ILR 2400 . Problem Set 1

# ILR 2400 . Problem Set 1 - Yi Cai yc639 ILR 2400 Jakubson...

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Yi Cai; yc639 ILR 2400; Jakubson September 30, 2008 Problem Set #1 1 1. A guest worker program is put in place whereby Mexican citizens could work in the US with a “guest worker” card allowing them to stay in the USA for three years. The employer would have to demonstrate a need for workers and prove that US citizen would not take the jobs. Assuming that Mexican citizens currently face formidable barriers to working in the US, the expected effect enactment of this program to have on equilibrium wages and employment in each country is as followed. a. Below are the labor market demand and supply graphs showing the change in labor demand and/or labor supply in the US and in Mexico resulting from this program. U.S. Supply and Labor Graph Mexico Supply and Labor Graph The blue curves D and S show the initial supply and demand curves in both the US and Mexico before the program. Note: the wage level W, at equilibrium in the US is greater than the wage level W, at equilibrium in Mexico. Once the guest worker policy is implemented, there will be an increase in supply in the US, illustrated by a supply curve shift to the right from S to S1. Simultaneously, There will be a decrease in the supply in Mexico illustrated by a supply curve shift to the left from S to S1. Supply in the US will increase as wages decrease; supply in Mexico will decrease as wages increase until wages are equal in both the U.S. and Mexico at equilibrium, noted by the purple line at W1.

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Yi Cai; yc639 ILR 2400; Jakubson September 30, 2008 Problem Set #1 2 b. After a year of operation, the US government starts to recover these administrative costs by making employers with guest workers pay a tax equal to 10% of the wages. Below are the labor market demand and supply graphs showing the change in labor demand and/or labor supply in the U.S. and in Mexico resulting from the tax. U.S. Supply and Labor Graph Mexico Supply and Labor Graph The green curves D and S show the supply and demand curves in both the US and Mexico after the guest worker policy was implemented. Once tax is implemented on guest workers, wages will decrease by the amount of tax, t and the new wages level is at W1. At the new wage, the supply curve in Mexico will shift from S to S1 until wages are equaled in both the US and Mexico, indicated by the pink line. c. A positive question: Is it fair to implement the guest worker policy? It ought to be fair to implement the guest worker policy because we want to achieve equal wage across borders. The guest worker policy eliminates all barriers to working in the United States including physical barriers such as the Arizona wall and language barriers. It is necessary to look at the positive effects of eliminating barriers such as looking at productivity of firms in the US. Also, as wages increase in Mexico, an increase the standards of living should be considered as a
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ILR 2400 . Problem Set 1 - Yi Cai yc639 ILR 2400 Jakubson...

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