Question

Skill-biased Immigration.

(a) Let us consider the immigration dynamics between the United States and Mexico. The minimum wage of the U.S. is $7.25, while that of Mexico is $5.1 in U.S. dollars. Let the return to skills in Mexico be two times of that of the U.S., partly because the U.S. (Mexico) is relatively abundant (scarce) in the availability of skilled workers. In other words, if we plot skills x on the horizontal axis and hourly wage y on the vertical axis, the equations that characterize the return to skills of the two countries are:

yM X = 5.1 + 2x

yUS = 7.25 + x

In this exercise, plot the above equations on a Cartesian plane, clearing labelling your axis, equations, and intersection point. Is there positive or negative selection of immigrants from Mexico to the U.S.? Explain

(b) The northern region of Mexico that borders the U.S. has a higher minimal wage of $8.8 U.S. dollars. Assuming that the northern border area has more supply of skilled workers that lowers its return to skills to one-half of that of the U.S., such that:

y ′ M X = 8.8 + 0.5x

On a new graph, plot the return to skills for the northern border area of Mexico and the U.S. What can you say about the flow of immigrant workers?

(C) Assuming that the U.S. raises the minimum wage to $9, while the minimum wages for Mexico in general and its northern border area remain unchanged. Redo the above exercises and interpret your results

Answer 1

In the figure below OX axis shows the skill and OY axis shows the wage rate. When the wage rate was $5.1 in Mexico, the demand for the labour increased but the skill reduces. Mexican people are not ready to accept the lower wages. when the wages was $7.5, people are ready to work in US, as a result, return to scale also increases. A shift in the demand curve shows the impact of wage rate.

c) When we assume that the US raises the minimum wage to 9$, when the mexico wages is constant, the result is that the immigrants, will not be ready to work at lower wage rate compared with the US and so there will be a shortage in the supply of immigrant labour. This shortage in supply gradually increases the wage rate till it come to the equillibrium level as shown in the diagram.In the figure, we find that when the wage rate increase to 9$, there is an increase in the skill of the labour, that is , there is increasing return to scale of labour skill.