Transcript Movement of Labor and Capital Between Countries

5
MOVEMENT OF LABOR
AND CAPITAL BETWEEN
COUNTRIES
1
Movement of Labor
Between Countries
2
Movement of
Capital between
Countries
3
Gains from Labor
and Capital Flows
4
Conclusions
Chapter Outline
• Introduction
• Movement of Labor Between Countries
 Effects of Immigration in the Short Run: Specific
Factors Model
 Determining the Wage
 Effect of Immigration on the Wage in Home
 Other Effects of Immigration in the Short Run
 Rentals on Capital and Land
 Effect of Immigration on Industry Output
 Effects of Immigration in the Long Run
 Box Diagram
 Determination of the Real Wage and Real Rental
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Chapter Outline
 Increase in the Amount of Home Labor
 Effect of Immigration on Industry Outputs
 Effect of Immigration on Factor Prices
• The Movement of Capital between Countries:
Foreign Direct Investment
 Greenfield Investment
 FDI in the Short Run: Specific-Factors Model
 Effect of FDI on the Wage
 Effect of FDI on the Industry Outputs
 Effect of FDI on the Rentals
 FDI in the Long Run
 Effect of FDI on Outputs and Factor Prices
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Chapter Outline
• Gains from Labor and Capital Flows
 Gains from Immigration




Wages at Home and Abroad
Gains for the Home Country
Gains for the Foreign Country
World Gains from Migration
 Gains from Foreign Direct Investment
• Conclusions
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Learning Objectives
• Understand the movement of labor between
countries.
• Understand the short run model—Specific Factors
Model.
• Understand the effect of immigration on the
wages in Home and Foreign.
• Understand the effect of immigration on the
rentals on capital and land and industry output.
• Understand the effects of immigration in the long
run
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Learning Objectives
• Understand how to determine the real wage and
rental rate.
• Understand the long run effects of the increase in
the amount of home labor on industry output and
factor prices.
• Understand Factor Price Insensitivity.
• Understand the movement of capital between
countries—FDI.
• Understand FDI in the short run–specific factors
model.
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Learning Objectives
• Understand the short run effects of FDI on wages,
rentals, and industry output.
• Understand the effects of FDI in the long run—on
factor prices and industry output.
• Understand the gains from labor and capital flows
at home and abroad.
• Understand the gains from foreign direct
investment.
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Introduction
• From May to September 1980, boatloads of
refugees from Cuba arrived in Miami.
• This would lead you to believe that these lessskilled 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.
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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.
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Introduction
• Next we use a long-run model—the HeckscherOhlin 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.
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Introduction
• After looking at what happens in the short run and
long run when labor moves across countries, we
will consider the effects of movement of capital.
• Foreign Direct Investment (FDI) occurs when a
company from one country owns a company in
another country.
• Finally, we will discuss the gains to the host and
destination countries, and to the world, from the
movement of labor and capital.
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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?
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Movement of Labor Between Countries
• Effects of immigration in the Short-Run SpecificFactors 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 + L A
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Movement of Labor Between Countries
• Determining the Wage




We use the graph from chapter 3.
Labor in manufacturing is measured from the left.
Labor in agriculture is measured from the right.
Both PMMPLM and PAMPLA are upward sloping as more
labor is used in a specific industry, the MPL and
therefore the wages fall in that industry.
 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.
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Movement of Labor Between Countries
Home Labor Market
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Movement of Labor Between Countries
• 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 ΔL,
reflecting the number of immigrants.
• Effect of Immigration on the Wage in Home
 We add the ΔL to figure 5.1,
 The PAMPLA shifts right by ΔL.
 The origin for manufacturing has not changed so the
PMMPLM does not change.
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Movement of Labor Between Countries
• 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.
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Movement of Labor Between Countries
The marginal
Immigration
product oftotal
increases
laborby
curve
labor
L,
shifts
right
shifting the
also by
origin
to L
0A’
Labor has
increased and
wages have
decreased at new
equilibrium, B
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Immigration to the New World
APPLICATION
• 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
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.
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Immigration to the New World
APPLICATION
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Immigration to the New World
APPLICATION
• Large-scale migration therefore contributed
toward a “convergence” of real wages across the
continents.
• Comparing the actual real wages with the nomigration 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.
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Immigration to the US and Europe Today
APPLICATION
• We don’t see large scale migration from Europe to the
“New World.”
• In many cases, the immigration includes a mix of lowskilled 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.
