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ECON - Problem Set B

Immigration versus Skills Upgrading in the H-O Model

Consider the H-O model where the world economy consists of two countries, Home and For- eign. Home is endowed with high-skilled workers of mass S and unskilled workers of mass N.  Sc  high-skilled workers and Nc  unskilled workers are hired to produce Yc   =  Sc(α)Nc(1) −α units of cars, while Sg  high-skilled workers and Ng  unskilled workers are hired to produce Yg   = Sg(β)Ng(1) −β  units of garments.  The car industry uses high-skilled labor more intensively than the garment industry, e.g., α =  > β =  . Both high-skilled and unskilled workers are freely mobile across the two industries within the same country, Sc +Sg  = S and Nc +Ng  = N.  Take garments as the unit of account, i.e., Pg  = 1. Pc denotes the relative price of car in terms of garments. Let Ws and Wn denote the respective wage rate of high-skilled and unskilled

labor. The wage ratio is defined as the skill premium

Workers have the conventional preference over garments and cars, represented by the con- vex indifference curve as in the lectures. Use the asterisk superscript for the variables in For- eign. The table shows the factor endowment in the two countries.

(a) Both countries are initially under autarky. Use the PPF curve and the indifference curve to show the consumption and production allocation in the two countries. Which country has a comparative advantage in garments? Explain your results intuitively.

(b) Use the diagram to show how changes in the skill premiumW(W)n(s)  affect the relative skilled- unskilled labor demand in each sector (N(S)c(c)   and ). Use the diagram to show the equilibrium determination of skill premium under autarky.

(c) Suppose that Home and Foreign move from autarky to free trade. How does trade affect the relative price of car in Home? Explain whether trade benefits skilled labor in Home.

(d) Suppose that Home and Foreign are under free trade.  If Home approves immigrant inflows of 20 skilled workers from Foreign, how does it affect Home’s PPF and sectoral pro-

duction?  Use the diagram to show the impacts of immigrant inflows on the skill premium and the sectoral skilled-unskilled labor ratio (N(S)c(c)   and ). Use the box diagram to show how immigrant inflows affect the sectoral inputs of high-skilled and unskilled labor.

(e) Suppose that Home and Foreign are under free trade. Rather than allowing immigrant inflows, the Home government decides to introduce the training programme, which upgrades 20 unskilled workers into high-skilled workers. How does it affect Home’s PPF and sectoral production? Use the diagram to show how this programme affects the skill premium and the sectoral skilled-unskilled labor ratio. Use the box diagram to show how this programme affects the sectoral inputs of the two types of labor.