EA Final Week 9
How do we calculate the total value of production in a country?
-Remember that if when there is no labour, nothing will be produced. • When the very first unit of labour is hired, the value of output will increase by the VMPL The VMPL is, by definition, the value of new output that is produced. • The area underneath the VMPL curve, therefore, shows the total value of production (in £). -The total value of production is area A (triangle above w*) + B (square below). Area A, what is left over, goes to capital owners. Area B is the amount received by labor. It is the wage per worker multiplied by the # of people employed.
What are some potential negative effects of immigration?
Fiscal strains on the host country's government. - Lower wages in the host country in certain sectors. - Lower overall incomes in the source country. - Social tension.
What are formal entry and exit barriers?
Formal barriers: Things like the UK has an annual quota on non-EU work visas. Quota, Prohibition, Imprisonment, Fines. Exit barriers: North Korean soldiers shoot people trying to leave the country. Exit visa, exit tax, prohibition, penalties on family.
Which of the following statements is false? a.Worldwide income inequality is larger than within-country income inequality. b.GCC countries generally have low levels of inequality within their countries. c.GCC countries have an impact on global inequality through their openness to migration. d. OECD countries have lower levels of within-country inequality than GCC countries. e.All of the above are false.
GCC countries have high levels of inequality within their countries. This is because they allow cheap labour to enter their countries relatively easily and migrant workers earn much less than the native population.
Which of the following is true regarding the increase in global immigration over the past 200 years? . Uneven economic development between countries has reduced the incentive to stay. Answers: a. Uneven economic development between countries has reduced the incentive to stay. b. Uneven economic development between countries has increased moving costs. c. Better communication technology has increased push factors. d. Better communication technology has increased "stay away" factors. e. None of the above is true.
None of these statements are true. Uneven economic development has increased the incentive to migrate because income differences between countries are now large. It did not affect the "stay" forces or the moving costs. Better communication technology has made it easier for people to move because they are better aware of foreign opportunities, but once again they did not affect the push and "stay away" factors.
What is the immigration surplus and how does it arise?
Notice that there is a net gain in Destino (the destination country). This gain goes to the owners of capital. • This gain is called the immigration surplus, which represents the total benefit of immigration to the citizens in the destination country. • This gain is driven by the fact that immigrants increase national income by more than it costs to employ them.
Have these factors stayed constant over time? If not, why?
Over the past 200 years, immigration has dramatically increased-thus these four factors have changed. -Economic growth and technological progress since 1800 have eliminated transport costs and dangers -Better communication allows people to be more aware of other opportunities and income disparities -**Gap in standard of living is now enormous compared to what it was 200 years ago
What are Stay and Stay Away factors? Examples?
Stay factors: positive incentives which make people want to stay in their countries. Positive features of the home country that are hard to leave. ex: Familial ties, social status, friendships, cultural familiarity, employment, property, political privileges, certainty Stay away: negative incentives which make people want to avoid the destination country. They are negative features of the destination country. ex: cultural barriers or discrimination against immigrants. Language barriers, low status, low unemployment, low wages, lack of political rights, crime, war, uncertainty
Which of the following statements is true? a. The immigration surplus exists because migrants decrease the productivity of labour. b. The immigration surplus exists because migrants stimulate domestic demand. c. The immigration surplus exists because migrants lower the productivity of capital. d. The immigration surplus exists because migrants raise output by more than it costs to employ them.
The immigration surplus represents the overall gains to the citizens of the destination country that result from immigration. The gains exist because migrants increase total output in an economy, but they are paid slightly less than the output increase. The correct answer is D.
How does the supply curve fit within the model? How does it shifting affect the equilibrium wage?
-A vertical labour supply curve is used just to make the graphs easier to work with. If the labour supply curve were upward sloping or bent backwards, the implications of the model be the same. • When the labour supply curve is combined with the labour demand curve, the equilibrium wage can be determined. • If the labour market is competitive, the equilibrium wage occurs at the intersection of supply and demand. -When demand or supply shifts, the equilibrium wage will change. -An increase in the supply of labor (vertical line shifting right) will lower the wage
What percentage of the world's population lives outside of their country of birth? In 2015 how many people migrate to the UK every hour? Emigrate? This is a feature of what process.
