International Economics

Labor Mobility

Manuel Fernández de la Concha Rebollo (mfernandez0998@hotmail.com)

1. Consider two countries: Germany and Poland.

a) Using a graph compare the wages in Germany and Poland

These countries produced only a product considering capital and labor as factors of
production with the same technology.
In Germany L/K= 4 and in Poland L/K=8
If the marginal product of labor in each country depends on the relative amount of
labor.

L/K MgPL
1 20
2 19
3 18
4 17 Germany
5 16
6 15
7 14
8 13 Poland
9 12
10 11
11 10
12 9
13 8
14 7

MgPL
25
20
15
10 MgPL

5
0
0 5 10 15

b) With labour mobility. Who gains and who loses in Germany

 We assume that the total labor force is constant. Before the mobility in Poland
(Home) the MPL was in point C, and in Germany (Foreign) the MPL was in point C.
The number of workers for Germany was O*L2 and for Poland OL2 before mobility.
If there is mobility as the MPL and so the salaries are bigger in Germany than Poland
there will be a transfer of workers from Poland to Germany till the equilibrium,
which is Point A where MPL are the same for Poland and Germany.
In Germany there will be a decrease of salaries (MPL will go from point B to point A)
but the owners of capital will be better off, because they benefit from the larger
labor supply.

c) Show that the “original” residents of Germany gain with the labor mobility.
As a consequence of the mobility there will be an increase of the output as a whole.
The output in Germany will increase by the area under its marginal curve from L1 to
L2.

2. Consider two countries Spain and Colombia with a production function Y=K^ 1/2
L^1/2

a) Compute the wage rate and the rental price of capital for both countries.
To calculate wage rate and rental price of capital we have to do partial derivatives.
Yk= L^1/2/2 k^1/2
Yl= K^1/2/2 L^1/2

Considering now that in Spain Ls=4 and Ks=16 we obtain that:

Wage rate=1
Capital rental price=1/4
 In Colombia with Lc= 4 and Kc=1 we obtain that:
Wage rate=1/4
Capital rental price=1

b) With labor mobility but not capital mobility.

As the wage rate in Germany is bigger than Colombia there will be emigration from
Colombia to Germany till a new equilibrium which is obtained when the wage rate
will be equal.
To obtain the number of workers in equilibrium we have to solve the system of
equations:
Ls+Lc=8---Lc=8-Ls
In Spain Yls= (Ks^1/2)/2Ls^1/2= 4/(2*Ls^1/2) = 2/Ls^1/2
In Colombia Ylc=1/(2*Lc^1/2)
As now Yls=Ylc and substituting Lc=8-Ls we obtain that Lc=1.6 and Ls=6.4
We have
Before After

Spain 4 6.4

Colombia 4 1.6

TOTAL 8 8

c) Who gains and who loses in Spain

Before After

Spain
Labor 1 0.79
Capital 0.25 0.31
Production 8 10.12

Colombia
Labor 0.25 0.79
Capital 1 0.63
Production 4 2.52

Total prod. 12 12.64

In the above table we have the wage rates and rental price of capital before and after the
mobility. The rates will decrease and the capital rental increases.

d) World production
Also in the table is calculated the production before and after the mobility, as the
economic theory says there have been an increase 12-12.64 units
e) Show that the original residents gain.
Before mobility the production was 8 units, and afterwards was 10.12. There have
being an increase in the production made in Spain.