Question

The labor supply and demand equations in Mexico and the US are Ndmex =140–2Wmex andNsmex =80 NdUS =600–4WUS andNsUS =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 of your textbook. 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).

Answer 1

A) Ndmex= 140-2wmex

Msmex = 80

equilibriium wages in mexico = demand for labor= supply of labour

140- 2wmex= 80

equilibrium wmex = 30

equilibrium labor at this wage rate = 80

NDus= 600-4wus

Nsus = 260

Equilibrium wages in US = DD(US)= SS(US)

    600-4WUS= 260

4WUS = 340

WUS = 340/4 = 85

Labor at this wage level = 260

B) Due to higher wages in US , 10mn workers migrate to US so resulting affect will be the following

Supply of workers will decrease by to 70 , so new wages will be

140-2wmex= 70

2WMEX= 70

wmex= 35

As the labor supply has decreased , wages rise in mexico, THIS WILL CAUSE THE LABOR SUPPLY CURVE TO SHIFT LEFT IN MEXICO

Supply of workers in US will be now 270

So equilibrium wages will be 600-4wus= 270

Wus = 330/4 = 82.50

Consequently wages have fallen in US , THIS WILL CAUSE THE PERFECTLY INELASTIC SUPPLY TO CURVE SHIFT RIGHT AT 270

C) Incase of unlimited flow of labor , there will be a unified market for labor in both nations

So total supply will be = Nsmex+ Nsus= 80+260 = 340

Total demand will be = Ndmex+ Ndus = 140- 2w+ 600- 4w = 740-6w

So equating total demand and supply

740- 6w = 340

6w = 400

w= 400/6

66.67

so labor demanded in mexico = 140 -2(66.67)

                                                       = 7

labor demanded in us = 600-4(66.67)

                                        = 333

so 73 labor units will migrate to us