Question

This question will ask you to consider the market for unskilled labor in the United States. Suppose that firms in the United States produce output according to the production function q = EN + EI , where EN denotes native employment and EI denotes immigrant employment.

a) Are natives and immigrants complements or substitutes in production? How do you know?

b) Draw a cost-minimizing firm’s isoquant and isocost when (a) native and immigrant labor receive the same wage, and (b) native labor is paid a higher wage than immigrant labor. Depict how much of either type of labor the firm prefers to employ in both cases.

c) Suppose the immigrants in the low-skill labor market in the United States are undocumented. If wages are bargained (so markets are not competitive), who do you expect will receive a higher wage? What’s the intuition? Who will the firm prefer to employ?

d) Now suppose the government considers an amnesty program, granting citizenship to all undocumented immigrants in the United States. How do you expect this will affect the quantity of immigrant and native labor demanded by the firm?

Answer 1