Answer to Question #253843 in Microeconomics for Kove

Question

Assume in a two-sector economy made up of agriculture and manufacturing, the government introduces a subsidy of y per hour on labour in the manufacturing sector. What will be the effect of the policy on the equilibrium wage, total employment as well as employment in agriculture and manufacturing?

Answer 1

A government subsidy on labour in the manufacturing sector will allow them to produce more goods and services. This will increase the overall supply which increases the quantity demanded and lowers the overall price. An increase in labour supply will cause the equilibrium wage to fall.

Increase in demand and supply will lead to higher employment in the manufacturing sector as well as in the agricultural sector, which will need to produce more to meet the market demand.