-Over 200 mm people of about 3% of the world's population. At current rates this will reach 4-5%. -70 people immigrate, about 34 people emigrate. Part of globalization. -13% of residents in England/Wales were born outside the UK in 2011. Highest amount from India. -Long-term net migration to UK is increasing. -52% tend to agree "there are too many immigrants in our country" Great Britain at 71%
What are some of the bases behind the labor market model of migration? What determines wages?
-Potential migrants are workers and their decision to migrate is based on wages. -Warges are determined in the market for labor; the price of labor is determined by the supply and demand for labor. -Need labor and capital to produce output; for this model assume all labor is the same (no low or high skilled workers). The usefulness/productivity of each input will depend on its relative abundance. -As workers become relatively abundant they become less usefull (100 chefs and 10 pans)
What do the capital owners think of migration (think of capital owners as employers/firms)?
-Remember from a previous slide that value comes from relative abundance. If there is a lot of labour relative to capital, capital becomes more useful/valuable and it is good to be a capital owner. • Capital owners (firms) in Destino will receive larger rents after immigration. - Capital in Destino becomes relatively scarce. • Capital owners in Nativo will receive smaller rents after migration. - Capital in Nativo becomes relatively abundant. -Before any immigration, capital owners in Destino were getting a surplus of A and capital owners in Nativo were getting a surplus of a (upper case/ lower case will be used to differentiate the two countries). • Before any migration, workers in Destino were getting a surplus of B and workers in Nativo were getting a surplus of b
How big is the immigration surplus?
-As it turns out, probably not very big. • Using the labour market model, Jorge Borjas estimated the size of this surplus (the area of the triangle) for the United States. - Note that his estimates are sensi.ve to the model's underlying assumptions. If this model poorly reflects the real world, these estimates are off! • Roughly 40 million people in the United States are migrants. Borjas estimates that the presence of all migrant workers in the US labour market makes GDP roughly 11% larger ($1.6 trillion) than it otherwise would be. -This contribution to the economy, however, does not measure the benefits to the citizens of the destination country - most of this goes to the migrants themselves in terms of wages and benefits. • Of the $1.6 trillion increase in GDP due to immigration, roughly 99.8% of that goes to the immigrants themselves. • This yields an estimated immigration surplus equal to $35 billion a year (or 0.2% of GDP) -To put this 0.2% into context, annual US military expenditure has been around 20 times this amount in recent years. • The size of the surplus is small. However, the underlying redistribution from domestic workers to capital owners is huge. • This £35 billion in surplus comes from a reduction in the earnings of the domestic workers (vis-à-vis competition with the immigrants) by $402 billion a year, and an increase in the profits of the capital owners by $437 billion a year
Why is the VMPL downward sloping?
-Bc the MPL diminishes as more labor is hired holding the amount of capital constant. Total output will increase but at a decreasing rate. When there is more labor, the amount of capital stock gets stretched thin (think of a factory that starts getting crowded)
What determines the supply of labor? What shape does it thus take in this model?
-Determined by a fundamental trade off between leisure and labor. -When you work more hours, you have more money to spend during your leisure time. But, when you work more hours, you have less leisure time altogether It is not always clear (both theoretically and in the data) how the wage affects this trade-off. • If your wage increases from £5 to £15 an hour, I bet most of you would want to work more. • But what if your wage increased from £15 to £500 an hour? I bet most of you would want to work less -In other words, it is not clear what the labour supply curve will look like. • It is possible that it slopes upward - people work more when the wage is higher. • It is also possible that it has a bend in it. People work more as the wage increases, but they start working less if the wage increases by enough. When one looks at cross-country evidence, it almost looks like the labour supply curve should slope downwards! -Given the ambiguity, it is usually assumed in this model that the labour supply curve is vertical.
