Assume that the wage-skill level relationship in one’s home country W(H) and i
ID: 1188140 • Letter: A
Question
Assume that the wage-skill level relationship in one’s home country W(H)
and in the United States W(US) is given by the equations below.
W(H) = 500 + 2S
W(US) = 325 + 2.5S,
where W is the wage and S is the skill level.
a. By making reference to a numerical value for skill level, determine
which workers will have an incentive to migrate to the United States. Is
this evidence of negative or positive selection? Explain.
b. Now suppose that it costs $20 to migrate to the United States. Who will
migrate to the United States? What has happened to the skill level of
those who elect to migrate? What has happened to the average skill level
in the home country? Why?
Explanation / Answer
W(H) = 500 + 2S
W(US) = 325 + 2.5S
Workers will have an incentive to migrate to the United States if,
W(US) > W(H)
325 + 2.5S > 500 +2S
0.5S > 175
S > 350
Worker with skill level greater than 350 will have the incentive to migrate.
b) Cost to migrate =$20
Hence worker with W(US) > W(S) + 20
325 +2.5S > 500 +2S + 20
0.5S > 195
S > 390
Worker with skill level greater than 390 will have the incentive to migrate.
Average skill level has increased to 390 for those who decide to migrate.
Average skill level of country would decrease because of migration to US.