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.