Question

In the book (The Economics of Immigration by Cynthia Bansak, Nicole B. Simpson, and Madeline Zavodny), there was a skill-unskilled model of employment. Instead, suppose that there are two types of workers: high-skilled and low-skilled workers. In addition, there is capital being utilized to create goods. To make our lives easy, assume that production is q = L_H^1/4 L_L^1/4 K^1/2. Once again assume that the market is perfectly competitive and that the price is determined by the local market (as opposed to the world market).

(a) If LL = 8LH, what does this tell us about the relative wage wH/wL?

(b) Assume the amount of Capital and Labour are all perfectly inelastic, create a diagram for each factor market (i.e. for each type of labour and capital) and explain what the influence on wage would be if more low-skilled workers were allowed to immigrate.

(c) How does your answer to the previous question change if only high-skilled workers are allowed to immigrate.

(d) Does this suggest anything about what you would expect to be happening to wage gaps compared to the average worker? What about the gini coefficient or inequality?

Answer 1