Macroeconomics 5th Edition by Olivier Blanchard

Exercise 4

Skill-biased technological change in the United States and Europe
This problem uses the labor demand/labor supply framework developed in problem 7 to explore the labor market histories of the United States and Europe.
The United States: Imagine that there are two labor markets, one for high-skill labor and one for low-skill labor.
a. Suppose there Is an increase In demand for high-skill labor and a decrease in demand for low-skill labor. For a given labor force, what happens to the real wage In each sector
Europe : Imagine that there are also two labor markets in Europe, but the low-skill labor market has a binding mini-mum Oral) wage. A binding minimum wage maws that the equilibrium wage would be lower than the required mini-mum wage. As a result, employment Is determined by the intersection of the minimum wage anti the labor demand curve. The difference between labor supply and labor demand at the minimum wage represents unemployment
b. Consider a decrease In labor demand for low-skill labor in Europe. What will be the effect on the real wage for low-skill workers /What will be the effect on unemployment Compare these results to those you obtained for the low-skill labor market In part (a) for the United States,
Comparing the effects:
Putting everything together, after an increase in demand for high-skill labor and a fall in demand for low-skill labor, In which economy will the Increase in wage inequality be higher In which economy will the increase un unemployment be higher (Assume that neither economy has a binding minimum wage in the high-skill labor market.)
d. Although the distinction between the United and Europe we have drawn in this problem is crude, how does your analysis relate to the labor market histories of these economies over the past two decades