Consider a production model with two inputs-domestic labor (EDom) and foreign labor (EFor). The market is originally in equilibrium in that

Then a wage shock occurs to cause a substantial amount of outsourcing. Specifically, as a result of the shock, EDom falls considerably while EFor increases considerably.
(a) Show that the shock either increased the domestic wage or decreased the foreign wage, at least relatively.
(b) In the years following the shock, what are three (significantly different) policies that the domestic country could employ if it wanted to reverse the outflow of labor?

Transcribed Image Text:

MP3diom MPsjor dom