III The specific-factors model Consider a two-sector economy consisting of manufacturing (M) and services (S) with three types of workers:

III           The specific-factors model 

Consider a two-sector economy consisting of manufacturing (M) and services (S) with three types of workers: workers with special skills in manufacturing (LM), workers with special skills in services (LS), and unskilled workers (L), who can work equally in both sectors. Both, LM and LS are assumed to be fixed. No other factors of production are required in either industry. Call the tree kinds of wages wm, ws and w.

Draw the “open-box diagram” with L on the horizontal axis, as well as the demand curves for L in the M and S sectors. Also mark the areas under these curves with appropriate wage bills, where LM wm is the wage bill paid to specialized workers in M, Lm w is the wage bill paid to unskilled workers in M, LS ws is the wage bill paid to specialized workers in S and Ls w is the wage bill paid to unskilled workers in S.

Suppose that, due to the introduction of free trade, the price of M products rises. What are the consequences for production in the two sectors and what will happen to the wage rates of the three kinds of workers. Consider nominal and real changes.

Suppose now that due to technical change in manufacturing the productivity there increases. What will happen to the production of manufactures and services? And who will benefit and lose?

What kind of educational or technology policy would the different kinds of workers prefer? Consider training of workers in specific skill categories, as well as subsidies for technical change.

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