There are only two countries in the world: Richland and Poorland. The labor demand curve in Richland
Question:
There are only two countries in the world: Richland and Poorland. The labor demand curve in Richland is given by:
W = K – 4L
Where W is the salary, K is a variable determined by the accumulated capital stock in the country and L is the labor force in the country. K = 500 is initially supplied by the capitalists in Richland. There is no depreciation.
Next to Richland, is Poorland. Poorland is poor and has an Arthur Lewis type dual economy. A large number of workers in the agricultural sector are not productive, they are disguised as unemployed with a marginal product of labor equal to zero. They are looking for jobs in Richland. The salary in Poorland is institutionally set at W = 10.
Nationalists in Richland argue that a more open immigration policy will reduce wages in Richland.
But globalists argue that it will be good for global well-being.
However, due to a loophole in the immigration system, 10 workers were able to immigrate to Richland.
As a result of this, Richland's workforce increases to 110 (L = 110 now). All workers work no matter what the salary is.
The nationalists are furious: they want the 10 migrant workers deported. The globalists are, of course, happy. Richland's chief economist offers a compromise. The economist points out that capitalists and immigrants benefit from immigration. So both capitalists and immigrants in Richland would have to pay a tax on the additional income they received as a result of migration. Tax revenue collected would be given to original Richland workers who suffered wage loss due to immigration.
Show your calculations and answer the following questions. You don't need to draw any graph (you can draw the graph on your scrap paper, but don't carry it).
Due to the immigration of 10 workers from Poorland to Richland:
(a) How much does Richland's salary change?
(b) How much does World Welfare change?
(c) How much do the incomes of capitalists change in Richland?
(d) How much do immigrants' total wages change (compared to their wages in Poorland)?
(e) If we follow the suggestion of the Richland economist, what would be the flat marginal tax rate (tax imposed on the additional income that capitalists and immigrants accumulate due to migration) that will exactly compensate Richland workers for their loss? of salaries? Find out the tax percentage that will do the job.