Answer to Question #265332 in Microeconomics for selah

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

Solution:

If the government imposes a subsidy on labor employed in the manufacturing sector, the effective wage rate that manufacturers must pay their employees is reduced. As a result, it becomes more profitable to employ more labor units. As a result, demand for labor in the manufacturing sector will rise.

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

The increased demand for workers will allow manufacturing sectors to employ more workers from the pool of unemployed people, thus increasing total employment. The employment level in the manufacturing sector will increase massively, while the agricultural sector will not be affected. Both the equilibrium and employment levels in the agricultural sector will remain the same.