Consider a labor market where the demand for a particular category of labor is g

Question

Consider a labor market where the demand for a particular category of labor is given by the equation L_D = 20 - 2W. Suppose that the supply curve of workers in this market who are also native-born citizens is given by L_N = 2W, while the supply curve of immigrants in this market is given by L_I = W, where L represents the number of workers, W is the wage expressed in real terms, and the subscripts D, N, and I are used to distinguish between the quantity of labor demanded and the quantity of labor supplied by native-born and immigrant workers. Answer the following 3 questions. a. Find the market-clearing wage and employment level assuming immigration is not allowed. b. Find the market-clearing wage and employment level after allowing for immigration. How many native jobs are lost to immigrants? c. Compute the total earnings of native-native-born workers in this market before and after immigration. How much is their earnings reduced?

Explanation / Answer

a) We know equilibrium is there when

Demand= supply

20-2w=2w

20 = 2w+2w

20=4w

w= 5$

Employment=20-2x5=10 workers

b) We have,

20-2w= 2w-w

w= 20

Employment=20-2x20= 20-40= -20

20 native jobs lost to immigrants.

c) Before immigration,

w=5, L=10 Earnings = 5x10=50

After immigration,

20-2w= 2w+w

20=5w

w =4, L= 20-8= 12

Actual earnings = 4x12 =48

Hence earnings are reduced by 2$

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