Question

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 60 in México and at 260 in the US).

where Nd^mex and Nd^US are the number of workers demanded in Mexico and the US (in millions of workers). W^mex and W^US are the yearly wage rates in Mexico and the US (in thousands of dollars). Ns^mex and Ns^US 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:

Nd^mex = 240 – 2 W^mex

Suppose that at the same time, the Mexican government sets a minimum wage of 90.

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

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