Question

3. The labor supply and demand equations in Mexico and the US are Ndmex = 140 – 2 Wmex and Nsmex = 80 NdUS = 600 – 4 WUS and NsUS = 260 (Notice: To make the exercise simple, we are assuming that the labor supply curves are perfectly vertical at 80 in México and at 260 in the US). where Ndmex and NdUS are the number of workers demanded in Mexico and the US (in millions of workers). Wmex and WUS are the yearly wage rates in Mexico and the US (in thousands of dollars). Nsmex and NsUS are the number of workers supplied in Mexico and the US (in millions of workers).

a. What are the equilibrium wages in Mexico and the US.

b. Due to the higher US wages (see your answer to part a), millions of Mexican workers want to emigrate to the US. However, the US inmigration authorities issue work permits for only 10 million Mexican workers. How will this limited flow of Mexican workers affect wages both in Mexico and the US (hint: if these flows take place, how many workers will there be left in México, how many workers will there be in the US, i.e., how do the labor supply curves shift?).

c. If an unlimited flow of Mexican workers is allowed (free movement of labor across borders), at the end, wages will be equal in both countries (basically, in practice, there will be just one unified labor market). What would be this wage? How many Mexican workers will emigrate to the US? How many Mexican workers will be demanded in the US? At the end, how many workers will there be in México and the US? (Hint: Find the total labor supply and demand equations).

d. With the creation of a Free Trade Zone in North America between the US, Mexico and Canada (the NAFTA agreement), the demand for Mexican food (produced mainly using labor intensive techniques) will increase. This in turn, will increase the demand for labor in Mexico. Asume that the new demand for labor in Mexico is: Ndmex = 240 – 2 Wmex Suppose that at the same time, the Mexican government sets a minimum wage of 80. Discuss the effects of these two simultaneous events on the Mexican labor market.

e. The US authorities know that wages for unskilled labor in the US will go down with the immigration of Mexican workers to the US. Suppose that the US authorities want to keep US wages at 69. How many Mexican workers should be allowed to enter to the US (i.e., how many work permits should the US government issue)?

Answer 1

Answer (A)

Given L^d (Mexico) = 140 - 2W

L^s = 80.

Also, L^d (US) = 600 - 4W and L^s = 260.

The equilibrium wages are decided at a point where the demand equals the supply of labour.

In Mexico, 140 - 2W = 80.

60 = 2W

W = $30.

In US, 600 - 4W = 260.

340 = 4W

W = $85.

Answer (B)

Now because the labor has migrated from Mexico to the US, the labor supply in the US has increased by 10 million, totaling up to 140 + 10 = 150 million. In Mexico 10 million has moved out, so the total labor supply = 80 - 10 = 70 million.

The labor supply curve in the US would shift to the right, as there is an increase of labor supplied. Whereas in Mexico, the labor supply curve would shift to left, indicating a decrease in supply.

Answer (C)

Total demand for labour = labour demand in Mexico + labour demand in US.

= 140 - 2W + 600 - 4W

= 740 - 6W

Labor supply total = supply in Mexico + supply in US

= 140 + 80 = 220.

Equilibrium is when the demand equals the supply,

740 - 6W = 220.          

520 = 6W

W = $80.7

Plugging in this value of wage into the labor demand function of Mexico, we get,

140 - 2*80.7

=- 21.4. Thus this is the labor demand. Labour supplied in Mexico is 80, therefore the remaining workers, 80 - 21.4 = 58.6 would migrate to the US.

Plugging in this value of wage into the labor demand function of US we get,

600 - 4*80

= 280. This is the demand for labor in the US.

supply of labor in US = 180. Demand for Mexican workers in the US is thus the difference between the demand and supply, 280 - 180 = 100 workers.

Finally, labor supply in Mexico = 21.4

Labour supply in US = 280.

Answer (D)

Labour demand = 240 - 2W

minimum wage = 80.

demand = 240 - 2*80

= 80.

Workers would again migrate to Mexico, due to higher wages offered there. And there'll be an excess supply, then gradually the workers would migrate back to the US until the wages and labor supply both are in equilibrium again.

Answer (E)

US Wages = 69 Thousand

             ND = 600 - 4(69)

                  = 600 - 276

                  = 324 Workers

SO, (276 - NS ) 276 -260 = 16 million

worker should be allowed from Mexico