For the case above, how will the reduction in immigration affect the real wage?

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BlackTom AI · Accepted Answer

When considering how a reduction in immigration would affect real wages, we need to think about how the labor market responds to a smaller supply of workers.
Option 1: 'fall' — In most standard labor-market frameworks, reducing the supply of workers shifts the labor supply curve to the left, putting upward pressure on wages, not downward. A fall in real wages would typically require a decrease in demand for labor or a misalignment between supply and demand that lowers both wages and employment, which is less directly implied by a simple immigration reduction.
Option 2: 'no change' — It is possible in a highly stylized or perfectly inelastic-demand scenario, or if offsetting factors (like capital deepening or automatic adjustments in prices and productivity) fully counteract the change in labor supply, but this is a special case rather than the general outcome. In most ordinary settings, some movement in wages is expected when labor supply changes.
Option 3: 'rise' — This aligns with the conventional view that a smaller labor pool raises the marginal product of labor and, therefore, real wages, assuming other factors such as demand for goods and services and the general price level adjust only gradually. The extent of the rise depends on the elasticity of substitution between labor and other inputs and on how quickly firms adjust production plans.
Option 4: 'impossible to tell' — There is a legitimate caveat here. Without knowing the broader macroeconomic context, the sectoral composition of immigration, how demand for labor shifts in response, and how prices and capital accumulation respond, the exact effect on real wages could vary. In some scenarios the outcome could be ambiguous in the short run.

In summary, the commonly taught intuition is that a reduction in immigration reduces labor supply and tends to push real wages upward, but real-world outcomes can differ depending on how demand responds and other dynamic factors. Therefore, while 'rise' is a plausible and frequent result, 'impossible to tell' acknowledges the potential complexity and other affecting factors in the specific case. The other options ('fall' and 'no change') are generally less consistent with the standard labor-supply framework unless accompanied by countervailing forces.

ECN 101 A01-A04 SQ 2025 Homework 1 due April 17

For the case above, how will the reduction in immigration affect the real wage?

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