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The interaction of labour markets

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Question 9

The diagrams below illustrate the interaction between two related labour markets: Market A (Cybersecurity Analysts) and Market B (Systems Administrators). These two occupations require overlapping technical skills, allowing workers to transition between them with some retraining.

Labor Market Interaction Diagram

Suppose there is a significant and sustained increase in global cybersecurity threats, which shifts the demand for Cybersecurity Analysts from D1 D_1\,D1​ to D2D_2D2​.

Which of the following describes the most likely sequence of adjustments and the final long-run equilibrium outcome in both labour markets?

The higher equilibrium wage in Market A (WA2W_{A2}WA2​) incentivises some Systems Administrators to retrain and transition to cybersecurity. This reduces the supply of labour in Market B, shifting the supply curve leftwards from S1S_1S1​ to S2S_2S2​, which increases the equilibrium wage in Market B to WB2W_{B2}WB2​ and reduces employment to LB2L_{B2}LB2​.

The higher equilibrium wage in Market A (WA2W_{A2}WA2​) increases the demand for complementary IT infrastructure. This shifts the demand curve in Market B rightwards, resulting in a higher equilibrium wage (WB2W_{B2}WB2​) and an increased level of employment (LB2L_{B2}LB2​) in Market B.

The expansion of employment in Market A (LA2L_{A2}LA2​) creates a demonstration effect, attracting new school-leavers into the IT sector. This shifts the supply curve in Market B rightwards from S2S_2S2​ to S1S_1S1​, resulting in a lower equilibrium wage (WB1W_{B1}WB1​) and a higher level of employment (LB1L_{B1}LB1​) in Market B.

The shift in demand in Market A causes a wage-price spiral that reduces firms' profitability. To cut costs, firms in Market B reduce wages from WB2W_{B2}WB2​ to WB1W_{B1}WB1​ and increase employment from LB2L_{B2}LB2​ to LB1L_{B1}LB1​, shifting the supply curve rightwards.

The interaction of labour markets Questions

  1. A Level
  2. /Economics
  3. /The interaction of labour markets