Immigration, Skill Premium, and Trade Patterns
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The world consists of two countries, H (Home) and F (Foreign). Both countries are endowed
with skilled labor (S) and unskilled labor (N). Country H is far smaller but relatively more
skilled-labor abundant than country F, \frac{S}{N} > \frac{S'}{N'}. Both types of labor are hired in sector e for
the production of electronics as well as in sector g for the production of garments. Sector e is
skilled-labor intensive, while sector g is unskilled-labor intensive. Consumers have the
preference over electronics and garments, U = C_e \times C_g, where C_e and C_g denote the
consumption of electronics and cars, respectively. The assumptions of the H-O model hold.
Take electronics as the numeraire. In equilibrium, skilled labor earns a higher wage rate than
unskilled labor. Skill premium is defined as the wage ratio of skilled versus unskilled labor.
Scenario 2: Unskilled Immigrants and Skill Premium under Free Trade
Country H is initially under free trade before it receives the inflows of unskilled migrants.
d) Show graphically and explain intuitively the impacts of unskilled migrants on skill
premium and on the sectoral skilled-unskilled labor ratio in country H. (2 marks)
e) Use the box diagram to show the impacts of unskilled migrants on sectoral inputs of skilled
and unskilled labor, respectively. How do unskilled migrants affect the welfare of skilled
labor and unskilled labor in country H? (2 marks)
f) Use the production possibility curve and the indifference curve to show graphically the
impacts of unskilled migrants on sectoral production and consumption. (3 marks)
g) Use trade triangle to explain graphically how unskilled migrants affects trade flows.
Explain intuitively whether your findings depend on the size of migrant inflows. (3 marks)
