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Lecture 5
After World War I, laws were passed severely limiting immigration. Only a trickle of
immigrants has been admitted since then By keeping labor supply down, immigration
policy tends to keep wages high.
Paul Samuelson, Economics, 1964.
A. Effects of Immigration
1. Short Run Analysis: using Specific-Factors Model
1.1 Effect of immigration on wage rate
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Amount of labor at Home increases by L=> origin for agriculture shifts from OA to OA'.
MPL curve in agriculture also shifts right by the amount L, to PA'MPLA.
The Home wage is now determined at point B', so the wage falls from W to W'.
Then labor employment in manufacturing changes to OML' and that of agriculture
changes to OAL'.
Case Study::Immigration to the New World
Some 30m Europeans immigrated to the New World between 1870 and 1913.
o => population of Argentina rose by 60%, Australia and Canada by 30% and
the United States by 17% (15 million)
In 1870 wages in the New World were almost 3 times as high as in Europe.
In 1910 they were about twice as high.
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Europe Sours on Labor Migration
Globalization has turned 200 million people into migrant workers in the last few
decades.
o 1/5 are Europeans, 1/10 are Africans and 3% are from Latin America.
Shift in Home
PPF due to
immigration
Home PPF
B
A
Relative price of
manufactured
goods, PM/PA
Output of
Manufacturing, QM
Figure 5.5: Shift in Home Production Possibilities Curve
With L at Home due to immigration => the PPF shifts outward and the output of
both industries increases, from point A to point B.
QM and QA increase because of the short-run nature of the specific factors model.
Because land (T) and capital (K) do not move between the industries in the short-run,
adding labor to both industries increases the output in both industries.
Owners of capital and land often support more open borders, which provides them
with foreign workers that can be employed in their industries.
Local unions and workers who view migrants as a potential source of competition
leading to lower wages.
Immigrant groups themselves, if they are large enough, might also have the ability to
influence the political outcome on immigration policy.
Shift in Home
PPF due to
immigration
A
Home PPF
Output of Computers, QC
Figure 5.9: The Long-Run Effect on Industry Ouputs of an Increase in Home Labor
With an increase in the amount of labor at Home, the PPF shifts outward. The output of
shoes increases while the output of computers declines as the equilibrium moves from
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point A to B. The prices of goods have not changed, so the slopes of the PPFs at points
A and B (i.e. the relative price of computers) are equal.
The finding that an increase in labor will expand one industry but contract the other
only holds in the long run; in the short run both industries will expand. This finding
shows how much the long-run model differs from the short-run model. The long-run
result is named after the economist T.N. Rybczynski, who first discovered it.
Rybczynski Theorem:
An increase in the amount of a factor found in an open economy will increase the output
of the industry using that factor intensively and decrease the output of the other industry.
More on the reasons why PPF shifts they way it does with an Increase in
the Amount of Home Labor
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(K, L) ( K, L+L)
EPC
K
QC
aKC QC=KC
EPS
QC
aTC QS = TS
QS
aLC QC = LC
aLS QS = LS
QS
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Case study: The Effects of the Mariel Boat Lift on Industry Output in Miami
The Mariel boat lift to Miami in 1980. The Cuban refugees were less skilled than the
average labor force in Miami.
According to the Rybczynski Theorem, we expect some unskilled-labor intensive
industry, such as footwear or apparel, to expand. And that some skill-intensive
industry, such as the high-tech industry, will contract.
In panel (a), with the inflow of refugees from Cuba in 1980, real value-added in
the apparel industry in Miami rose from 1983 to 1984, and the trend decline of
this industry in Miami was slower (i.e., value-added did not fall as fast) after
1980 than in the comparison cities.
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Case Study: immigration and U.S. Wages, 1990-2004
In 2004 the share has grown to 12% - a doubling of foreign-born persons in 25 years.
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If a U.S. company acquires 10% or more of a foreign firm then that is counted as an
FDI outflow from the United States.
When a company builds a plant in a foreign country it is sometimes called greenfield
FDI (since we imagine the site for the plant starting with grass on it).
When a firm buys an existing foreign plant it is called acquisition FDI (or sometimes
brownfield FDI).
from W to W'. More workers are drawn into the manufacturing industry, and the labor
used there increases from 0ML to 0ML'. Because these workers are pulled out of
agriculture, the labor used there shrinks from 0AL to 0AL' (measuring from right to left).
1.2.Effect of FDI on the Industry Outputs: It is easy to determine the effect of an inflow of
FDI on industry outputs. Because workers are pulled out of agriculture, and there is no
change in the amount of land used there, then output of the agriculture industry must fall.
With an increase in the number of workers used in manufacturing, and an increase in
capital used there, the output of the manufacturing industry must rise. These changes in
output are shown in Figure 5.12, where the PPF shifts outward. At constant prices for
goods, the equilibrium outputs shift from point B to point B', with more manufacturing
output and less agricultural output.
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1.3. Effect of FDI on the Rentals:
There are 3 ways to measure the impact of FDI on the rental of capital
Method 1:
o With an inflow of FDI, employment in Mfg increases due to higher MPLM,
fewer workers are employed in agriculture, and each acre of land cannot
be used as intensively.
o The value of marginal product of land, RT = PA MPTA, falls.
o If MPTA falls and PA remains unchanged, then land rental must fall.
o This method does not tell us how RK changes
Method 2:
o Take the revenue earned in manufacturing and subtract the payments to
labor.
Method 3:
o Look at the value of the MPK, in the figure below.
Wage, W
C
W'
W
PMMPL'M
PAMPLA
OM
LM
PMMPLM
L
L'
LA
OA
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The Effect of FDI on Rentals and Wages in Singapore
We can use two methods to analyze the impact of FDI on wages and rentals,:
First, we can estimate the MPK in Singapore, using a production function that
applies to the entire economy.
The second approach involves the following:
If capital was rented instead of purchased, what would the rental be?
The rental agency needs to make the same rate of return on renting the
capital equipment that it would make if it invested elsewhere.
The real rental is:
R PK
(i d )
P P
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Combining the gains to the Home and Foreign countries, we obtain the triangular
region ABA*, the world gains from immigration.
Turning the triangle on its side, its base equals (W W*), the difference in the Home
and Foreign wage in the absence of any migration.
The height of the triangle is (L L), the number of foreign workers that would
emigrate in the equilibrium with full migration.
So the area of the triangle is 1/2(W W*) (L L).
==>
Increase in the Home labor force & thus reduction in the real wage in Home.
Reduction in the Foreign labor force & increase in the real wage in Foreign.
The redistribution of the worlds labor force = = >
Increases the worlds output as a whole
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