Question

It is sometimes claimed, that influx of foreign migrants into the labour force is a cause of unemployment. Show the effect of labour market. What does it mean for real wages and employment? Use the labour market figure with demand and supply curves. What happens with these curves if there is inflyx of migrants? Give one example.

Answer 1

a. Influx of foreign migrants in a domestic market would increase the supply of labor. The increase in supply usually decreases the price of the labor. However the changes in demand and wages of labor depend on the 1. Skills of the migrated newly arrived labors and also the 2. Relationship between the existing labors and the newly arrived labor force in the production process. Labor market equilibrium is a combination of a certain wage for a particular quantum of labor force that is absorbed in the production process. Excess supply would reduce the wage and excess demand would increase the wage rate. We assume that the wage and prices are not fixed or sticky.

In the diagram we see equilibrium at E for the labor market, wage at w* and labor at L*

b. In case of the influx of labor force, of say L’, would mean that the total labor force= L+L’. The increase of L’ would reduce employment of the domestic labor force if the L’ newly arrived labors consist of skill sets that can supplement the existing domestic labor force.

The diagram below shows that the labor supply increases to L*+L’ and wage falls to w**

c. On the other hand in case the influx consist of labor force that is mostly skilled in activities that are complementary to the skill sets of the domestic work force, in that case the reduction in employment of the domestic force is not anticipated; rather increase in output and productivity can be experienced due to improved technological function with increased complementary labor force.

d. Thus, the total effect of migration of labor force into an economy would depend on the composition of the L’ or the migrating labors skill sets.

e. The wages and also the demand for labor would also depend on the complementarity or supplementary relationship that prevails in the production process between the labor factors available.

f. In the diagram we see that in case of substituting nature of skill set among the migration labor force, the supply increases to increase labor in take at a reduced wage rate, however, due to the substituting nature of skill sets, the domestic labor in take reduces, reducing the income of the domestic workers and also decreasing total demand, thus, labor supply increases marginally to L’’ from L* but less than that without demand decrease. And the wage rate decreases further due to the availability of substitute skill sets that pulls down the wage rate further.

g. In case the skill set of the migrating workers is complementary in nature, demand would increase the labor intake and might also marginally improve the wage rate.

For example, suppose the migrating labor has a skill set of working with hand-loom machine for textile. In case the domestic labor force is also skilled in functioning of hand-loom machine, the migrating labor force would be capable of substituting the existing labor force, thus would reduce employment at domestic level. On the other hand in case the labor force consists of managerial skill sets capable of handling labor force working with hand-loom machines, in this case the migrating labor force is complementary to the existing domestic labor force and hence would be capable of increasing output and also not reducing labor intake too much.

wage labor employment

Wage Wtt 0 L* L*+L' labor employment

Wage we st 0 L L*+L labor employment

wage S' w* 017 W* S" L*L*' labor employment

wage labor employment

Wage Wtt 0 L* L*+L' labor employment

Wage we st 0 L L*+L labor employment

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