Problem

Consider an economy that consists of two regions-the North and the South. The elasticity of labor demand in each region is -0.5. The economywide labor supply is perfectly inelastic. The labor market is initially in an economywide equilibrium, with 600,000 people employed in the North and 400,000 in the South at the wage of $15 per hour. Suddenly, 20,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native residents and also supply their labor inelastically.

a. What will be the effect of this immigration on wages in each of the regions in the short run (before any migration between the North and the South occurs)?

b. What will be the effect of this immigration on wages in each of the regions in the long run (after native workers respond by moving across regions to take advantage of whatever wage differentials may exist)? Assume labor demand does not change in either region.

c. Suppose 1 ,000 native-born persons migrate from the South to the North each year for every dollar difference in wages between the two regions. What will be the percentage change in the ratio of the wages in the two regions during the first year after the entry of the immigrants?