Labor Economics 5th Edition by George Borjas

Exercise 7

Suppose Hinterland has been a closed economy (meaning there is no immigration from foreign countries and no international trade). The current labor force has 4 million skilled workers and 8 million unskilled workers. Both types of labor have perfectly inelastic supply curves, and the current skilled-unskilled wage ratio is 2.5. The elasticity of demand of skilled labor is 0.4, while the elasticity of demand of unskilled labor is 0.1. Suppose Hinterland allows a brief period of immigration, during which time 1 million skilled workers and 4 million unskilled workers migrate to Hinterland. Suppose there are no other changes to the economy. Approximately what is the new skilled-unskilled wage ratio (Hint: the percent change in the wage ratio is approximately equal to the percent change in the skilled wage minus the percent change in the unskilled wage.)