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Immigration to the US and Europe Today
APPLICATION
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Immigration to the US and Europe Today
APPLICATION
• The category of workers without a high school
degree holds the largest amount of foreign born
workers.
• The group of workers with Ph.D.s holds the next
largest group of foreign-born workers.
• The middle educational levels, which comprise
about 80% of the U.S. labor force, have the
lowest percent of foreign-born workers.
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Immigration to the US and Europe Today
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.
• The negative impact of immigration on wages is
fairly modest for most workers and is offset with
capital moves between industries as discussed
later.
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EU’s New Tack on Immigration
HEADLINES
• 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.
• Business complain regularly about a shortage of
highly skilled personnel.
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EU’s New Tack on Immigration
HEADLINES
• 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.”
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Movement of Labor Between Countries
• 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.
 Use the same two measurements for rentals as in
chapter 3.
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Movement of Labor Between Countries
• 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.
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Movement of Labor Between Countries
• 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.
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Movement of Labor Between Countries
• 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.
 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.
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Movement of Labor Between Countries
Immigration causes an increase in
home labor which shifts out the
PPF, increasing production from A
to B,
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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.
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Effects of Immigration in the Long Run
• 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?
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Effects of Immigration in the Long Run
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Effects of Immigration in the Long Run
• 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 OAC 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.
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Effects of Immigration in the Long Run
Labor allocated to computers
LC
L
0C
KC
Total Amount
of Capital in
the Economy
Capital
allocated to
computers
K
A
K
Capital
allocated to
shoes
KS
0S
LS
L
Labor allocated to shoes
Total Amount of Labor in the Economy
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Effects of Immigration in the Long Run
• 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 capitallabor ratio in each industry.
 If there is a higher capital-labor ratio, then by the law of
diminishing returns, the marginal product and real
rental must be lower and vice versa.
 Because each line in the box diagram is a particular
capital-labor ratio, it is also a particular wage and rental.
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Effects of Immigration in the Long Run
• Increase in the Amount of Home Labor
 Immigration leads to increase in the amount of Home
labor to L′ = L + ΔL.
 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.
 This leads to some capital being withdrawn from
computers and allocated to shoes.
 To maintain the capital-labor ratio, some labor will also
leave computers to shoes.
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Effects of Immigration in the Long Run
• Increase in the Amount of Home Labor
 Because both labor and capital increase, the capitallabor ratio is unchanged.
 Due to this, 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, ΔL.
 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.
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Effects of Immigration in the Long Run
• 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.
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Effects of Immigration in the Long Run
Increase in Home Labor
4. Decrease in Labor in the Computer industry
L’
L
3. Increase in
Capital in the
Shoe industry
K’
B
K
1. Increase in
Home labor due to
immigration:
additional labor
(ΔL) allocated to
shoes
L
0S
K’
2. Decrease in
Capital in the
Computer
industry
K
A
0’S
0C
L’
5. Additional
increase in Labor
in the Shoe
industry
ΔL
L
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Effects of Immigration in the Long Run
• 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.
 More shoe production and less computer production
 This only holds in the long run.
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Effects of Immigration in the Long Run
The Long-Run Effect on Industry Outputs of an Increase in
Home Labor
Output of
Shoes, QS
Shift in Home
PPF due to
immigration
Relative Price of
Computers, PC/PS
An increase of both
capital and labor in
shoe production
causes an increase in
shoe output and a
decrease in computer
output
Output of Computers,
QC
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Effects of Immigration in the Long Run
• 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 and
two factors, an increase in the amount of a factor
found in an economy will increase the output of
the industry using that factor intensively and
decrease the output of the other industry.
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Effects of Immigration in the Long Run
• 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.
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The Effects of the Mariel Boat Lift on Industry Output in
Miami
APPLICATION
• Figure 5.10 panel (a) shows real value added in
the apparel industry for Miami and the average of
comparison cities.
• Real value added measures the payments to
labor and capital in an industry corrected for
inflation.
 A way to measure the output of the industry.
 We adjust for city size by looking at value added per
capita.
• The industry decline in Miami is slightly slower
than in comparison cities after 1980.
 Some evidence of the Rybczynski Theorem.
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The Effects of the Mariel Boat Lift on Industry Output in
Miami
APPLICATION
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The Effects of the Mariel Boat Lift on Industry Output in
Miami
APPLICATION
• Panel (b) shows the output of a group of skillintensive industries.
• These industries fell more rapidly in Miami after
1980.
