Reference no: EM133080219

An economy consists of two regions, the North and the South. The short-run elasticity of labor demand in each region is -0.5 (such that for every 1% increase in the wage, employment drops by 0.5%, or vice versa: for every 1% increase in employment, the wage decreases by 2%). Labor supply is perfectly inelastic within both regions. The labor market is initially in an economy-wide equilibrium, with 600,000 people employed in the North and 400,000 in the South at a wage of $15 per hour. Suddenly, 20,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native residents and also supply their labor inelastically.

Question

- Suppose that for every dollar difference in the hourly wage between the two regions, 1,000 people per year migrate from the South to the North (e.g. if the wage gap (wNorth -wSouth) would be 1 dollar, 1000 people would migrate North each year, but if the wage gap is only 0.5 dollars, then only 500 would migrate North per year). What will be the new equilibrium wage rates and employment levels in each of the two regions after one year? (Again, give exact answers.)