Labor Economics Problem Set 6 1. John and Jane live in Lafayette....

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Labor Economics Problem Set 6 1. John and Jane live in Lafayette. John’s net present value of lifetime earnings in Lafayette is $150,000, while Jane’s is $200,000. The cost of moving to Chicago is $10,000 per person. In Chicago, John’s gross present value of lifetime earnings would be $165,000, while Jane’s would be $203,000. a. Compute the change in John’s net present value of lifetime earnings if he moves to Chicago. b. Compute the change in Jane’s net present value of lifetime earnings if she moves to Chicago c. If John and Jane choose where to live based on their joint well-being, will they move to Chicago?, Why? d. Is Jane a tied-mover or a tied-stayer or neither?. Why? e. Is John a tied-mover or a tied-stayer or neither?. Why? 2. Read the following articles from the New York times. The scrambled states of immigration States are divided by the lines they draw on immigration Consider the following model of international migration. The potential migrants originate in country 0, the source country. Suppose the distribution of skills in the source country uniform over the closed interval [1, 100]. That is, worker 1 has 1 efficiency unit of skill, worker 2 has 2 efficiency units of skill, worker 3 has 3 efficiency units of skill and so on. There are 100 workers in the population. In deciding whether to migrate to the United States, these workers compare their earnings in the source country (w0) with their potential earnings in the United States (w1). Suppose it costs $10 to migrate to the United States. The wage-skills relationship in each of the two countries is given by: w0 = 350 + 0.75s w1 = 300 + 1.50s Where s is the number of efficiency units of skill the worker possesses a. What is the threshold skill level, call it s*, that determines which individuals will migrate? b. Draw a graph showing the equations for the weekly earnings in the source country (w0) and the potential earnings in the United States (w1). In that graph, identify the intercepts and slopes, the threshold skill level (S*), which individuals will choose to move from the source country to the United States, and which individuals will choose to stay in the source country? Is the immigrant flow positively or negatively selected?, Why? c. Assume an indifferent person stays in the home country. How many people will choose to move to the U.S? What is their average skill level? What are their average earnings? d. Assume an indifferent person stays in the home country. How many people will choose to stay in the home country? What is their average skill level? What are their average earnings? e. Assume that because stringent immigration policies set up by Border States like Texas and Arizona, the migration cost increases to 15 dollars. What is the new threshold skill level, call it S*, that determines which individuals will migrate? How does the increase in migration cost affect the number of immigrants, the average skill level and earnings of immigrants, and the average skill level and earnings of stayers? f. Suppose that because of more welcoming attitudes towards immigrants, regardless of their legal status, the returns to skill for immigrants in the United States increase so that the wageskills relationship becomes w1 = 300 + 2s. Suppose it still costs $10 to migrate to the United States. How does this affect the number of people who choose to migrate? How does this affect the average skill level of immigrants and stayers? Explain why these changes occur in the way that they do. g. Consider the initial set up of the model. What happens if the United States introduces a welfare system? In particular, suppose that the Unites States sets up an income floor (w1 F=380) below which it will not allow the income of their resident to fall. If any resident of the United States earns less than w1 F=380, the government provides a welfare payment which brings the resident’s income up to w1 F . Assume that immigrants and natives are eligible for welfare in the United States and that the source country does not have a welfare system. Draw a graph showing this new scenario. In that graph, identify the intercepts and slopes, the threshold skill level, which individuals will choose to move from the source country to the United States, and which individuals will choose to stay in the source country? h. How does the introduction of a welfare system in the destination country affect the number of people who choose to migrate and the selection of the immigrant flow? How does it affect the average skill level and wages of immigrants and stayers? Explain why these changes occur the way that they do.

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