• This could also be some evidence of the
Rybczynski Theorem although there was also
some decline in population of some more skilled
workers at that point as well.
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The Effects of the Mariel Boat Lift on Industry Output in
Miami
APPLICATION
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The Effects of the Mariel Boat Lift on Industry Output in
Miami
APPLICATION
• Wages did not really change during this time.
• Is this also from the Rybczynski Theorem?
• During this time, computer use in manufacturing was
increasing significantly.
• This increase was much slower in Miami than in similar
cities.
• One explanation is that firms employed the Mariel
refugees and other low-skilled workers rather than
switching to computer technologies.
• This is just another example of how the refugees could be
absorbed across many industries.
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Immigration and US Wages, 1990 - 2004
APPLICATION
• There has been slightly more than a doubling of
foreign-born persons in the U.S. in 25 years.
• Part A of Table 5.1 reports the estimated impact
of immigration over 1990-2004 on wages of
various workers, distinguished by education level.
• Part A is from the specific factors model
 Greatest impact on workers with less than 12 years of
education.
 Average impact on U.S. wages is -3.2%
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Immigration and US Wages, 1990 - 2004
APPLICATION
• Let’s allow capital to grow in each industry to
accommodate the inflow of immigrants.
• Total U.S. immigration has a negative impact on
only the lowest and highest-educated workers.
• Positive impact on other workers.
• The overall wage rises by 0.3%
• Part B looks at illegal immigration only.
 Only the wages of the lowest-educated persons are
negatively affected.
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Immigration and US Wages, 1990 - 2004
APPLICATION
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Movement of Capital between Countries:
Foreign Direct Investment
• We can now look at how capital moves from one
country to another through foreign direct
investment (FDI).
 When a firm from one country owns a company in
another country.
• U.S. Department of commerce uses a 10% rule to
determine FDI.
 If a foreign country acquires 10% or more of a U.S. firm,
that is FDI inflow to the U.S.
 If a U.S. company acquires 10% or more of a foreign
firm then that is FDI outflow from the U.S.
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Movement of Capital between Countries:
Foreign Direct Investment
• Greenfield FDI—when a company builds a plant
in a foreign country.
• Acquisition FDI (or Brownfield FDI)— when a firm
buys an existing foreign plant.
 E.g. inflow of investment into eastern Europe due to
privatization.
• Having capital move from high-wage to low-wage
countries to earn a higher rental is the traditional
view of FDI and one we will use here.
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Movement of Capital between Countries:
Foreign Direct Investment
• Greenfield Investment
 Our focus here will be on Greenfield investment—the
building of new plants abroad.
 We model FDI as the movement of capital between
countries just as we did with labor.
 How does the movement of capital into a country affect
the earnings of labor and capital there?
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Movement of Capital between Countries:
Foreign Direct Investment
• FDI in the Short Run: Specific Factors Model
 Manufacturing uses capital and labor.
 Agriculture uses land and labor.
 As capital moves into the economy, it will be used in
manufacturing.
 Additional capital will raise the marginal product of
labor in manufacturing.
 Therefore it will shift out the curve PMMPLM.
 We can see this in figure 5.11a.
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FDI in the Short Run: Specific Factors Model
Increase in the Capital Stock in the Short Run
Wage, W
Equilibrium
shifts to
An
inflow of capital
point
B, increasing
into
the
wages and labor used
manufacturing
in manufacturing.
sector
shifts out the
Labor
is pulled
marginal
productout
of of
agriculture
labor in
labor
curve so
in that
that sector falls.
sector
PA· MPLA
W’
B
W
A
PM· MPL’M
PM· MPLM
0M
L
L’
LM
0A
LA
Total Labor in the Economy, L
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FDI in the Short Run: Specific Factors Model
• Effect of FDI on the Wage
 The equilibrium wage increases to W′
 More workers are drawn in to manufacturing.
 The labor in agriculture shrinks since the labor is pulled
from there.
• Effect of FDI on the Industry Outputs
 Since land has not changed, output of agriculture must
fall.
 Since labor and capital increase in manufacturing,
output must increase.
 No change in prices of goods.
 As PPF increases, equilibrium shifts to B.
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FDI in the Short Run: Specific Factors Model
• Effect of FDI on the Rentals
 Fewer workers are employed in agriculture, as each
acre of land cannot be used as intensively.
 Marginal product of land must fall.
 Rental on land, RT = PAMPTA
 If MPTA falls and PA is unchanged, RT must fall.