Give some background separate labor markets of each country, and what immigration does in this model
-In the labour market model of immigration, each country has a separate labour market. There is a unique labour demand and supply curve in each country. Because of this, different countries may have different wages. • Immigration, in this model, acts to increase or decrease the supply of labour across countries. • Assume that we have just two countries: Nativo and Destino, each with their own currency
What about the article on immigration and world inequality?
-Inequality b/w countries is much much greater than inequality within countries. -Divide a country's wealth into two halves - the wealthiest 22% of people in the United States take half, and rest of the 78% take the other half. (a 22-78 split) • In Germany, this split would be 29-71. • Globally, this number is 8-92. In other words, the world's wealthiest 8% earn half of the world income. If the world were a country it would be the most unequal in the world.
What would the world look like if there were no economic restrictions? (discusses the two required reading papers)
-Many people want to but due to restrictions they can't (U.S. Diversity Lottery-allocates 50,000 visas per year. In 2011 there were 13.6 million applications 272 per spot. - If so: The world would be much richer and the world would be much more equal
What are some features from Clemens (2011) regarding immigration and world output? What are estimated gains to world GDP if barriers were removed?
-The amount a worker can produce depends critically on where they happen to live. Norwegian workers are far more productive than those in Niger; GDP per worker is 30x greater. -part of the difference is due to access to better tool, technology, and better developed economic institutions. If a Niger worked moved they'd be automatically more productive. -Immigration restrictions depress world output because they prevent workers from moving to where they are most productive. -Clemens (2011) estimates that the emigration of about 5% of the world's poorest population will lead to global gains which exceed the gains from eliminating all barriers to trade and capital flows combined. If all barriers to labour mobility were removed, the estimated gains are in the neighbourhood of 50-150 percent of world GDP! - Barriers to immigration are the single biggest economic distortion
What happens when the wage in Destino is higher than that in Nativo?
-The model predicts that there will be an incentive for Nativo workers to migrate to Destino. -This migration will shift the supply of labour to the right in Destino (lowering the equilibrium wage) and it will shift the supply of labour to the left in Nativo (increasing the equilibrium wage). -So long as wD> wN, there will be an incentive for individuals to keep migrating from the low wage country to the high wage country. • Do you think that migration will continue until the wages are equal (wD= wN)? • Immigration tends to reduce, but not entirely eliminate, wage differences. • Wage differences are not entirely eliminated because there are many stay and stay away factors (such as linguistic differences, family .es...). Migrating away from home is not worth getting just £0.01 more an hour.
How do we find the equilibrium price of labor? What is the demand curve for labor known as? What components does it consist of? What does the MPL tell us? How do you calculate VMPL?
-We need a supply and demand curve for labor. The demand comes from firms and the supply comes from workers. -The demand curve for labor is known as the value of the marginal product of labor curve. -The VMPL consists of the Marginal Product of Labor (MPL) and the Price of what is being produced (P). -The MPL indicates how many more units of output will be produced from adding one more unit of labor to the production process. If the MPL is 3, one more unit of labor will get you 3 more units of output. You also need to know the price of each unit of output. The VMPL=MPL*P. It indicates how much additional money each laborer is worth. Employer will only pay up to the VMPL for labor. So if it is 10, and the wage is 8, the employer makes 2 per worker. Once wage=VMPL no more workers will be hired.
What do countries do to fight global inequality and how does this compare to Posner and Weyl (2014)?
-since 1970 rich countries try to donate .7% of national income to foreign aid; the UK (2013) meets this target, foreign aid in UK amount to 170 pounds per citizen. -Gulf Cooperation Council Countries are very open to immigration; UAE, Qatar, Kuwait, Bahrain--more than half of the population is foreign born. Paid little thus huge within country inequality: $5000 a year as opposed to Emirati $300,000. Yet these immigrants have far more than they would at home. Estimated at home by Clemens (2013) to earn $1000 a year. So it increases migrant income by a factor of 5. Up to 75% is remitted back home. This has a far greater impact on reducing global inequality.
