Answer to Question #256011 in Microeconomics for e@a

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

If wage subsidies are paid to workers, labor supply will increase while labor demand may not increase sufficiently, resulting in unemployment.

Labor subsidies from the government will enable the manufacturing sector to produce more goods and services. This increases overall supply, which increases overall demand and lowers overall price. The equilibrium wage will fall as labor supply increases.

Increased demand and supply will result in more jobs in the manufacturing and agricultural sectors, which will need to produce more to meet market demand.