Consider an economy of only two industries, one high wage and the other low wage. Each employs the same number of workers, equally divided between two occupational groups: skilled and unskilled. Skilled workers are identical with each other in the two industries, and so are the unskilled.

The low-wage industry pays its skilled labour $21an hour and its unskilled labour $6, during both a recession and an expansion; that is, it has a rigid wage structure.

The high-wage industry pays its skilled labour $33per hour in both a recession and an expansion, but it pays its unskilled workers $6during recession and $25 during expansion; that is, only its skilled wages are rigid over the business cycle.

Assume that there is a barrier to mobility between the two industries, preventing worker migration between the two industries. Please express all wage differentials in terms of percentage difference (e.g. 80%).

a) For the whole economy, calculate the inter-occupational wage differential (ratio of skilled to unskilled wages) in both the recession and the expansion.

b) Calculate the inter-industry wage differential (ratio of high-to low-wage industries) for both skilled and unskilled workers in both the recession and the expansion.

c) Does the inter-occupational wage differential narrow or widen in the expansion and recession? Why?