The prediction that unrestricted trade causes a convergence of wages across the trading countries seems quite stark: Is it really the case that U.S. wages will converge to the wages in the third world if trade is unrestricted? We will consider this here.

A. Workers in the U.S. have significantly more human capital€”education, skills, etc. €”than workers in Bangladesh. As a result, workers in the U.S. have a higher marginal product of labor.

(a) Begin by illustrating the U.S. and the Bangladesh labor markets side-by-side, with demand and supply in Bangladesh intersecting at a lower wage in the absence of trade and migration than in the U.S.

(b) Suppose workers in the U.S. are 20 times as productive per hour as workers in Bangladesh. To account for this, interpret the wage in your U.S. graph as the €œwage per hour€ and interpret the wage in Bangladesh as the €œwage per 20 hours€ of work. What will happen when trade between the U.S. and Bangladesh opens and U.S. companies outsource production?

(c) Does your graph look any different than our outsourcing graphs in the text? Does it still imply that wages for U.S. workers will converge to wages of Bangladeshi workers?

(d) True or False: In order for true convergence of wages to emerge from trade and outsourcing, countries in the developing world will have to first invest in schooling and other forms of human capital accumulation.

(e) True or False: Under a full free trade regime across the world, differences in wages across countries will arise entirely from differences in skill and productivity levels of workers.

B. Consider the case where U.S. workers are k times as productive as Bangladeshi workers. Suppose labor demand and supply in Bangladesh are given by

while labor supply in the U.S. is given by

Since firms care about both wage costs as well as labor productivity, suppose that labor demand in the U.S. is given by

(a) Derive the wage w^US in the U.S. and the wage w^B in Bangladesh if there is no trade or migration. (b) Suppose trade between the U.S. and Bangladesh opens€”and U.S. firms outsource some production that used to take place in the U.S. to Bangladesh. Suppose that the impact in labor markets is equivalent to immigration of X Bangladeshi workers to the U.S. Determine the new wage w^B (X ) in Bangladesh and w^US (X ) in the U.S.

(c) At the equilibrium level of migration X ˆ—, what is the relationship between w^US (X ^ˆ—) and w^B (X ^ˆ—)?

(d) Use this relationship to calculate the equilibrium level of migration that the outsourcing of U.S. production is equivalent to.

(e) Suppose that A = 16,000, B = ˆ’1,000, C = 160,250, D = ˆ’10,000, α = 0.00018, β = 0.00002, γ = 0.0007 and δ = 0.0002. Suppose further that k = 20 €” i.e. U.S. workers are 20 times as productive as Bangladeshi workers. What is w^B and w^US in the absence of trade? What is the employment level in the U.S. and in Bangladesh?

(f) When trade is opened up and we determine the migration level X ^ˆ— that free trade is equivalent to, what is X ^ˆ—?

(g)What are the equilibrium wages in the U.S. and in Bangladesh in the new equilibrium? What are employment levels in the two countries?

Transcribed Image Text:

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