An individual who lives in France is debating whether or not to migrate to Germany. The factors which influence this individual's decision of whether or not to migrate will fall into one of several broad categories. Categorise each of the following incentives accordingly. 1) list the four types of incentives a. France increases the tax rate on the wealthiest 10% in the country. b. German unemployment decreases c. European agreements improve the international transportability of pensions. d. France re-introduces mandatory military service. e. Children in Germany no longer learn French in school. f. Germany requires work permits for French migrants.
1)The incentives that influence immigration can be placed into the following categories. Push versus pull - which are negative features of home country and positive features of destination country. Stay versus "stay away" - which are positive features of the home country and negative features of the destination country. Formal entry and exit barriers are legal barriers that prevent in-migration or out-migration. And finally, the cost of moving affects the immigration decision. a. It depends on who this potential migrant is. If the French migrant is in the wealthiest 10%, this would represent a push factor. If the migrant is not in the wealthiest 10%, this would likely represent a stay factor. This is because the tax on the wealthiest 10% probably implies some sort of redistribution to everybody else. b. This would represent a pull factor. There are good economic conditions and an availability of jobs in Germany. c. This would lower the incentive to stay. d. Military service is a push factor e. Language barriers are a stay away factor. f. This would represent a formal barrier to entry.
Two neighbouring countries (home and destination) initially have the same equilibrium wage. In the home country, due to an increase in taxes on investment returns, there is a decline in the capital stock. As a result of this, in the home country we should expect that
As a result of the decreased capital stock, the marginal product of labour will decrease in the home country (each worker now has fewer tools to work with). This implies that the demand curve will shift downwards and the equilibrium wage will decrease. Because the equilibrium wage decreases, there will be migration from home to the destination. This will lead to a leftward shift in the home country's labour supply curve. The correct answer is E, none of the above.
Barriers to migration reduce world GDP because they
Barriers to migration reduce world GDP because they prevent workers from moving to where they are most productive. The correct answer is B. If a higher wage is available in the destination country, this means labour is more valuable in the destination country. If everybody could move to where they are the most valuable, world output would increase. As discussed in lecture, the magnitude of this distortion is enormous.
What formula gives us the total value of output? How do you calculate who earns more: workers or capital owners?
Because the demand curve represents the marginal value of each unit of labour, the area below the demand curve represents the value of production. This can be found by first finding the area of the upper triangle, and then of the lower square. A+B. For that B-A or A-B. This production is split between workers and capital owners. The amount paid to labour is the wage times the amount of labour employed. This is £2,000. The amount paid to capital is what is left, which is the upper triangle that has an area of £1,000. Labour earns £1,000 more than capital.
All workers are assumed to be identical in the labour market model of immigration presented in class. But in reality, workers are heterogeneous in many respects. For example, some workers are more skilled than others. Suppose that our model had three factors of production: capital, skilled workers, and unskilled workers. In the destination country, who do you think will win and who do you think will lose as a result of unskilled immigration?
Capital owners in the destination country will unambiguously win because capital becomes relatively more abundant. Unskilled workers in the destination country will unambiguously lose. This is because they will compete for the same jobs with the unskilled immigrants and their wages will fall. The skilled workers may win or they may lose. This all depends on the degree of substitutability/complementarity between skilled and unskilled workers. If skilled workers and unskilled workers are complements in the production process (i.e. firms require both types of labour), then skilled workers will benefit from unskilled immigration for the same reason that capital owners benefit. But if skilled workers and unskilled workers are substitutable in the production process (i.e. firms can easily replace skilled workers with unskilled workers), then the skilled workers will lose from unskilled immigration.
Which of the following statements is false: I. Over 200 million people, or about 3% of the world's population, live outside their country of birth. II. The movement of people across borders is one of the key characteristics of the phenomenon referred to as globalisation. III. Countries that are open to immigration have no impact on reducing global inequality. IV. Immigration restrictions can depress world output by preventing people from moving to where they are most productive.
III is false. Countries that are open to immigration have a very large impact on reducing global inequality. Although migrants in these counties tend to earn less than natives, so these open migration policies can lead to large within-country inequality; migrants earn much more than they would do at home. Therefore, openness to immigration can have a far greater impact on reducing global inequality than the philanthropic policies adopted elsewhere in the developed world.
