Suppose that initially the Michigan economy is in equilibriu

Suppose that, initially, the Michigan economy is in equilibrium with no unemployment. The supply of workers is ES = -1,000,000 + 200w, and the demand for workers is ED = 19,000,000 – 300w, where w = annual wages, and E = number of employed workers. Then, structural unemployment arises because the demand for labor falls in Michigan but wages there are inflexible downward and no one moves out of state. If labor demand falls to ED = 18,000,000 – 300w, how many workers will be unemployed in Michigan

Solution

Wages are determined where demand for labour is equal to supply of labour

19,000,000-300W = -1,000,000+200W

29,000,000 = 500W

W = 58000

Quantity = -1,000,00+200(58000) = 1600000 workers

Since wages are not flexible when demand falls ot 18,000,000-300W, demand for labour is 18,000,000-300(58000) = 60000

There will be 1,000,000 (1160000-600000) workers who will be unemployed.