If during the first year of the new administration Wages in

If during the first year of the new administration, Wages in market X - which requires workers with the same traits and skills as workers in the clothing market – rise. Explain the long-term effects each will have on both wages and employment levels in the domestic clothing labor market?

Solution

With the increase in the wage in the market X will result in the movement of labor in the market X. This will increase the supply of labor in the market X. The fall in supply in the clothing market will lead to wage rise in the sector as well (to meet the demand of the firms). This movement will result in the sustained increase in the wage rate. The employment level will shrink in the clothing market in the short run but will return to the original level in the long-run due to increase in wage in the clothing market as well.