workers (Q2). \[ \text{Demand: } D1 \rightarrow D2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \] b. New oil-drilling equipment is invented that is cheap and requires few workers to run.

Identify the effect on demand for oil workers

The invention of new oil-drilling equipment that requires fewer workers to run will decrease the demand for oil workers, as companies can now produce the same amount of oil with less labor.

Illustrate the change on the demand and supply diagram

In the demand and supply diagram for oil workers, the decreased demand for oil workers will shift the demand curve to the left (from D1 to D2). This will lead to a new equilibrium point with a lower equilibrium wage (W2) and a lower equilibrium quantity of workers (Q2). \[ \text{Demand: } D1 \rightarrow D2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \] c. Several major companies that do not mine coal open factories in Texas, offering many well-paid jobs outside the oil industry.

Identify the effect on supply of oil workers

The opening of factories offering well-paid jobs outside the oil industry will increase the supply of workers in other industries, which will decrease the supply of oil workers, as some of them may choose to work in those factories instead.

Illustrate the change on the demand and supply diagram

In the demand and supply diagram for oil workers, the decreased supply of oil workers will shift the supply curve to the left (from S1 to S2). This will lead to a new equilibrium point with a higher equilibrium wage (W2) and a lower equilibrium quantity of workers (Q2). \[ \text{Supply: } S1 \rightarrow S2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \] d. Government imposes costly new regulations to make oil-drilling a safer job.

Identify the effect on supply of oil workers

The imposition of costly new regulations to make oil-drilling a safer job will increase the cost of production for oil companies. In order to compensate for these increased costs, oil companies may decrease the demand for oil workers or offer lower wages.

Illustrate the change on the demand and supply diagram

In the demand and supply diagram for oil workers, the decreased demand for oil workers due to the new costly regulations will shift the demand curve to the left (from D1 to D2). This will lead to a new equilibrium point with a lower equilibrium wage (W2) and a lower equilibrium quantity of workers (Q2). \[ \text{Demand: } D1 \rightarrow D2 \\ \text{Equilibrium wage: } W1 \rightarrow W2 \\ \text{Equilibrium Quantity: } Q1 \rightarrow Q2 \]

Key concepts

Demand and Supply

The concepts of demand and supply are foundational in labor markets. In the context of oil workers in Texas, demand refers to how many oil workers companies are willing to hire at different wage levels. Supply indicates how many workers are willing to work at those wages.
These two forces determine the equilibrium point where the number of workers oil companies want to hire equals the number of workers willing to work.

• When demand for oil workers increases, the demand curve shifts right. This means more workers are needed, often because oil is in higher demand itself, leading to higher wages and employment levels.


• Conversely, if new technologies that require fewer workers are introduced, demand decreases, shifting the demand curve left, resulting in lower wages and employment.

Understanding these shifts in demand and supply help explain changes in hiring levels and wage rates over time.

Equilibrium Wage

The equilibrium wage is the rate at which workers in a specific market, like Texas oil fields, both agree to work and are hired. This wage is determined at the intersection of the supply and demand curves for labor.
When either the demand or supply curve shifts, the equilibrium wage changes. When demand for oil workers rises, perhaps due to increased oil production's necessity over coal, equilibrium wages rise too. More workers will be employed, and wages will likely increase.
In contrast, a decrease in demand for workers due to reduced labor needs—such as when efficient technology is introduced—will lower equilibrium wages. In these instances, not only do wages fall, but so may the total quantity of jobs available.

Government Regulations

Government regulations can significantly impact labor markets by imposing new rules that affect how industries operate. In oil drilling, new safety regulations might necessitate additional costs for companies, potentially influencing the demand for workers.
For example, if regulations require more extensive safety procedures, the costs involved may lead companies to employ fewer workers to balance their expenses. This shifts the labor demand curve to the left, typically reducing equilibrium wages and employment levels.
However, by making jobs safer, regulations could also increase the willingness of some individuals to work in the industry, affecting the supply side of the market. This dual effect underlines the nuanced role regulations play in shaping labor dynamics.

Technological Change

Technological change can dramatically alter labor markets, often by reducing the number of workers needed for specific tasks. New advancements in oil-drilling equipment can lead to fewer operational positions, thereby directly influencing labor demand in the industry.
When companies adopt more efficient technology, the reduced need for labor shifts the demand for workers downward, potentially lowering wages and employment levels. New technology might initially increase productivity and lower production costs, which could eventually affect consumer prices for oil.

• This shift can be negative for workers whose jobs become redundant and for those who face reduced employment opportunities in the sector.


• At the same time, technological improvements can create new opportunities in the long run, as they may lead to the development of additional products or services requiring new types of skilled labor.

Thus, while technology can cause initial disruptions, it also opens pathways for workforce evolution and growth.