economia internazionale alireza naghavi capitolo 10(b) la...

Economia Internazionale

Alireza Naghavi

Capitolo 10(b)

La mobilità internazionale del lavoro e capitale

2 of 114© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

Introduction

• From May to September 1980, boatloads of refugees from Cuba arrived in Miami.

• This would lead you to believe that these less-skilled workers would drive down wages.

• However, this immigration does not appear to have pulled down the wages of other less-skilled workers in Miami.

• Explaining this effect is one goal of this chapter.


Introduction

• A similar situation occurred with the 1989 emigration of Russian Jews to Israel.� The immigrants were more highly skilled than the

existing Israeli population.� However, the relative wages of high-skilled workers in

Israel actually rose during the 1990s.� In other large scale immigrations, the wages of

domestic workers did fall.

• This chapter will use the short-run model—the specific factors model—to explain the case where immigration leads to a fall in wages.


Introduction

• Next we use a long-run model—the Heckscher-Ohlin model—where an increase in labor will not lower the wages.

• The long-run model gives industries more time to respond which allows the economy to absorb the new workers.

• It comes down to the domestic countries’ ability to expand exports in areas that use the immigrants’ skills.


Movement of Labor Between Countries

• Migration is the movement of labor from the Foreign country to the Home country.

• The wages paid to labor and the rentals paid to capital and land are determined by the prices of goods purchased.

• Prices of goods are determined by the world market for those goods.

• If prices of goods are fixed, how do the Home wage and rentals paid change as labor moves between countries?



• Effects of immigration in the Short Run Specific-Factors Model:� In the short run, only labor is mobile among Home

industries: capital and land are fixed.� This is the specific factors model.� Determining the Wage:

� Total labor, L, is the amount used in manufacturing, LM, plus the amount used in agriculture, LA

� L = LM + LA



• Determining the Wage� Labor in manufacturing is measured from the left.� Labor in agriculture is measured from the right.� PMMPLM is downward sloping because as more labor is

used in manufacturing, the MPL and therefore the wages fall in that industry.

� PAMPLA is upward sloping because we are measuring LA from right to left: as LA increases, MPL and wages in agriculture fall.

� Equilibrium wage is at A where the two curves cross.� When wages are equal across industries, there is no

reason for labor to move between them.



Figure 5.1 Home Labor Market



• Determining the Wage� We assume that the Foreign equilibrium wage, W*, is

lower than Home equilibrium wage, W.� Foreign workers will want to immigrate to Home and the

Home workforce will increase by an amount ∆L, reflecting the number of immigrants.

• Effect of Immigration on the Wage in Home� We add the ∆L to figure 5.1,� The PAMPLA shifts right by ∆L.� The origin for manufacturing has not changed so

PMMPLM does not change.



• Effect of Immigration on the Wage in Home� The new equilibrium Home wage is at B, at a lower

wage.� The extra workers are shared between both industries

since both industries have more workers, but fixed amounts of capital and land.� The wage declines due to the diminishing marginal product of

labor.

� Therefore, the specific-factors model predicts that an inflow of labor will lower wages in the Home country.



Immigration increases total labor by ∆L, shifting the origin to 0A’

The marginal product of labor curve shifts right also by ∆L

Labor has increased and wages have decreased at new equilibrium, B

Figure 5.2

APPLICATION


Immigration to the New World

• Between 1870 and 1913, 30 million Europeans left their homes in the “Old World” to emigrate to the “New World.”

• The U.S. population increased by 17% and the U.S. absorbed the largest number of people.

• The New World had higher real wages� In 1870, real wages in the New World were nearly 3

times higher than in Europe.

• Over time capital accumulated, so real wages in both locations grew, but at a slower rate in the New World.

APPLICATION



Figure 5.3

APPLICATION



• Large-scale migration therefore contributed toward a “convergence” of real wages across the continents.

• Comparing the actual real wages with the no-migration estimates, we see that the growth of wages in the New World was slowed due to immigration.

• Wages in Europe grew slightly faster due to the emigration.

APPLICATION


Immigration to the US and Europe Today

• We no longer see large scale migration from Europe to the “New World.”

• Instead, we see migration from developing countries to wealthier ones.� In many cases, the immigration includes a mix of low-skilled

workers and high-skilled workers.

• In the U.S. much of the recent debate focused on the issue of illegal immigration.� There are about 12 million illegal immigrants in the U.S.� This often obscures the fact that the majority of immigrants are

legal.

• The combination of legal and illegal immigrants in the U.S. creates a U-shaped pattern between the number of immigrants and their educational level.

