Question

Assume that the supply of low-skilled workers is fairly elastic, but the employers' demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams.

Short answer

If the policy goal is to expand employment for low-skilled workers, it's better to focus on supply-side policies that shift the supply of unskilled labor (S to S'), as this leads to a significant increase in employment, at the cost of a small decrease in wages. However, if the policy goal is to raise wages for this group, then it's better to focus on demand-side policies that shift the demand for unskilled labor (D to D'), resulting in a considerable increase in wages, with a moderate increase in employment.

Step-by-step solution

Draw the initial supply and demand diagram for low-skilled workers

To analyze the effect of different policies on low-skilled workers, we need to start with a basic supply and demand diagram. Draw two axes, with the horizontal axis representing the quantity of low-skilled workers (Q) and the vertical axis representing their wages (W). Draw an upward-sloping supply curve (S) and a downward-sloping demand curve (D). Label the initial equilibrium point E₀, with its corresponding wages and quantity as W₀ and Q₀, respectively.

Analyze the effect of a policy that shifts the supply of unskilled labor

Now, consider a policy that shifts the supply of unskilled labor to the right. This shift represents an increase in the number of available low-skilled workers, perhaps due to an increase in training programs. Draw a new supply curve (S') to the right of the initial supply curve (S). The new equilibrium point E₁ is found at the intersection of the demand curve (D) and the new supply curve (S'). The wages decrease from W₀ to W₁, while employment expands from Q₀ to Q₁. Note that, given the elasticity of supply, the increase in quantity is significant, but the decrease in wages is relatively small.

Analyze the effect of a policy that shifts the demand for unskilled labor

Next, consider a policy that shifts the demand for unskilled labor to the right. This policy could include subsidies for hiring low-skilled workers or incentives for industries that require unskilled labor. Draw a new demand curve (D') to the right of the initial demand curve (D). The new equilibrium point E₂ is found at the intersection of the original supply curve (S) and the new demand curve (D'). The wages increase from W₀ to W₂, while employment expands from Q₀ to Q₂. Given the inelastic demand, the increase in wages is substantial, but the increase in employment is comparatively modest.

Compare the effects of the two policies on employment and wages

Based on the previous analysis, we can make a comparison of the two policies: 1. Shifting the supply of unskilled labor (S to S'): This policy leads to a significant increase in employment, at the cost of a small decrease in wages. 2. Shifting the demand for unskilled labor (D to D'): This policy results in a considerable increase in wages, with a moderate increase in employment.

Choose the appropriate policy for the given goal

For the policy goal of expanding employment for low-skilled workers, it's better to focus on supply-side policies that shift the supply of unskilled labor (S to S'). However, if the policy goal is to raise wages for this group, then it's better to focus on demand-side policies that shift the demand for unskilled labor (D to D').