Potential Econ 101 Exam Question:
Suppose the supply of lower-wage workers suddenly decreases. a) What is the effect on wages and employment in sectors dependent on lower-wage workers? b) What is the effect in output markets dependent on employment of input markets that employ lower-wage workers?
In your answer please use basic supply and demand analysis, graphs, and provide an example as illustration. If possible, provide a mainstream news story to support your analysis.
Suggested Answer:
a) If the supply of lower-wage workers decreases (shifts to the left) the the total number of workers employed in lower-wage jobs will decrease and the wages for those lower-wage workers still working will increase (see graph below):
Example: If a new immigration policy results in the deportation of large numbers of lower-wage workers, the total number of workers employed in lower-wage sectors will decrease and the wages of those workers working in lower-wage jobs will increase. For arguments sake, let's call the workers legal and illegal, and suppose that illegal workers are willing to work for lower wages. This means lower-wage workers fall at the lower tail of the worker supply curve (they will be in the southwest corner of the graph). If mass deportation of illegal workers occurs, and wages do not rise, then total employment in these sectors will fall by the amount of the deportation. But because lower-wage demanding illegal workers have displaced higher-wage demanding legal workers, employers in these sectors will begin to offer higher wages and draw some of the higher-wage legal workers into these sectors. The end result is higher wages in these sectors, fewer total workers employed in these sectors, but more legal workers working in these sectors (at higher wages) than before. A WIN for legal workers.
b) But we need to recognize that higher wages in these sectors represent an increase in input prices for output markets reliant on these inputs. An increase in inout prices shows up as a decrease in supply in the output market and higher output prices and lower output quantities (see graph):
Example (cont'd): The decrease in the supply of workers due to a new deportation immigration policy will result in an increase in prices for outputs that rely on lower-wage workers for production. For example, the prices of most domestically produced fruits and vegetables are likely to increase as a result of the decrease in availability of lower-wage workers and the higher wages for the legal workers. That a LOSE for domestic fruit and vegetable consumers.
In addition, the higher prices of domestic fruits and vegetables will increase the pressure to import fruits and vegetables from countries that can produce fruits and vegetables with lower-wage workers AND the higher wages for legal workers will increase the incentives for domestic producers to lower costs in other ways, likely through technological improvements that reduce the demand for higher-wage legal workers.
Mainstream news story to support my analysis (From the Washington Post):
President-elect Donald Trump has promised a major crackdown on illegal immigration, triggering immense alarm among the country's 11 million undocumented people. But Trump’s deportation promises, if fulfilled, would ripple far beyond the lives of illegal immigrants. Deportations would affect vast swaths of the economy — with a particularly dramatic impact on agriculture.
As a result, Americans could see the cost of some fruits and vegetables soar.
Undocumented workers account for 67 percent of people harvesting fruit, according to the Agriculture Department. They make up 61 percent of all employees on vegetable farms, and as many as half of all workers picking crops.
Agricultural economists across the political spectrum say that there’s no way that workforce could be raptured up without reverberations throughout the food system — think farm bankruptcies, labor shortages and an eventual contraction of the broader economy. And even if you’re far from the agriculture industry, you could see $4 milk, low-quality oranges, and extortionately priced raspberries.
The logic behind these dire predictions is pretty straightforward. If Trump were to begin deporting farmworkers or requiring that farms verify their work status, farmers would have three ways to fill in the labor gaps. They could hire legally authorized workers, who are vastly more expensive; switch away from crops that require human laborers to harvest them; or cut production, allowing fields to fallow and fruit to go unharvested.
Whichever way you slice it, farmers pay more to produce less — which could squeeze the budgets of the very Americans who supported Trump’s immigration message. To many of them, mass deportation sounded attractive in the abstract. But practically speaking, the economy is so complex — and so interdependent — that Trump could not possibly deport the country’s 11 million undocumented people without also impacting middle-Americans’ wallets.
In fact, to keep costs under control, Americans may end up being forced to buy more groceries from abroad, undermining Trump's effort to boost American industry.
