3. The labor supply and demand equations in Mexico and the US are N d mex = 180

Question

3. The labor supply and demand equations in Mexico and the US are

Ndmex = 180 – 2 Wmex    and Nsmex = 60

NdUS = 540 – 4 WUS       and NsUS = 180

(Notice: To make the exercise simple, we are assuming that the labor supply curves are perfectly vertical at 60 in México and at 180 in the US).

where Ndmex and NdUS are the number of workers demanded in Mexico and the US (in millions of workers). Wmex and WUS are the yearly wage rates in Mexico and the             US (in thousands of dollars). Nsmex and NsUS are the number of workers supplied in Mexico and the US (in millions of workers).

a. What are the equilibrium wages in Mexico and the US.  

b. Due to the higher US wages (see your answer to part a), millions of Mexican workers

    want to emigrate to the US. However, the US inmigration authorities issue work          

    permits for only 10 million Mexican workers. How will this limited flow of Mexican               

    workers affect wages both in Mexico and the US (hint: if these flows take place, how              

    many workers will there be left in México, how many workers will there be in

    the US, i.e., how do the labor supply curves shift?).

c. If an unlimited flow of Mexican workers is allowed (free movement of labor across

    borders), at the end, wages will be equal in both countries (basically, in practice,        

    there will be just one unified labor market). What would be this wage? How many              

    Mexican workers will emigrate to the US? How many Mexican workers will be

    demanded in the US? At the end, how many workers will there be in México and the

    US? (Hint: Find the total labor supply and demand equations).

d. With the creation of a Free Trade Zone in North America between the US, Mexico and

    Canada (the NAFTA agreement), the demand for Mexican food (produced mainly using

    labor intensive techniques) will increase. This in turn, will increase the demand for

    labor in Mexico. Asume that the new demand for labor in Mexico is:

Ndmex = 240 – 2 Wmex

    Suppose that at the same time, the Mexican government sets a minimum wage of 90.

    Discuss the effects of these two simultaneous events on the Mexican labor market.  

e. The US authorities know that wages for unskilled labor in the US will go down with the

    immigration of Mexican workers to the US. Suppose that the US authorities want to

    keep US wages at 88. How many Mexican workers should be allowed to enter to the US

    (i.e., how many work permits should the US government issue)?

Explanation / Answer

Ndmex = 180 – 2 Wmex    and Nsmex = 60

NdUS = 540 – 4 WUS       and NsUS = 180

For mexico, at equilibrium

Demand of labor=supply

180 – 2 Wmex =60

120=2 Wmex

Wmex=60

Nd=60

In US

540 – 4 WUS =180

WUS=90

b. If the migration takes place, 10 millions mexicans will start migrate to US. The labor force left in mexico will be 50 million(60-50) the labor force in US become 190. The supply curve of labor shifts to right in US as supply increases, and towards left in mexico as supply decreases.

c. In such case there ia unified labor market and

total demand =total supply

adding demand curves and supply curves we get

720-6W=240

6W=480

W=80

labor demanded in US at this wage rate,

540-2*80=220 m workers

labor demanded in mexico

180-2*80=20 m workers

Thus, 40 million workers from mexico will migrate to US as labor demanded increases by 40 units and in mexico it decreases by 40 units.

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