Graphing Exercise: Immigration

Suppose each worker cares only about getting the highest wage. If information about wage differences is good and migration is costless and unimpeded by restrictive rules in either country, then migration will continue as long as the wages in the two countries are unequal. However, even in this simplified world the flow of workers will affect wage rates, GDP, and the amount of labor and capital income in each country. In this exercise, we'll explore these economic impacts of migration.

 Exploration: How does immigration affect income shares and the value of world GDP?

The applet shows the (hypothetical) aggregate demands for a particular type of labor in both the United States and Mexico. Initially, there are 80,000 workers of this type in the U.S. and 60,000 similar workers in Mexico. Notice also that the demand for labor is lower in Mexico than the U.S., perhaps reflecting differences in the domestic demands for the goods and services these workers produce or in the total amount of capital available. These differences in the sizes of the worker pools and differences in domestic labor demand initially combine to produce lower wages in Mexico than the U.S..

To use the applet, simply click and drag the blue diamond to the left to illustrate migration of workers to the U.S. from Mexico, or to the right to show a reverse flow of workers. Wages and employment will automatically adjust to maintain equilibrium of labor supply and demand in the two countries. The graphs will illustrate changes in GDP, total labor income, and total capital income in both countries. Clicking on the Show gains/losses to: button will toggle between illustrating the changes in GDP, labor income, and capital income in the two countries. Note: the gain or loss to labor includes both the changes in income of those who remain at home and the changes in incomes of migrant workers as well. The change in migrant worker income is calculated as the number of migrants multiplied by their wage gain and is shown on the graph of the destination country.
1. Starting from the initial situation, which direction of migration—from Mexico to the U.S. or from the U.S. to Mexico—will increase combined world GDP?
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2. Under the assumptions stated above—good information accompanied by costless and unimpeded migration—migration will continue as long as wages are different in the two countries. What is the equilibrium amount of migration between the two countries? What is the resulting equilibrium wage in each country?
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3. In equilibrium, what is the impact on GDP in each of the two countries? On combined GDP?
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4. Is the migration-induced increase in U.S. GDP distributed evenly between U.S. workers and U.S. capital owners? Who "wins" and who "loses" in Mexico?
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5. Explore on your own. In general, who loses when labor migrates from a low-wage to a high-wage country?
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