The Effect of International Trade Barriers on Migration Flowsinside.org.es/docs/presentaciones/Presentaciones/2.The... · 2011. 8. 17. · and job heterogeneity, the result would

Outline

The Effect of International Trade Barriers onMigration Flows

Joel López Real1 Antonia D́ıaz2 Fernando Perera Tallo3

1,2Universidad Carlos III de Madrid

3Universidad de la Laguna and CAERP

Inside Meeting January 2007

Joel López-Real, D́ıaz, Perera-Tallo The Effect of International Trade Barriers on Migration Flows

Outline

Outline

1 Motivation

2 The environment

3 Preview of results

4 Caveats


Motivation The environment Preview of results Caveats

Motivation

What are the costs of trade barriers between developed anddeveloping countries?

Not much for developed countries, theory says, sinceinternational prices should be close to autarky prices ofdeveloped countries (provided that labor factor does not move)

Here we challenge this view



Motivation

Migration seems to prevail over time

Heckscher-Ohlin models (trade due to differentiation ofproducts) goods trade and factor mobility are perfectsubstitutes (at least in the long run)

This is not the case in Ricardian models (trade due tocomparative advantage)

We focus our analysis on steady states

Migration imposes an extra burden of trade barriers ondeveloped countries (sometimes, depending on migrationpolicy)



The environment

Ricardian model of trade



Locations and Technology

Two countries x ∈ {N,S}Two tradeable goods a consumption good C, an investmentgood I and a non tradeable public good, G (Ricardian modelof trade)

The consumption good

Y Ct x = AC

(KCt x

)α (LCt x

)1−αThe investment good

Y It x = AIx

(KIt x

)α (LIt x

)1−αAIN > A

IS



Demography

Each period t + 1, a stork brings n Pt new dinasties into theworld

n Pt/2 are dropped in North, n Pt/2 are dropped in South,At the period of birth, dinasties can migrate to the othercountry,

Evolution of population (assuming migration from South toNorth)

PNt+1 = PNt +

n Pt2

(1 + mt+1)

PSt+1 = PSt +

n Pt2

(1−mt+1)



Preferences and endowments

Dinasties are born with zero assets

They are endowed with one unit of efficiency units of laborevery period

Their utility function is

∞∑i=0

βi [ln (ct+i) + η ln (Gt+i)]



Institutional arrangementsInternational trade

Trade barriers

τ IS : ad valorem trade barrier to investment goodτCN : ad valorem trade barrier to consumption good

the barriers proceeds are thrown away (they finance an extrapublic good)

Foreign direct investment is not allowed



Institutional arrangementsFinancing the public good

The government finances the public good G with income taxes,

Gt x = τYt x for x ∈ {N,S}



Institutional arrangementsMigration costs

Migration is costly: Some efficiency units of labor are lost

Language barriersLegal restrictions to work in particular sectors or professions

New born dinasties differ in the “portability” of their efficientunits of labor

At home li = 1, i ∈ [0, 1],Abroad, li = 1− iγ , i ∈ [0, 1].



Household problem

V jt x = max∞∑i=0

βi[ln

(cjt+i x

)+ η ln (Gt+i x)

]

s.t.pct+i xpIt+i x

cjt+i x + kjt+i+1 x − (1− δ)k

jt+i x =

(1− τ) wt+i x ljt+i x + (1− τ) rt+i x kjt+i x,

kjt x = 0.



Preview of resultsAssumptions

1 Households expend more than 50% of their after tax incomein consumption:

β ≤ 1+α n1+2 α n(1−τ)2 Trade barriers are not severe enough to prevent trade:

AINAIS

≥ (1 + τ IS)(1 + τCN )



Patterns of trade and migration

North produces both goods, consumption and investmentgoods, while the South specializes in the consumption good

If there were a continuum of goods specialization would not becomplete in South

There is migration ifV jt N ≥ V

jt S

Southerners with higher portability of skills will migrate. Twointerpretations:

1 Migrants are selected among workers with higher skills2 Migrants are selected among those with lower loss



PricesInternational relative prices

Trade barriers distort relative prices in the South but do not affectthese of the Noth:

pINpCN

= AC

AIN= p

free trade,IN

pfree trade,CN= p

autarky,IN

pautarky,CN

pISpCS

= AC

AIN(1 + τCS )(1 + τ

IS) >

pfree trade,ISpfree trade,CS

= pfree trade,IN

pfree trade,CN

This is so because

The high productivity country has a larger size economy

There is only one investment good



PricesFactor prices

Interest rate

rN = rS =α n + (1− β)

(1− τ) β= rfree tradex

WageswN = w

free tradeN

wNwS

= (1 + τCS )1

1−α (1 + τ IS)α

1−α

Under free trade there is no migrationTrade barriers increase the wage gap between North and South



QuantitiesIn South

Trade barriers reduce per capita capital and disturb wages,giving incentives in the South to migration:

kS = kfree tradeS

[1

(1 + τCS )(1 + τIS)

] 11−α

< kfree tradeS

Migration pattern goes from the South to the Noth

mN = m(τCN , τ

IS

)> 0



QuantitiesIn North (I)

There is a loss in labor productivity and, given income taxes, areduction in the public good

lN(τCN , τ

IS

)= 1−

[m

(τCN , τ

IS

)]1+γ(1 + γ)

[1 + m

(τCN , τ

IS

)] < 1 = lf tNkN

(τCN , τ

IS

)=

[αAIN

r

] 11−α

lN(τCN , τ

IS

)< kf tN =

[αAIN

r

] 11−α

gN(τCN , τ

IS

)= τAIN

[αAIN

r

] 11−α

lN(τCN , τ

IS

)< gf tN



QuantitiesIn North (II)

Notice that the losses in North are associated to

Portability of skills (which is affected by labor marketregulations in the North)

Universal access to the public good

Two models of immigration policies : U.S., Europe



Welfare gains of free tradeIn South

V jt S − Vfree trade,jt S < 0: Households born and residing in the

South experiment a reduction in their wage and per capitapublicly provided good

V jt N − Vfree trade,jt S < 0: Immigrants, meaning households

born in the South and residing in the North, suffer lowerwages and publicly provided good

Welfare in South increases even if South eliminates barriers toimports of investment goods (and North keeps barriers to importsof consumption goods)



Welfare gains of free tradeIn North

V jtN − Vft,jtN < 0: North native households also suffer

reductions in welfare through the fiscal channel

Boomerang Effect: Immigrants have less productivity and lowerwages implying that migration reduces the per capita tax revenuesin the North, but since immigrants participate in the public systemlike natives do, the consequence is a reduction in the per capitapublicly provided goods



Caveats

In this model there are no reason for South to impose tariffson investment goods

We have not modeled the income distribution implications oftrade barriers

The size of the barriers does not affect patterns of trade

In a more general model with a continuum of investmentgoods, this would not be the case

“Portability of skills” is very rough

We would like to have a richer model with skill heterogeneityand job heterogeneity, the result would still hold


OutlineOne

Main TalkMotivationThe environmentLocations and TechnologyDemographyPreferences and endowmentsInstitutional arrangementsHousehold problem

Preview of resultsPatterns of trade and migrationPricesQuantitiesWelfare gains of free trade

Caveats

Documents

The Effect of International Trade Barriers on Migration Flowsinside.org.es/docs/presentaciones/Presentaciones/2.The... · 2011. 8. 17. · and job heterogeneity, the result would