Answer to Question #156402 in Microeconomics for Muhmmad Yousuf

Question

In many countries including Pakistan, wages in skilled labour markets (doctors,

engineers, IT specialists, chartered accountants, etc.) are much higher than those in

the unskilled labour markets where wages are very close, if not equal, to the minimum

wage rate.

i. Use demand-supply diagrams to demonstrate what could have created the wage

differential between skilled and unskilled workers?

ii. What effect could this wage differential have on the market for unskilled workers

over time? Again use a diagram to demonstrate this effect.

Answer 1

a)

As you can see in the above diagram, the supply of highly skilled workers is lower than that of low-skilled workers, therefore, the equilibrium wage is at a level close to the minimum wage.

b)

The diagram shows that as the general skill of the workforce rises, wages rise.