An economy consists of two regions, the North and the South. The labor market is

Question

An economy consists of two regions, the North and the South. The labor market is initially in an economy-wide equilibrium, with 1,000,000 people employed in the North at $25 per hour and 2,000,000 in the South at a wage of $15 per hour. Assuming that the cost of moving from North to South and South to north is negligible and that the employees are perfect substitutes for one another, what would the wage be in the future and how many people would live in the North and the South. Jobs are also perfectly mobile.

Explanation / Answer

It is considered that the cost of moving from south to north is negligible.

Since in North higher wage is paid, there would be people moving from the south to north. Now at north more number of labor are supplied than demanded so the wage per person shows a tendency to decrease. On the contrary, in South number of labor goes below the demanded value which causes an increase in the wage. Now, until this difference in wage is settled, labor would continue to migrate to the north till the point when the condition in north and south is the same.

Here at this point, we have to assume that the total money paid to all the labor is not changing. So, initially the total money paid = 25 * 1000000 + 2000000 * 15 = 55 million per hour.

So finally also this amount of money would be paid. So finally when the wage in north and south is the same, the value of wage would be = 55 million / total number of people = 55 / 3 = $ 18.33 per hour and equal number of labors would be working in north and south, so labors working in north and south each = (2000000+ 1000000) / 2 = 1.5 million.

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