Transcript Iranzo & Peri (Andreea)

Migration and trade :Theory with an
application to the Eastern-Western
European integration
Susana Iranzo, Giovanni Peri
Journal of International Economics 2009
Andreea Bicu
20 Nov. 2009
Agenda
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Aim of the paper
Theoretical model
Autarky
Trade and migration
Costs of migration
East-West calibration
Aim of paper
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Significant differences in migration rates for
different education levels – “brain drain”
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Impact on sending countries is considered to be
negative
The paper tries to quantify positive effects through
“spillovers” mediated by trade and make predictions
when legal costs are reduced/eliminated
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The model
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Two countries i and j (“West” and “East”)
Two sector Y and X (“Homogenous” and
“Differentiated”)
Skill-differentiated workers
Differences in productivity across countries and
sectors
The model - preferences
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CES preferences
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Demand
The model - production
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Production and productivity
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Costs of producing one unit of each good
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Wages
Equilibrium
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Good X
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Price and quantity
Price index and number of varieties in symmetric
equilibrium
Good Y
Labor specialization
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Cut-off skill level from inter-industry wage
equalizing condition
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Note that
,
and
Autarky – size and productivity
Graphical representation
M( ) ↑→N↑→ Px↓
Cx↑→ ↓ and Wx↑
Autarky – skill distribution
Graphical representation
gx↑→ Cx↓→
Cx↓→Wx↓
gx ↑→Wx↑
↑ and Px↓
East - West
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Country 1 (West) vs. country 2 (East)
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Larger population
Higher total productivity
Higher relative productivity in sector X,
in sector Y,
Larger share of highly educated workers
, lower
Migration costs modeled as a proportion of the
wages
Migration and no trade
Migration and no trade
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Supply of highly educated workers increases in
West and decreases in East
In the absence of trade, Propositions 1-4 make the
following predictions:
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Price level in West decreases (number of varieties X
increases) → positive real wage effect
Price level in East increases (number of varieties X
decreases) → negative real wage effect
In sum, the sending countries experience a negative
effect when there is no trade
Trade
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Demand for home production and imports
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Price levels
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World market-clearing conditions
Costless trade
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Price (and cost) equalization in sector X
Comparative advantage (relative productivity
differences) causes the two countries to specialize
Costly trade
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Partial price convergence, comparative advantage is
decreased
Trade and migration
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Migration costs:
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Loss of skill (productivity loss
Psychological cost (real income loss
Legal barriers (fixed cost
)
)
)
New migration cut-off point from equalizing costadjusted real wages
Application to West-East
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Parameterization of the model using data from
previous studies
Poland and Germany as representatives (1989)
Trade and no migration
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Income per capita East = 42%
Total trade = 9% of GDP
(2004)
Share of differentiated goods = 77.9% (81.5%)
Trade and migration
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Calibrating trade costs in order to reproduce the
migration rates from Table 1 (14% of highly
educated)→ approximate the rest to 0
Human capital loss
Psychological cost
Legal costs
(inferred from the other two in
order to match the migration rate)
Reducing legal barriers (
=0.78 )
Reducing legal barriers
Conclusions
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Migration benefits both the receiving and the
sending country in the presence of trade
Reducing by half the costs due to legal barriers
would increase the migration rate from East to
West from 1.48% to 9%
In this scenario, the only loss due to increased
competition would be for highly educated natives in
the West (-0.18% from real wage)
Criticism
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Some parameter values (ex: TFP) are kept
unchanged throughout the East-West calculations
Simplifying assumptions for Y sector (price
equalization, no trade costs)
Propositions 1-4 assume identical economies that
only differ w.r.t. one characteristic
All migrants are considered to be highly educated,
calibration of costs disregarding other groups
Legal barriers are modeled as fixed costs but could
also be proportional to wages