Labor Migration - International Economics - Lecture Slides, Slides of Economics

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Labor Migration

• There are two countries: Home and Foreign.
• There are two factors of production: Land ( T ) and

Labor ( L ).

• Both countries produce only one good (refer to it

as “output”).

• Both countries have the same technology but

different overall land-labor ratios.

• Home is the labor-abundant country and Foreign

is the land-abundant country.

• Perfect competition prevails in all markets.

Basic Assumptions

Rents

Wages

MPL

Labor, L

Marginal Product of

labor, MPL

Figure 7-2: Diminishing Marginal

Product of Labor

Total output, Q , is the sum of

Wages and Rent. This is the

entire area under the MPL

curve up to the level of

employment.

Employment Level

Real wage

Nominal Prices

• The nominal price of a commodity is simply

the number of dollars (or any other

relevant unit of account) that must be paid

to buy one unit of the commodity

• For example, the nominal price of labor—

also called the nominal wage—may be $

per hour

Real and Nominal Prices

• Real Price of X, in units of Y, is equal to

Nominal Price of X / Nominal Price of Y

• So, if w is the nominal wage and p is the

nominal price of a cup of coffee, then the

real wage is w / p.

• For example, if w is $8 per hour and p is $2,

then the real wage is w / p = 8/2 = 4 cups of

coffee per hour, as in the previous slide.

Real Wage and Real Rent

• The purchasing power of the (nominal) wage, w,

whether in units of cloth or food, is the real wage:

w/PC and w/PF.

• The purchasing power of the (nominal) rent, r ,

whether in units of cloth or food, is the real rent:

r/PC and r/PF.

• To see who gains and who loses from trade, we

need to focus on the real wage and the real rent

and check what happens to these two things as

autarky ends and free trade begins.

Level of Resource Use

• The amount of labor used in the production

of an additional unit of cloth is then 1/MP

or 1 divided by the marginal product of

labor in cloth production

Level of Resource Use—Example

• Suppose an additional worker produces an

additional 5 yards of cloth in one hour’s

work. Then MP = 5.

• Therefore, to make one additional yard of

cloth, you need only 1/5 of a worker.

• This shows that the labor needed to make

one unit of cloth can be calculated as 1/MP

Price = Marginal Cost

• If P > MC at the current level of production,

additional production would increase profit

• If P < MC at the current level of production,

reduced production would increase profit

• Therefore, profit is maximized only if P = MC
• Therefore, if a good is being produced , P = MC

must be true

Real Wage and Real Rent

• Therefore, P = MC = w / MP

• Therefore, w/P = MP

• This implies that the real wage in

units of, say, cloth is the Marginal

Product of labor in the

production of cloth

• Similarly, the real rent in units of

food is the Marginal Product of

land in food production

C

L

C

MP

P

w

F

T

F

MP

P

r

L^2

International Labor Mobility

Figure 7-3 : Causes and Effects of International Labor Mobility

MPL

MPL MPL*

MPL*

Home

employment

O Foreign

employment

O*

A

B

C

L^1

Migration of labor

from Home to Foreign

Total world labor force

Marginal product

of labor

Why Resources Migrate

• Recall that Heckscher-Ohlin theory implies factor-

price equalization

• However, if the assumptions of Heckscher-Ohlin

theory are not satisfied, the real price of a resource

may not be equal everywhere

• When the real price of a resource varies from

country to country, there will be a strong economic

incentive for the resource to migrate

• from the low-price country to the high-price country.

Quantity of Labor, L

Price of Labor, w/p

Demand, which is the firms’ willingness to pay for labor

( w/p ) 0

L 0

A

B

By recalling an earlier lecture we can see that A + B represents the total value of labor (or, businesses’ willingness to pay for labor)

But B represents the wages earned by the workers. This is ( w/p ) 0 × L 0. Therefore, A represents the surplus earned by firms. As capital is the only other resource, the surplus ( A ) goes to the owners of capital.

In short, A + B is the total output. B goes to labor as wages, and A goes to capital as profits.

Before and After Immigration

Home employment

O Foreign

employment

O*

Total world labor force

A

B

C

D

E

F

G

H

I

J

Populations before migration Populations after migration

w/p home (^) w/p foreign

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