14.64 Labor Economics and Public Policy, Problem Set 1 Solution

Borjas, Problem 4­4 This question asks how the wages of (presumably high‐skilled) natives should change when there is a change in the quantity of available low‐skilled (immigrant) labor assuming that natives and immigrants are complements. Whenever two factors of production are complementary, an increase in one increases the returns to another. So in this case, the llegal alien hiring penalties raises the cost of unskilled labor, lowering the amount of nskilled labor that is hired which reduces the returns to skilled labor, lowering their wage. i u Borjas, Problem 4­6 Elasticity of demand for labor is –0.5. This implies that a 1% increase in wages reduces mployment by 0.5%. Alternatively (just flipping the fraction), an increase in employment y 1 e r e b % reduces the wag offe ed by firms by 2%.