Question

Migration between North Korea and South Korea has been prohibited since the end of the Korean War in \(1953 .\) South Korea is now much richer than North Korea and has a much higher marginal product of labor and a much higher wage rate than North Korea. If workers could migrate from North Korea to South Korea, we would expect: \(L O 25.3\) a. Output to fall in South Korea but rise in North Korea. b. Output to rise in each country. c. Total combined output in the two countries to fall. d. Total combined output in the two countries to rise.

Short answer

Total combined output in the two countries would rise.

Step-by-step solution

Understand Economic Terms

First, let's clarify the terms in the problem. The 'marginal product of labor' refers to the additional output produced by adding one more worker. A 'higher wage rate' in South Korea suggests that labor is more productive there. This means output increases significantly with additional labor.

Effects of Migration on South Korea

If workers from North Korea, where the marginal product of labor is low, migrate to South Korea, where the marginal product is high, these workers will contribute to an increase in total output due to the efficient utilization of labor and resources in South Korea.

Effects of Migration on North Korea

With fewer workers in North Korea, the average productivity per remaining worker may increase, but the total workforce declines. The overall output in North Korea might decrease initially due to reduced labor, though the remaining workers may become more productive.

Combined Output Analysis

The total combined output of both countries will likely increase. The greater productivity and efficient resource allocation in South Korea will offset the initial decline in output from North Korea, resulting in a net increase in total combined output.

Key concepts

Marginal Product of Labor Explained

The marginal product of labor (MPL) is an essential concept in understanding labor migration's impact on a country's economy. It refers to the additional amount of output a company gains from an extra worker being employed. Think of it as how productive the next hired worker will be. This is crucial because, in countries like South Korea with a high MPL, each worker contributes significantly to increased total output.

In contrast, in North Korea, where the economy is less developed, the MPL is lower. This means that additional workers don't significantly boost output because resources are not utilized as effectively. The gap in MPL between two regions often drives labor migration since workers tend to move towards areas offering higher productivity and, consequently, better wages.

Thus, if North Korean workers migrate to South Korea, they transition from a low MPL environment to a high MPL one, where their labor produces considerably more output. This change highlights the economic potential in regions with better resource utilization and technology.

Understanding Wage Rate Differences

Wage rate differences between countries like North Korea and South Korea are driven largely by the differences in productivity, as reflected by the marginal product of labor. The wage rate is essentially the payment for labor services. When the MPL is high, as it is in South Korea, workers are more productive, and employers are willing to pay higher wages.

In North Korea, lower productivity leads to lower wages due to the limited value addition each worker brings. This difference creates a strong incentive for workers to migrate to regions with higher wages. When workers see higher potential earnings in another country, they naturally seek to maximize their income by moving to regions with a higher MPL.

Migration thus causes an adjustment in labor supply and demand between countries, smoothing out wage rate discrepancies over time. It can eventually lead to wage equalization, balancing economic opportunities across regions and making labor markets more efficient.

Resource Allocation Efficiency

Resource allocation efficiency refers to how well an economy uses its resources to produce goods and services. It's about getting the most value out of a country's available resources, like labor. Efficient resource allocation implies that labor is directed to the sectors or regions where it is most productive.

When workers move from North Korea to South Korea, they contribute to a more efficient allocation of resources. South Korea can better utilize its workers thanks to its advanced technology and capital, compared to North Korea. This results in a higher total output, as labor is employed in the most productive way possible. In economic terms, South Korea's efficient resource allocation supports higher productivity and economic growth.

Moreover, migration can help balance the labor force in each country. In South Korea, it can address labor shortages and enhance growth, while in North Korea, it may lead to improved productivity per remaining worker, as fewer workers use the same resources more effectively. Overall, efficient resource allocation driven by migration can enhance economic welfare in both regions.