Consider two competitive labor markets: the agricultural labor market in the USA and the agricultural labor market in Mexico.Suppose the agricultural sector uses two factor inputs: labor and land.The major output is corn.Labor may move between these markets costlessly (a simplifying assumption; migration has obvious costs).Land supplies are fixed in the short run and long run.Land cannot move (ignore plate tectonics).

Starting in the 1990s, the North American Free Trade Agreement (NAFTA) allowed US farmers to sell their highly-subsidized, low-priced corn in Mexican agricultural markets.Within 10 years, corn prices in Mexico fell by two-thirds.

(a) Using standard assumptions, discuss the effects of this shock on wages and employment in both markets, all else equal.response in the textbox below.

(b) Illustrate your argument(s) with a diagram