 More capital and labor are used in manufacturing




RK = PMMPKM
MPKM falls due to diminishing returns—reduces RK.
As labor increases MPKM rises—raises RK
Unknown which effect is greater.
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FDI in the Short Run: Specific Factors Model
• Effect of FDI on the Rentals
 We can use another method for rental on capital.
 Revenue earned in manufacturing and subtract the payments to
labor.
 If wages are higher, and all else is the same, there must be a
reduced amount of funds left over as earnings of capital, so
rental is lower.
 We start at original equilibrium point A.




Assume capital stock expands from FDI.
Wages are held constant.
Labor used in manufacturing expands up to point C.
The only way MPL can be constant is if each worker has the
same amount of capital to work with.
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FDI in the Short Run: Specific Factors Model
• Effect of FDI on the Rentals
 The capital-labor ratio for manufacturing is identical at A and
C—therefore MPKM must also be equal
 This means the rental on capital is also equal at A and C
 What about if the manufacturing wage increases while
holding capital constant in that sector?




We move from C to B.
As wage rises, less labor is used in manufacturing.
With less labor on each machine, the MPK and RK must fall.
Because the rental on capital is the same at A and C but lower
at B than C, the overall effect of the FDI inflow is to reduce the
rental on capital.
 Since FDI inflow also reduces rental on land, then both rentals
fall.
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FDI in the Short Run: Specific Factors Model
Stock on the Rental on Capital
Increase in Home MPLM
due to FDI
Wage, W
Moving
from A
In
the movement
to C,Cwages
from
to B,
and hence
the
wages
increase
capital/labor
and
so does the
ratio do not
capital/labor
From this we
change
ratio
can conclude
that rental on
capital is lower
at B than A.
PA· MPLA
W’
B
W
C
A
PM· MPL’M
PM· MPLM
0M
L’
L
LM
Therefore rental on
capital falls when the
capital stock
increases through
FDI
0A
LA
L
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FDI in the Long Run
• We continue with the same assumptions as
before.
 There are two industries, computers and shoes, with
two factors, labor and capital.
 Computers are capital intensive and shoes are labor
intensive.
 Figure 5.13a, is similar as before in our box diagram.
 The amount of labor and capital used in each industry
produces the output of shoes and computers shown by
point A on PPF of panel (b).
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FDI in the Long Run
• Effect of FDI on Outputs and Factor Prices
 Capital increase due to FDI.
 Box panel sides expand with new origin at O’C
 OSB is shorter than OSA so less labor and less capital
are used in the production of shoes and output falls.
 OCB is shorter than OCA so more labor and more
capital are used and the output of computers rises.
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FDI in the Long Run
• Effect of FDI on Outputs and Factor Prices
 Change in output if from point A to B.
 As Rybczynski Theorem states, the increase in capital
through FDI has increased the output of the capitalintensive industry and reduced the output of the laborintensive industry.
 This change in output is achieved with no change in the
capital labor ratios in either industries
 OC’B and OSB have same slopes as OCA and OSA.
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FDI in the Long Run
• Effect of FDI on Outputs and Factor Prices
 Because capital-labor ratios are unchanged, the wage
and the rental on capital are also unchanged.
 In the long run model, an inflow of either factor of
production will leave factor prices unchanged.
 In immigration, we found cases where wages were
reduced (short run) and where wages were constant
(long run).
 There are fewer studies for FDI.
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
• Singapore has encouraged foreign firms to
establish subsidiaries within its borders, especially
the electronics industry.
• Singapore has the fourth-largest amount of FDI in
the world.
• As capital in Singapore has grown, what has
happened to the rental and the wage?
• Table 5.2, part A, shows much of this.
 MPK has fallen due to diminishing returns.
 Each worker has more capital, so MPL increases.
 These are consistent with specific factors model.
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
• There is a second approach to calculating the
rental on capital.
 If capital was rented instead of purchased, what would
the rental be?
 The rental agency needs to make the same rate of
return on renting the capital equipment that it would
make if it invested elsewhere.
 If it invests PK at interest rate i, could expect PKi
 We must also consider depreciation on capital.
 Real rental is:
R P
P

K
P
(i  d )
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
• Table 5.2 part B shows the growth rate in the real
rental computed from the previous formula and
depends on the interest rate.
• The table also shows the real wage computed
from actual wages paid in Singapore.
 Real wages grow over time.
 This is not expected from our long run model.
• This is an indication of productivity growth
 This leads to an increase in the MPL and in the real
wage.
