Problem: Consider an economy that consists of two regions-the North and the South. The elasticity of labor demand in each region is -0.5. The economy-wide labor supply is perfectly inelastic. The labor market is initially in equilibrium, with 600,000 employed in the North and 400,000 in the South at the wage of $15/hour. Suddenly, 20,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native population and supply labor inelastically.
Question 1: What will be the immediate impact on wages in each of the regions in the short run (before any migration between the North and the South occurs)?
Question 2: What will be the effect of this immigration on wages in each of the regions in the long run (after natives respond and migrate across regions)? Assume no change in labor demand.