APPLICATION



Figure 5.4

APPLICATION



• The category of workers without a high school degree has the largest percentage of foreign born workers.

• The group of workers with Ph.D.s has the next largest percentage of foreign-born workers.

• The middle educational levels, which comprise about 80% of the U.S. labor force, has the lowest percentage of foreign-born workers.

APPLICATION



• Illegal immigrants into the U.S. compete primarily with the lowest-educated workers.

• Legal immigrants compete with workers at the highest educational levels.

• Under the specific factors model, the greatest impact on labor will be for the lowest and highest educated U.S. workers.� This is supported by the data.

• The negative impact of immigration on wages is fairly modest for most workers and is offset with capital moves between industries as discussed later.

HEADLINES


EU’s New Tack on Immigration

• Due to a shrinking workforce, Europe’s leaders are looking for ways to attract talented foreigners, even as some countries on the Continent close their borders.

• A new EU-wide “green card” would allow skilled workers already in the 25-nation bloc to change countries without extra paperwork.

• Europe's work force is expected to shrink by 20 million between now and 2040, according to the European Commission.

• Businesses complain regularly about a shortage of highly skilled personnel.

HEADLINES


EU’s New Tack on Immigration

• Commissioner Franco Frattini, the man charged with developing common immigration policies for the EU, has a vision:� A North African engineer could go to work in Europe,

earn good money, and return regularly to his hometown to start and maintain a business.

• Immigration policy is still up to individual countries.

• Mr. Frattini uses the term “brain circulation” instead of the accusatory term “brain drain.”



• Other Effects of Immigration in the Short Run� U.S. and Europe have both welcomed foreign workers

in specific industries: agriculture and high-tech.� They do this even though those foreign workers

compete with domestic workers in those industries.� Therefore there must be benefits to the industries.� We can measure these potential benefits by the

payments to capital and land—rentals.



• Rentals on Land and Capital� Two ways to compute rentals:

� As the earnings left over in the industry after paying labor.

� As the marginal product of capital or land times the price of the good produced in each industry.

� Under either calculation, immigration increases rentals on capital and land.

� Given this, it should not be surprising that owners of capital and land often support more open borders.



• Rentals on Capital and Land� The restriction on immigration should be seen as a

compromise between:� Entrepreneurs and land-owners who might welcome the foreign

labor.� Local unions and workers who view migrants as a potential

source of competition leading to lower wages.� The immigrant groups themselves who might also have the

ability to influence the political outcome of immigration policy.



• Effect of Immigration on Industry Output� We showed before that immigration led to an increased

labor force in each industry.� With more workers and the same amount of capital and

land, output rises in both industries.� Immigration leads to an outward shift in the PPF.� With constant prices of goods, output rises - from point

A to point B in Figure 5.5.� This result depends on the short-run nature of the

specific factors model.� If land and capital are not fixed, as in the long run, one

industry's output will rise while the other will fall.



Immigration causes an increase in home labor which shifts out the PPF, increasing production from A to B,

Figure 5.5


Effects of Immigration in the Long Run

• In the long run, all factors are free to move between industries.

• We will ignore land to simplify.• As before, only capital and labor are used to

produce shoes and computers.• This is similar to the Heckscher-Ohlin model from

before except that labor can move between countries.

• Total capital: K = KA + KM earning rental R.• Total labor: L = LA + LM earning wage W.



• Computers are capital intensive and shoes are labor intensive.� As before, LS/KS > LC/KC and KC/LC > KS/LS

• Again we can see the PPF and show the equilibrium output at point A.� The tangency between the PPF and the world relative

price line.

• How is equilibrium affected by the inflow of labor into Home due to migration?



Figure 5.6



• Box Diagram� Figure 5.7 shows a new box diagram to help us answer

our question.� Length is total amount of labor at Home, L.� The vertical axes measure the total amount of capital,

K, at home, in each industry.� OSA shows the amount of labor and capital used in

shoes and OCA in computers.� The capital-labor ratio in each industry is the slope of

the respective industry line.� OSA is flatter, so capital-labor ratio in shoes is less than in

computers.



L

K

K

L

LS

LC

KC

KS0S

0C

Labor allocated to computers

Capital allocated to shoes

Capital allocated to computers

Labor allocated to shoes

Total Amount of Capital in the Economy

Total Amount of Labor in the Economy

A

Figure 5.7



• Determination of the Real Wage and Real Rental� The wages and rentals are determined by the marginal

products of labor and capital.� The marginal products are determined by the capital-

labor ratio in each industry.� If there is a higher capital-labor ratio, then by the law of

diminishing returns, the marginal product of capital and real rental must be lower and the marginal product of labor and real wage must be higher; the opposite holds for a higher L/K ratio.

