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 labor supply curve in both regions is perfectly inelastic. The labor market is initially in an economywide equilibrium, with workers in each region earning $15 per hour. Suddenly, 20,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native residents and also supply their labor inelastically.
1. What will be the effect of this immigration on wages in each of the regions in the short run (before any migration between the North and the South occurs)? Illustrate your answer using a graph.
2. Suppose that there is a housing shortage in the North so that workers are unable to move from the South to the North. What will be the effect of this immigration on wages in each of the regions in the long run? Illustrate your answer using a graph.