Question

Q2: In a world with two countries where country ALPHA is rich with more highly skilled workers and BETA is poorer with less skilled workers. Using diagrams, discuss and illustrate the market and welfare effects of the following: b) Modify the diagrams in (a) to discuss what would happen if the Demand for Labour in ALPHA increased substantially? (4 marks) When demand increase substantially, the high wage and lack of labor attracts wokers from Beta.Large amount of people migrate from BETA to ALPHA and lower the wage to $5/hour.ALPHA Native northern workers loose area a having their wage rate bid down from $6 to $5. Employers in ALPHA gain area (a+b) (because they pay less for labour). The net gain is area b. Workers remaining in BETA gain area d (because of the reduction in competition). Employers in BETA loose are (d+e) (because they have to offer higher wage rates) The net loss is area e or(d+e-d) .

Answer 1

To illustrate the market and welfare effects of the substantial increase in the Demand for Labour in ALPHA, we can modify the diagrams from the previous scenario (a).

Diagram 1: Labor Market in ALPHA before the increase in Demand for Labour

Wage Rate ($/hour)

/\

/ \

/ \

/______\

Quantity of Labor

In this diagram, the supply of labor in ALPHA intersects with the demand for labor at a wage rate of $6/hour. The equilibrium quantity of labor is determined by this intersection point.

Diagram 2: Labor Market in BETA before the increase in Demand for Labour

Wage Rate ($/hour)

/\

/ \

/ \

/______\

Quantity of Labor

In this diagram, the supply of labor in BETA intersects with the demand for labor at a lower wage rate compared to ALPHA. The equilibrium quantity of labor is determined by this intersection point.

Now, let's modify the diagrams to reflect the substantial increase in the Demand for Labour in ALPHA:

Diagram 3: Labor Market in ALPHA after the increase in Demand for Labour

Wage Rate ($/hour)

/\

/ \

/ \

/______\

Quantity of Labor

Due to the substantial increase in the Demand for Labour in ALPHA, the demand curve shifts to the right. This indicates that employers in ALPHA are demanding a larger quantity of labor at each wage rate.

Diagram 4: Labor Market in BETA after the increase in Demand for Labour

Wage Rate ($/hour)

/\

/ \

/ \

/______\

Quantity of Labor

As a result of the increased demand for labor in ALPHA, workers from BETA are attracted to ALPHA due to higher wages and better employment opportunities. This leads to a decrease in the supply of labor in BETA.

The market and welfare effects can be summarized as follows:

- In ALPHA, the wage rate decreases from $6/hour to $5/hour due to the influx of workers from BETA. This benefits employers in ALPHA as they can now hire labor at a lower wage rate, resulting in a gain in area (a+b).

- However, native workers in ALPHA experience a decrease in their wage rate from $6/hour to $5/hour, which results in a loss of area a. This is because the increased competition for jobs leads to a bidding down of wages.

- In BETA, the workers who remain in the country benefit from reduced competition for jobs, resulting in a gain in area d.

- On the other hand, employers in BETA face increased competition for labor and are required to offer higher wage rates. This results in a loss of area (d+e) or (d+e-d).

Overall, the substantial increase in the Demand for Labour in ALPHA leads to a redistribution of welfare between the two countries, with employers in ALPHA gaining and native workers in ALPHA and employers in BETA experiencing losses. The remaining workers in BETA benefit from reduced competition.