� Because each line in the box diagram is a particular capital-labor ratio, it is also a particular wage and rental.



• Increase in the Amount of Home Labor� Immigration leads to increase in the amount of Home

labor to L′ = L + ∆L.� The axes in box diagram expand: figure 5.8.� Instead of allocating the extra labor to both industries,

we allocate it all to shoes—the labor intensive industry.� Moreover, some capital is withdrawn from computers

and allocated to shoes.� To maintain the capital-labor ratio in computers, some

labor will also leave computers to shoes.



• Increase in the Amount of Home Labor� Because both labor and capital increase in shoes, the

capital-labor ratio is unchanged.� The additional labor in the economy is fully employed.� In the box diagram, we show the new origin for shoes

OS due to the increase in labor, ∆L.� At point B, we have a new possible equilibrium.� Remember we said the slopes of the lines showed the

capital-labor ratio.� Notice the slopes of the lines have not changed.



• Increase in the Amount of Home Labor� What has happened to wage and rentals?� Since the capital-labor ratios are unchanged, so are the

marginal products.� Therefore the wages and rentals are unchanged.� This is a very different result from the short-run model.� When capital can move freely between industries,

immigration in the long run has no impact on the wage and rental rates.



A

L

L L’

L’

BK’

K

K’

K

0S0’S

0C

L

∆L

1. Increase in Home labor due to immigration: additional labor (∆L) allocated to shoes

2. Decrease in Capital in the Computer industry

3. Increase in Capital in the Shoe industry

4. Decrease in Labor in the Computer industry

5. Additional increase in Labor in the Shoe industry

Increase in Home LaborFigure 5.8



• Effect of Immigration on Industry Outputs� Since the factors of production both increase or

decrease, it makes sense that output will follow the same trend.� Since labor and capital moved to shoes, shoe output expands

and capital production contracts.

� On our PPF, due to the increase in labor, the PPF shifts out more in the direction of shoes.

� Since prices are unchanged, the economy moves to equilibrium at point B in Figure 5.9.� More shoe production and less computer production

� This only holds in the long run.



Output of Computers, QC

Output of Shoes, QS

Relative Price of Computers, PC/PS

Shift in Home PPF due to immigration

An increase of both capital and labor in shoe production causes an increase in shoe output and a decrease in computer output

The Long-Run Effect on Industry Outputs of an Increase in Home Labor

Figure 5.9



• The long run result we just showed was named after economist T.N. Rybczynski, who first discovered it.

• Rybczynski Theorem:In the Heckscher-Ohlin model with two goods andtwo factors, an increase in the amount of a factorfound in an economy will increase the output ofthe industry using that factor intensively anddecrease the output of the other industry.



• Effect of Immigration on Factor Prices� Notice that the change in outputs in the Rybczynski

Theorem goes hand-in-hand with the finding that wage and rental will not change due to the increase in labor (or capital).

� That is because the economy can absorb the extra amount of labor by changing output.

• Factor Price Insensitivity:In the Heckscher-Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices.


Gains from Labor and Capital Flows

• Why is immigration so controversial?� Some groups oppose the spending of public funds on

immigration.� Other groups fear the competition for jobs created by

an inflow of workers.

• Does immigration provide an overall gain to the host country, not including the gains to the immigrants themselves?

• Are there overall gains to the destination country, in the same way as we have found overall gain from trade?


Gains from Labor and Capital Flows

• Immigration benefits the host country in the specific factors model.

• If immigrant earnings with Foreign income are included then emigration benefits the Foreign country, too.

• We will discuss the overall gains from immigration.


Gains from Immigration

• To measure gains from immigration we will use the specific-factors model.

• We look at the total world labor with the Home and Foreign labor together: L + L*.

• Home workers are measured from the left and Foreign workers are measured from the right—on the horizontal axis.

• We can see how many workers are located in each country.



• Wages at Home and Abroad� As immigrants enter the Home country, the wage is

reduced.� The downward-sloping line—Home wage: W at point A

in Figure 5.14.� Foreign workers enter and labor force grows—Home

wage reduced to W′ at B.� Labor demand curve for economy as a whole

� The same holds for Foreign: wage at W* at point A*. � Labor force in Foreign shrinks and wage rises:

W′ at point B.



• Wages at Home and Abroad� Point B is equilibrium with full migration.� Wages are equalized at W′. � Equilibrium with full migration is reached only in the

very long run.� Has this migration benefited the workers (not including

the immigrants) in the Home country? � Has migration benefited the Foreign country, including

the migrants?



