Question

Consider the labor market. Illustrate graphically what happens if there is increased immigration. Does it make a difference if the average education level of the immigrants is really high? How would you graphically illustrate that? Explain your reasoning. (20 points)

Answer 1

Impact of increased immigration on Production Possibility Curve (PPC):

Let us see the graph below to know what happens to our PPC when there is increased immigration into our labour market:



Explanation:

1. Labour is an important RESOURCE for producing goods and services in an economy.
2. When immigration increases in to our labour market, definitely our RESOURCES for production increase in our economic system.
3. When the RESOURCES increase, PPC tends to shift or move rightward.
4. In the presented diagram, PPC1 is our existing curve showing the various combinations of the maximum quantity of two goods x and y that can be produced in the economy (before increase in immigration takes place).
5. In response to the increase in RESOURCES (of labour, due to increase in immigration), the production capacity of the whole economy will increase. Here in the diagram, we can see that now good x and good y both can be produced in increased numbers.
6. PPC1 moves rightward (or forward) to again a new position at PPC2.
7. This is good for the GDP of an economy.

Does it make a difference if the average education level of the immigrants is really high?

When the average education level of immigrants is higher than that of our existing labour, it is certainly going to make some changes in our existing system, as below:

1. In the short run, as an immediate effect of immigration, the well educated immigrants will start replacing the relatively less educated existing labour.
2. However, due to increased supply of labour (primarily caused by increased immigration) and demand remaining same in the short run, the wage rates of well educated labour will fall.
3. Wage rates of well educated labour may fall to the extent of leveling those with the rates prior to increase in immigration. And this will happen not only for the immigrants but for domestic labour as well. This may finally result into either of two possibilities (i) immigration might stop or slowdown to negligible levels; (ii) the economic policies of the country are revamped to take advantage of the new scenario. Coming points illustrate the possible outcomes of the 2nd possibility:
4. In medium to long run, the economy having an increased skill and education level overall, will require more investment on technology and capital intensive techniques, because better skilled labour is highly available.
5. Increased investment on technology and capital intensive methods will lessen the demand for labour further. The whole economy may be in a fix due to this.
6. Invariably, the economy will have to go more competitive globally, trying hard to produce more in numbers and better in quality; and to export more to the world. If successful in doing to, the country will reap immense benefits.