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EFFECT OF IMMIGRATION

Consider a hypothetical economy in labour market equilibrium:
a. What would be the immediate effect of an increase in immigration in the labour market in this country. Explain your answers using the wage-setting and price-setting model.
b. Using the graph from part (a), explain how in the long term employment and the real wage may change.
c. Now suppose that some of the immigrants to the country decide to set up businesses, rather than become employees. Explain how you expect this to affect the wage-setting curve, the price-setting curve, and the labour market equilibrium in your graph.

User Lee Huang
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Your answer is explained below. Please refrain from directly copy and pasting this, instead use your own words which are inspired by sources.

a) Immediate effect of increased immigration:

Wage-setting model: The supply of labor increases as immigrants enter the labor force, shifting the labor supply curve to the right. This leads to downward pressure on wages as firms now have more workers to choose from.

Price-setting model: The supply of labor increases, but firms have limited ability to adjust wages downward in the short run. This may lead to higher unemployment as firms do not need to hire all the new workers.

In both models, the initial result is lower wage growth or possibly even falling real wages, and potentially higher unemployment.

b) Long term effects:

As time passes, wages can adjust downward to some extent. This will bring the labor market back toward equilibrium, although real wages may remain slightly lower than before. Unemployment may stabilize or even fall as demand for labor eventually increases to absorb some of the immigrant workers. The key is that in the long run, wages and employment can adjust through changes in demand and productivity gains from a larger workforce. But full adjustment takes time.

c) If some immigrants become entrepreneurs:

This would shift the price-setting curve to the right, as more businesses mean greater demand for labor from firms. This increase in labor demand would offset some of the initial supply shock from immigrants becoming employees. As a result, unemployment would likely not rise as much or for as long, and downward pressure on wages may be smaller. The rightward shift of both curves would mean a new equilibrium with higher employment and real wages that are relatively unchanged.

Thanks, have a marvelous day!

User Lamma
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