• Gains for the Home Country� We need to measure the contribution of each Foreign

worker to the output of one good or the other in that country.� Home Wage = MPL*P� The first Foreign worker to migrate has a marginal product

equal to the Home wage (W at point A). � As more Foreign workers migrate, the MPL falls due to

diminishing returns.� The immigrants’ marginal product is measured by the wage

which falls from W to W′.



• Gains for the Home country� At equilibrium at point B, all Foreign immigrants are

paid the Home wage of W′. � Even though all workers are paid the same wage, the

first worker had an MPL equal to W.� Each additional worker had the MPL equal to some

point between W and W′. � The last worker has an MPL = W′. � So there has been a gain in production for every worker

up to the very last worker.� The output of goods in the Home economy exceeds the

wage that they are paid.



• Gains for the Home country� The difference between the marginal products of the

workers and the wage paid is the gain for the Home economy.

� Adding up all the gains from the Foreign workers, we get triangle ABC.� Home gains due to full immigration.



• Gains for the Foreign Country� We need to include the wages received by the migrants

who left when calculating Foreign income.� These wages are often returned to their families.

� Even if the wages are not sent back, we still incorporate them in the measure of Foreign income since that is where the migrants originally came from.

� Foreign Wage W* = MPL*P.� As foreign workers emigrate, MPL in Foreign rises,

Foreign wages rise from W* to W′.



• Gains for the Foreign Country� Each of these higher marginal products or wages,

between W* and W′, equals the drop in foreign output from workers leaving.

� The wage Foreign workers earn in Home is much higher than their Foreign marginal products of labor: between W* and W′.

� The difference between the wage earned by the migrants and their Foreign marginal products is the gain to Foreign.

� Adding up all the gains to foreign immigrants we obtain the triangle A*BC.� This gain represents the earnings of the emigrants over and

above the drop in output that occurs when they leave Foreign.


Gains to Foreign

Gains to Home


0 0’

Wage, W

L L*

World amount of labor

A

A*

W

W*

L

BW’ C

L’

Home Wage

Foreign Wage The Home wage, W

determined by A, is higher than the Foreign Wage W* at A*

The gains to Home and Foreign from migration can be shown.

Workers move from Foreign to Home until equilibrium is reached at C, full migration, with wages equalized at W’

World Labor Market

Figure 5.14

SIDE BAR


Immigrants and Their Remittances

• Immigrants often send a substantial portion of their earnings back home—remittances.

• The International Monetary Fund (IMF) estimates that remittances were $126 billion in 2004, up from $72.3 million in 2001.

• Table 5.3 shows the remittances received by some developing countries, as compared with their net foreign aid, in 2000.

• The income sent home by immigrants is a larger source of income than is official aid.

SIDE BAR



Table 5.3

SIDE BAR


Immigrants and Their Remittances

• The fact that immigrants return some of their income back home may not be enough to compensate their home countries for the loss of their labor.

• To calculate the gains, we need to include all the earnings of the immigrants in their home countries’ income.� In the case of highly-educated migrants, unless these migrants

return most of their earnings back home those countries lose from the outflow of these workers.

• Jagdish Bhagwati, an economist, has proposed that countries impose a “brain drain” tax on the outflow of educated workers.



• World Gains from Migration� Combining the gains to the Home and Foreign

countries we obtain the triangular region ABA*, the world gains due to immigration.

� We can measure the area of this triangle but we need to know the difference in wages before any migration and the number of people who would emigrate.

� One way to think about world gains from migration is that it equals the increase in world GDP due to immigration.

� We can then say the difference between the Home and Foreign wages therefore equals the net increase in world GDP due to migration.



• World Gains from Migration� Adding this up across all migrants, we get the triangle

ABA*, the increase in world GDP and the world gains due to migration.

� In practice, however, there are other costs that immigrants bear which would make the gains from immigration less than the increase in world GDP.� Moving costs, payments to traffickers of illegal immigrants.

� These costs must be subtracted from the increase in GDP in order to obtain the net gains.


Conclusions

• Immigration potentially affects the wages in the host country where the workers arrive.

• In the short-run specific-factors model, a larger supply of workers due to immigration will lower wages.

• The arrival of immigrants is beneficial to owners of capital and land in the specific factors model.� As wages are reduced in the short run the rental on

capital and land will rise.


Conclusions

• In the long run, when capital can move between industries, the fall in wage will not occur.

• Industries that use labor intensively can expand, and other industries contract, so that the immigrants become employed without any fall in wages.� Rybczynski

• Immigration creates world gains as labor moves from countries with low marginal products to countries with high marginal products.

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