Question

6. Use the segmented labor market model { where one sector is the US (US), the other is Mexico

(M) to answer the following:

(a) Depict graphically the initial equilibrium in each sector assuming wUS > wM . Both sectors are in equilibrium (i.e., there Ls = LD in each sector), but the wages are different due to a lack of mobility across countries.

(b) Suppose labor becomes perfectly mobile across countries due to a relaxation of immigra- tion restrictions and each sector adjusts to the new equilbirum. Depict graphically the new equilibrium in each country. How does the new equilibrium compare in terms of (i) employment, (ii) unemployment, and (iii) the size of the labor force in each country?

(c) Returning to part (a), suppose instead that rms become perfectly mobile across coun- tries, but labor remains immobile, and each sector adjusts to the new equilbirum. Depict graphically the new equilibrium in each country. How does the new equilibrium compare in terms of (i) employment, (ii) unemployment, and (iii) the size of the labor force in each country?

Answer 1

Answer a :-

In the above graph as we see, the equilibrium quantity of labour demanded and labour supplied for both the countries are equal which is Q .

However both the countries have different demand and supply curves due to difference in wages of both the countries .

The US wages in figure 1 is higher than Mexico wages in figure 2.

Answer b :-

Now when the immigration restrictions are opened and there is perfect mobility of labour , the following effect takes place .

As soon as the immigration restrictions are removed, the workers of mexico tend to move to us for earning higher wages thus increasing supply of labour in US market and decreasing the supply of labour in Mexico market .

Due to change in supply , the US wages gradually falls down and the Mexico wages eventually becomes higher .

The mobility of labour continues until the wages in both market becomes equal .

1) The employment in Mexico increases

2) The unemployment in US increases

3) The work force in US increases, while it decreases in Mexico .

Answer c :-

As there is no mobility of labour , the market equilibrium remains at part a .

There is no increase or decrease of unemployment in any of the countries .

There is no change in workforce in any of the countries .