Question

Explain a situation using the supply and demand for skilled labor in which the increased number of college graduates leads to depressed wages. Given the rising cost of going to college, explain why a college education will or will not increase income inequality.

Short answer

An increase in college graduates can lead to depressed wages if the supply of skilled labor outpaces its demand, resulting in an excess supply of skilled labor and allowing firms to offer lower wages. The rising cost of college can contribute to income inequality if it limits access to higher education for lower-income individuals, resulting in fewer opportunities for higher-paying jobs. However, if the wages of college graduates don't significantly improve due to an oversupply of skilled labor, the impact on income inequality may be minimized.

Step-by-step solution

Understand the concept of Supply and Demand for Skilled Labor

Supply and demand for skilled labor refer to the number of skilled laborers (workers with higher education and specialized skills) available in the market and the demand that firms have for these workers. In a situation where there is an equilibrium between supply and demand, wages would be at a level where the number of workers needed by firms matches the number of workers available.

Analyze the effect of increased college graduates on wages

For skilled labor, an increase in college graduates means an increase in the supply of skilled labor. If the demand for skilled labor remains constant, or does not rise as fast as the increased supply, then the market will experience an excess supply of skilled labor. In this scenario, firms have more options when hiring workers and can, therefore, offer lower wages. This would result in the depression of wages for skilled labor.

Discuss the rising cost of going to college

The rising cost of going to college is a significant issue in many countries, as it makes higher education less accessible to a large portion of the population. This can lead to increased income inequality, as a smaller number of people from lower-income backgrounds can gain access to higher education and the higher-paying jobs that often come with it.

Analyze the effect of college education on income inequality

If obtaining a college education becomes increasingly costly, people from lower-income backgrounds may find it more challenging to access it. This makes it harder for them to gain employment in the higher-paying jobs that demand a higher skill set, leading to increased income inequality. On the other hand, if a college education leads to a saturated supply of skilled labor and doesn't substantially increase the wages of college graduates, the impact on income inequality may be minimized. To conclude, a situation where increased college graduates depress wages can happen when the supply of skilled labor exceeds its demand. Meanwhile, rising college costs can either increase income inequality if it leads to a more significant wage gap between those with and without a college education or have lesser impact on income inequality if the wages for skilled labor don't significantly improve due to an oversupply of skilled labor.