Question

Consider wage rates and migration flows from the low-wage South to the high-wage North, describe one shift in conditions that, by itself, could have cause the set of changes to a drop in wage rates in both South and North, and additional migration from South to North. Explain the shift and your rationale in 2-3 sentences.

Answer 1

Let's suppose there are two regional labor markets namely north and the south.Now of we assume that the laborers in both the markets similiar skills and the laborers working in north are perfect substitutes for workers in south.Now if the equilibrium wage of north WN as shown in the figure greater than the equilibrium wage in the south say WS .Now the laborers will find the laborers with similiar skills as theirs getting paid more than them .Thus there is a wage differential existing between the two markets and this wage differential does not represent a true market equilibrium.Thus the southern laborers will migrate to the north where they can get higher wages and can attain higher level of utility.Now as the southern laborers migrate to the north it will depress the northern wages and the supply curve of the north SN will shift to the right and become SN' as there is more supply of labor in North as more laborers have migrated from south to north due to increased wage in the north.As more laborers shift from north to South the northern wages also get depressed and thus there is a drop in wage rate in both south and north.Now after the southern laborers migrate from south to north there is less supply of labor in the south and the supply curve of south will shift to the left from SS to SS' as shown in the figure.Thus there is additional migration from north to south.At the end wages are equated at w*.The given figure represent both northern labor market and southern labor market.In the northern market the shaded region AEDB represent the gains of trade in north.The migration of laborers from south to north has increased gains of trade in North.