What are the implications of the model?
Implication 1: Immigration tends to increase the wage in the origin country and lower the wage in the destination country. This causes wages to converge. Shown in the US: States with high wages in the year 1950 had slower wage growth between 1950-1990 than states with low wages in 1950. • In other words, states with low wages started "catching up" to states with high wages. • This convergence was largely caused by internal migration. - People from low-wage states moved to high-wage states. Implication 2: Economic forces which create wage differences will also create migration. For example, there will be a mass retirement in Austria in about 15-20 years. - This can be seen by the shape of their population pyramid. • This mass retirement results in a leftward shift in the Austrian labour supply curve. • The equilibrium wage in Austria will increase as a result of this, which will encourage migration to Austria.
What are further implications of the labor market model of immigration?
Implication 3: Immigration will create winners and losers. • Workers in Destino (where the migrants move to) will see their wages fall after immigration - They lose because labour in Destino becomes relatively more abundant. • Workers that stayed in Nativo (where the migrants move from) will see their wages increase after migration. - They win because labour in Nativo becomes relatively less abundant. • The workers who migrate from Nativo to Destino will also win, or else they never would have moved in the first place. - This is because they earn higher wages in Destino.
What are Costs of Moving?
In 1650 passage from England to New World was equivalent of half a year of wages for a farmer. Now can cost 1,300 pounds for UK application. Very little immigration for world's poorest countries because it is so costly.
What does the labour market model of immigration predict about wage convergence? Would you expect to see larger and more persistent wage differences within the United States or within Europe? Explain.
In the labour market model of immigration, all potential migrants are workers who will move when a higher wage is available in a different country. This reduces the supply of labour in the source country (raising the wage) and it increases the supply of labour in the destination country (lowering the wage). As a result, wages in the two countries will converge. This wage convergence only goes so far, however. People will only move if the higher wage in the destination country outweighs the costs associated with immigrating. Within the United States, the cost of moving between regions is low. This is because there is a great deal of cultural similarity between states and there are no formal barriers to migrate. In the United States, we should therefore expect that any wage differences would be erased quite quickly as migration will be very responsive to wage differences. Even though there are no formal migration barriers in most cases, Europeans immigrate much less than their American counterparts. This is because there are larger cultural differences between European countries. As a result, we should expect that wage differences will be more persistent within Europe.
Use the two following statements to answer this question T or F or not enough I. When push and pull factors are both strong, there will be little immigration. II. When stay and stay away factors are both strong, there will be a lot of immigration.
Push factors are incentives that make immigrants want to leave, and pull factors are incentives that make immigrants want to come to the destination country. If both of these factors are strong, there will be a lot of immigration. Statement I is false. Stay factors are incentives that make immigrants want to stay, and stay away factors are incentives which make the destination country undesirable. When stay and stay away factors are strong, there be little immigration. Statement II is false.
What are Push factors? What are Pull factors? What are examples of each?
Push factors: negative incentives that make people want to leave their country ex. low wages, potato famine, war, overpopulation, high taxes, religious persecution, crime, social immobility Pull factors: positive incentives that attract migrants to destination country ex: high wages. Dominions Land Act in Canada (1871, 160 free acres), high wages, employment, property rights, economic freedom, law and order, religious freedom, educational opportunities So both contribute to yes, let's leave.
It was discussed in class that immigration restrictions reduce output by preventing people from moving to where they are most productive. But this hinges on the assumption that productivity depends on where you live rather than who you are. To what extent do you think that this assumption is true? That is, if a worker moves from a low-labour-productivity country to a high-labour-productivity country, to what extent will that worker become more productive?
The literature does not have a clear answer for the magnitudes, but economists do believe that location-specific factors play a key role in generating productivity differences across countries. Countries with high labour productivity tend to have more capital (tools for workers), better legal environments, better technology, and so on. Every worker, no matter what, will become more productive in these environments. On the other hand, productivity differences due to differences in human capital are embedded in the person. If an individual moves from one country to another, they do not automatically become better educated, for example. Furthermore, linguistic or cultural barriers might prevent immigrants from being as productive as their native counterparts.
