Question 3

Structural unemployment is sometimes said to result from a mismatch between the job skills that employers want and the job skills that workers have. To explore this idea, consider an economy with two industries: auto manufacturing and aircraft manufacturing:

(a) If workers in these two industries require similar amounts of training, and if workers at the beginning of their careers can choose which industry to train for, what would you expect to happen to the wages in these two industries? How long would this process take? Explain. (b) Suppose that one day the economy opens itself to international trade and, as a result, starts importing autos and exporting aircraft. What would happen to the demand for labour in these two industries? (c) Suppose that workers in one industry cannot be quickly retrained for the other. How would these shifts in demand affect equilibrium wages both in the short run and in the long run? (d) If for some reason wages fail to adjust to the new equilibrium levels, what would occur?