A market for domestic assembly plant workers parameterized by the labor supply a

Question

A market for domestic assembly plant workers parameterized by the labor supply and demand equations LDs = -30+6W and LD = 170-2 W where W = an hourly wage and L = 100’s of workers. You also know that the migrating workers will have a labor supply relation of LSm = -10+4 W . We further know that these foreign workers each earn approximately $6.00 per hour (USD) in their native labor markets. Allowing these workers into the market will increase the demand for the firm’s production by 15%, such that labor demand will increase to LD = 195- 2 W . You further expect an increase in demand for other goods and services in the market opening up some 4,000 good paying jobs, of which you expect at least 500 to be management and supervisory positions with a high level of pay.

1. By how much do the employers and worker representative expect the equilibrium wage may change in response to this increase in labor supply?

2. How many domestic workers would be displaced as a result of this change?

3. How many migrant workers would the firm expect to employ as a result of this change?

4. What will be the new equilibrium wage these firms will have to pay?

5. How many workers do you expect the firm will attract based on the market clearing wage you expect?

Provide a graphic model illustrating the expected changes in the labor market given what you know. Be sure to include the domestic labor supply and demand relations as well as the new relations given the potential addition of these new workers and the added demand you expect them to yield.

Explanation / Answer

The domestic labour demand and supply functions are: LD = 170-2 W and LDs = -30+6W respectively.

Therefore the equilibrium wage rate without migration is when labour demand = labour supply such that:

170-2 W= -30+6W

Or 8W = 200

Or W = $25/hour

Therefore level of employment = 170-2W = 120*100 = 12000 workers

After allowing for migration, the labour demand rises to LD = 195- 2 W and labour supply rises to:

- 10+4 W+ (-30+6W) or Ls = -40+10W

1) Therefore the new equilibrium wage is -40+10W = 195- 2 W

Or 12W = 235

Or W = $19.58~ $20

The change in the equilibrium wage rate = $25-$20 = $5

Therefore the % change in equilibrium wage is (5/25)*100 ~ 20%

Thus, the equilibrium wage can be expected to change by approximately 20%

2) At this wage, total labour demanded = 195- 2W = 155*100 = 15500 workers

Domestic labour supply = -30+6W = 90*100 = 9000 workers

Therefore number of domestic workers displaced = 15500-9000 = 6500 workers

3) At this wage, the migrant labour supply = -10+4W = 7000 workers

Since total labour demand = 15500 and 9000 domestic workers are hired, the number of migrant workers who will be hired are:

15500-9000 = 6500

4) The new equilibrium wage that the firms will have to pay is $19.58/hour ~ $20/hour.

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