Effects of international labor mobility
This article summarizes the effects of international labor mobility. At the end of the written article is a video highlighting the points for people who prefer audio visual learning. However, I recommend you read first and then watch.
To explain the effects of international labor mobility we will imagine a hypothetical world where there are only two factor inputs (Land (T) and Labor (L)) and one product (output (Q)). The amount of output produced depends on the quantity of T and L: (Q(T,L)).
The graph above shows that output varies with the amount of labor on a fixed amount of land.
The slope shows the marginal product of labor (MPL). Notice, that following the law of diminishing returns, MPL falls as the ratio of land to labor rises.
We can also plot the graph in a different way.
- MPL depends on the quantity of labor
- REAL WAGES earned in a situation of perfect competition = MPL
- The total output of the economy equals the area under the MPL curve
- Wages earned equals real wage rate X amount of labor.
- The remainder are rents earned by landowners
What happens when we get labor movement?
Suppose we have two countries that allow each others’ workers to move freely across their borders.
- Country X has an abundance of workers. This means that wages are relatively low and the rents earned by land are relatively high.
- Country Y has a shortage of workers. This means that wages are relatively high and the rents earned by land are relatively low.
We will assume that the language, culture and skills of workers in X and Y are identical. We will also assume that the costs of moving between X and Y are minimal. In this case there will be a strong incentive for worker from X to move to Y so that they can earn higher wages.
Situation before labor begins to move between X and Y
- OL 1 workers from Country X C = original wage in X
- O*L1 workers from Country Y B = original wage in Y
Situation after labor moves and equilibrium has formed
- OL 2 New wage
- O*L2 New wage
Summary of effects
- Real wages now for both X and Y converge at A
- World output rises by the amount in triangle ABC
- Workers in Y now have lower wages than previously and landowners now earn more rents
- Workers who remained in X gain from the higher equilibrium wage (although they would in real life have had to wait some time until equilibrium was established. The workers who moved first saw higher initial wages). Landowners in X now earn less from rents.
Now watch the video summary of international labor mobility