When the price of output is £12 and the marginal product of labour is 3, the value of the marginal product of labour is ____. We should expect that the marginal product of labour will ____ as more labour is added
The value of the marginal product of labour is the marginal product of labour multiplied by the price. It is the value of output that each extra unit of labour provides. As more labour is hired, the marginal product of labour will decrease because the other factors of production (capital) will be spread more thinly. The correct answer is B.
b. Due to the high wages offered in Chocoland, suppose that 10 workers immigrate from the neighbouring town. How does this affect the equilibrium wage, total output, the total amount received by capital owners, and the total amount received by workers. Be sure to distinguish between the native workers and the migrant workers. c. Who is in favour and who is opposed to immigration? Is there any way in which the gains from the winners can be redistributed to compensate the losers?
This will increase the labour supply to 60 and it will decrease the wage to £70. The following diagram depicts the total value of output and how it is split. There are 50 units of native labour, and they receive a wage of £70. Native labour earns 50*£70=£3,500. There are 10 units of migrant labour, and they also receive a wage of £70. Migrant labour earns 10*£70=£700. Capital earns the upper triangle, which has a height of £30 and a width of 60. Capital earns £900. Total output is £5,100. Capital owners win from migration and native workers lose. The migrant labourers win, or else they would not have migrated in the first place. Total output increases. c. Native labourers will be opposed to immigration and capital owners will be in favour of immigration. The gains to capital owners outweigh the losses to the native workers, however. Following immigration, one possible policy to redistribute these gains would be to increase taxes on capital in order to lower taxes on labour.
The town of Chocoland produces cookies using labour and capital. Given the price and the existing capital stock in Chocoland, the value of the marginal product of labour curve (VMPL) is represented by the equation VMPL = £100-0.5L where L is the labour supply. Assume that all workers in the world are identical. The labour market in Chocoland is depicted below. (we see supply of labor is 50) a. Assuming this labour market is competitive, calculate the equilibrium wage, the value of output, the total amount received by capital owners, and the total amount received by workers.
a. First, we should calculate the equilibrium wage. The supply of labour in Chocoland, as seen in the diagram, is 50. The equilibrium wage can be found by plugging 50 into the VMPL curve. The equilibrium wage is therefore £100-0.5(50) = £75. The following diagram depicts the total value of output and how it is split between labour and capital. The total amount received by labour is equal to the wage, £75, times the quantity of labour, 50. The amount paid to labour is therefore £75*50=£3,750. The amount paid to capital is equal to the upper triangle which has a height of £25 and a width of 50. The amount paid to capital is therefore £625. Total output is the sum of this, £3,750+£625=£4,375.
Use the labour market model of immigration to predict migration patterns between the countries of Nativo and Destino. Assume that the wages in each country are initially the same. Use diagrams where appropriate. a. Through government funded research grants, the production technology in Destino improves b. The capital stock in Destino increases due to increased saving and investment. c. Due to the way in which the population pyramid in Nativo is structured, a huge number of young people enter the labour force all at once.
a. The improvement in technology will presumably increase the marginal productivity of labour in Destino. Recall that the demand for labour (The value of the marginal product of labour) is equal to the marginal product of labour times the price. This will increase the equilibrium wage in Destino. As a result, there will be migration from Nativo to Destino. This shifts labour supply in Nativo to the left and it will shift the supply of labour in Destino to the right. b.: The effects of this will be identical to part a. This is because an increase in the stock of capital raises the marginal productivity of labour. Essentially, each worker has more tools to work with, so each worker is more productive. c. As a result of the increase in the labour force in Nativo, the labour supply curve will shift to the right. This will lower the equilibrium wage in Nativo. There will now be an incentive for Nativo workers to migrate to Destino. But because there are many stay and stay away factors, there won't be such extensive mass migration from Nativo to Destino and a wage gap will persist.
