Imagine a scenario where society eliminates higher education, forcing students to enter the workforce directly after secondary school. In a situation where there are not enough jobs available for everyone seeking employment, how would wages and prices adjust to ensure that those who want jobs can find them?
The correct answer and explanation is :
In a scenario where higher education is eliminated and students must enter the workforce immediately after secondary school, labor supply would drastically increase. However, if there are not enough jobs to meet this influx of workers, market forces would lead to adjustments in wages and prices.
Wage Adjustment (Market Equilibrium)
With a large labor supply and insufficient demand, competition for jobs would intensify, causing wages to decrease. Employers, facing a surplus of workers, could afford to offer lower wages since many job seekers would be willing to accept them. This downward pressure on wages would continue until reaching a market-clearing level—where the number of workers willing to work at that wage equals the number of jobs available.
Price Adjustment (Cost-Push & Demand-Pull Effects)
Lower wages would reduce workers’ purchasing power, leading to lower overall demand for goods and services. Businesses, in response, may lower prices to maintain sales, potentially reducing inflation or even causing deflation. However, if businesses continue to cut wages, workers may struggle to afford basic necessities, leading to reduced consumption and economic stagnation.
Other Possible Market Adjustments
- Expansion of Low-Wage Employment: Employers may create more low-paying, flexible jobs (e.g., gig work, part-time jobs) to absorb the labor surplus.
- Government Intervention: Policies like minimum wage laws, public job programs, or unemployment benefits could be introduced to stabilize wages and employment.
- Automation and Efficiency Gains: Employers may invest in technology to reduce dependence on human labor, further limiting job availability.
Conclusion
In this situation, wages would fall until they reach equilibrium where job supply meets demand. If wages drop too low, economic activity could decline due to reduced consumer spending, prompting businesses to further lower prices. This creates a delicate balance requiring potential government intervention to ensure economic stability.