An economy consists of two regions, the North and the South. The short-run elasticity of labor demand in each region is -0.5. Labor supply is perfectly inelastic within both regions. The labor market is initially in an economy-wide equilibrium, with 600,000 people employed in the North and 400,000 in the South at a wage of $15 per hour. Suddenly, 20,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native residents and also supply their labor inelastically.
(a) What will be the effect of this immigration on wages in each of the regions in the short run (before any migration between the North and the South occurs)?
(b) Suppose 1,000 native-born persons per year migrate from the South to the North in response to every dollar differential in the hourly wage between the two regions. What will be the ratio of wages in the two regions after the first year native labor responds to the entry of the immigrants?
(c) What will be the effect of this immigration on wages and employment in each of the regions in the long run (after native workers respond by moving across regions to take advantage of whatever wage differentials may exist)? Assume labor demand does not change in either region.