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
• In part B productivity growth is positive, but in part
A it is negative.
 The average growth in the real wage and real rental is
rising in B.
 In part A the average growth in real wage and real
rental is zero or negative—no productivity growth.
• The idea that Singapore might have no
productivity growth contradicts what many believe
about its economy and that of other fast-growing
Asian countries.
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The Effect of FDI on Rentals and Wages in Singapore
APPLICATION
• If there was no productivity growth then all growth
is due to capital accumulation.
 FDI has no spillover benefits.
• Positive productivity growth indicates that freemarket policies pursued by Singapore stimulated
innovations.
 Higher productivity and lower costs.
• Most believe that productivity increased but that
belief is challenged by part A.
• Which scenario is correct is a source of debate for
economists.
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The Myth of Asia’s Miracle
HEADLINES
• So what is the difference in growth in economies
due to productivity growth versus capital
accumulation?
• The U.S. in the past has felt left behind when
countries increase production temporarily due to
huge increases in capital accumulation.
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Gains from Labor and Capital Flows
• Foreign investment and immigration are both
controversial policy issues.
• Most countries have at some point controlled FDI
but later became open to foreign investment.
• However, almost all countries impose limits on
immigration.
• U.S. immigration controls were established by the
Quota Law of 1921.
 Allows a limited number of persons arriving annually
from each country of origin
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Gains from Labor and Capital Flows
• The Immigration and Nationality Act Amendments
of 1965.
 Revised the country-specific limits and allowed
immigration on a first-come first-served basis up to a
limit.
• Subsequent revisions to the immigration laws in
the U.S. have changed policies.




Penalties for employers hiring illegal immigrants.
Allowed some illegal immigrants to gain citizenship.
Tightened border controls.
Deported other illegal immigrants.
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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?
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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.
• Also, an inflow of capital benefits the host country
not including the extra earning of foreign capital.
• If we count those extra earnings then FDI also
benefits the source country for the capital.
• We will discuss the overall gains from immigration
or FDI.
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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.
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Gains from Immigration
• 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.
 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*.
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Gains from Immigration
• 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?
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Gains from Immigration
• 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′.
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Gains from Immigration
• 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.
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Gains from Immigration
• 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.
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Gains from 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′.
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Gains from Immigration
• 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.
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Gains from Immigration
World Labor Market
Workers move from
The
wage,
W
The Home
gains
to
Home
Foreign
to Home
untiland
determined
bymigration
A, is
Foreign from
equilibrium
is reached
at
higher
than
the Foreign
can
be
shown.
C, full migration, with
Wage W* at A*
wages equalized at W’
Foreign
Wage
Wage, W
A
W
Gains to
Home
B
W’
C
W*
A*
Gains to
Foreign
0
L
Home
Wage
0’
L’
L
L*
World amount of labor
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Immigrants and Their Remittances
SIDE BAR
• 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.
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Gains from Immigration
SIDE BAR
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Immigrants and Their Remittances
SIDE BAR
• 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.
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Gains from Immigration
• 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.
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Gains from Immigration
• 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.
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How Large are Moving Costs?
SIDE BAR
• Illegal immigrants are often willing to make high
payments to traffickers to move from one country
to another.
 Payments to traffickers are in Table 5.4.
• Even legal immigrants face some costs of
migration, paying for transportation, legal
expenses, wage discrimination, prejudice, etc.
• So moving costs are a lower-limit on the extra
income they expect to receive, added up over the
years they will be away.
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How Large are Moving Costs?
SIDE BAR
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How Large are Moving Costs?
SIDE BAR
• When the costs of moving are high, then
immigrants need to work abroad for enough years
to more than cover these costs.
• In order to both have the income needed to pay
costs and have enough working years left to make
immigration worthwhile we expect immigrants to
be middle-aged.
 This supports evidence that immigrants are often in
their 30s or 40s.
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Gains from Migration
APPLICATION
• How large are the gains from migration?
• Estimates are shown in the first row of Table 5.5.
• Net gains to the U.S. in this case equal the
increase in U.S. GDP.
• Different studies have been done to estimate
these gains from migration.
• Each row of Table 5.5 shows a different estimate
and study.
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Gains from Migration
APPLICATION
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Gains from Migration
APPLICATION
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Labor Migration in the Expanded European Union
HEADLINES
• We hear a lot of talk about how the EU is a
“borderless continent” and how labor can move
freely across it.
