Question

Use the perfectly competitive model of wage determination (with a single labor market) to predict the e ects of repealing immigration laws (i.e., opening the borders to all immigrants) on the level of employment and the equilibrium wage in the United States. What is the e ect on unemployment once the labor market reaches the new equilbrium?

Answer 1

Solution

In a competitive market,there are many firms.the firms are wage takers.The equilibrium wage rate is the meeting point of industry supply and industry demand curves.

The supply curve is perfectly elastic as the supply of labor will be generally huge as qualifications may not be required for the job to be done.

Due to repealing labor laws (opening the borders to all immigrants) will lead to tremendous increase in supply of labor.Due to which the equilibrium wage rate will see downward trend if the skills the immigrants possess are substitute to the skills of the native labor.Due to decreases in equilibrium wage rate,the firms can / will be able to provide more jobs.If the labor (native+immigrant) is willing to work at this reduced equilibrium wage,the unemployment rate will reduce slightly in the short-run.But in case, the labor is not willing to work at this wage rate,the unemployment rate increases.

In case the skills possessed by the  immigrant labor is a complement to the native labor,then as a synchronizing effect,the productivity of the labor which will lead to the rise in the wage rates.

Hope this solution helps! Please give a "Thumbs Up" rating for this solution !!