• With the membership in the EU beginning to
include the poorer eastern countries, some
wealthier countries have problems with this labor
freedom.
• A Swedish labor court was seeking a judgment
from the EU’s highest court.
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Labor Migration in the Expanded European Union
HEADLINES
• A Latvian company won a bid to build a school in
Sweden, and would of course use Latvian
workers.
• A Swedish labor union objected to the wages paid
to the foreign workers and blocked the build,
which was later cancelled.
• The Latvian company has sued the Swedish
union and may seek damages.
• The Swedish labor union says it was acting in the
best interest of the Latvian workers—that they
should be making the same wage as Swedish
construction workers.
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Labor Migration in the Expanded European Union
HEADLINES
• Sweden has no minimum wage and wages are
determined by collective agreements.
• Of course Sweden has a fear that the influx of
workers from Latvia would cause European
average wage to fall.
• “The main issue is how far countries are willing to
go to take steps to stop social dumping or wage
dumping.” - John Pettersson, official at Swedish
Ministry of Industry, Employment and
Communications.
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Gains from Labor and Capital Flows
• Gains from Foreign Direct Investment
 We can show these gains as we did with immigration.
 Figure 5.15 shows the world amount of capital on the
horizontal axis: K + K*.
 Rental earned in each country is on the vertical axis.
 Home rental is R, at point A.
 Foreign rental is R* at point A*.
 Foreign rental is higher than Home so capital will flow
from Home to Foreign.
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Gains from Foreign Direct Investment
• As capital enters Foreign, the marginal product of
capital will fall as will its rental.
• As capital leaves Home, the marginal product will
rise as will the rental.
• Equilibrium with full capital flows is at B, where
rentals are equal at R′.
• Gains to Home from capital outflow is the triangle
ABC.
• Gains to Foreign is the triangle A*BC.
• World gains are A* BA.
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Gains from Foreign Direct Investment
World Capital Market
Foreign
Rental
Rental, R
Home
rentalwith
ratefull
(R) is
Equilibrium
Gains to Foreign
and
lower
than
Foreign
(R*).
capital
flow be
is at
B with
Home can
shown
rents equalized
R’
Capital
will moveatfrom
Home to Foreign to
receive a higher rental
Gains to
Foreign
A*
R*
B
R’
C
Gains to
Home
R
A
Home
Rental
K’
0
0’
K
K
K*
World amount of Labor
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Conclusions
• Immigration potentially affects the wages in the
host country where the workers arrive.
• In the short-run specific-factor 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.
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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 Theorem
• Movement of capital is foreign direct investment
(FDI) and have similar effects to immigration.
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Conclusions
• In the short run, the entry of foreign capital into a country
will lower the rental on capital, raise wages, and lower the
rental on land.
• In the long run, when capital and land can move between
industries, change in the wage and rental need not occur.
• Industry outputs can adjust according to the Rybczynski
Theorem so that the extra capital is fully employed without
any change in the wage or rentals.
• Both immigration and FDI create world gains as labor and
capital move from countries with low marginal products to
countries with high marginal products.
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Key Points
1. As in the specific-factors model, when the
amount of capital and land are held fixed in both
industries, immigration leads to a fall in wages.
2. As immigration leads to a fall in wages, the
marginal products of specific-factors rise, and
therefore so do their rentals.
3. Fixed amounts of capital and land in the short
run is realistic, but in the longer run, firms will
move capital between industries which changes
the implied effect of immigration on wages and
rentals.
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Key Points
4. Factor Price Insensitivity occurs as a long run
model with two goods and two factors. If both
are perfectly mobile between industries, labor
from immigration will move to the labor-intensive
industry. The capital/labor ratio will not change
so neither will wages or rentals.
5. According to the Rybczynski Theorem,
immigration will lead to an increase in output in
the labor-intensive industry and a decrease in
output from the capital-intensive industry.
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Key Points
6. Besides trade in goods and factors, countries
also interact with each other through foreign
direct investment (FDI).
7. In the short run, FDI lowers the rentals on capital
and land, and raises wages. In the long-run, the
extra capital can be absorbed in the capitalintensive industry without any change in wages
or rentals
8. According to the Rybczynski Theorem, FDI will
lead to an increase in the output of the capitalintensive industry and a decrease in the output
of the labor-intensive industry.
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Key Points
9. The movement of capital and labor generates
overall gains for both the source and host
countries, provided that the income of the
immigrants is included in the source country’s
welfare. Hence, there are global gains from
immigration and FDI.
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