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Andreea Bicu 20 Nov. 2009

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. Aim of the paper Theoretical model Autarky Trade and migration

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Andreea Bicu 20 Nov. 2009

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  1. Migration and trade :Theory with an application to the Eastern-Western European integrationSusana Iranzo, Giovanni Peri Journal of International Economics 2009 Andreea Bicu 20 Nov. 2009

  2. Agenda • Aim of the paper • Theoretical model • Autarky • Trade and migration • Costs of migration • East-West calibration

  3. Aim of paper • Significant differences in migration rates for different education levels – “brain drain” • 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

  4. The model • 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

  5. The model - preferences • CES preferences • Demand

  6. The model - production • Production and productivity • Costs of producing one unit of each good • Wages

  7. Equilibrium • Good X • Price and quantity • Price index and number of varieties in symmetric equilibrium • Good Y

  8. Labor specialization • Cut-off skill level from inter-industry wage equalizing condition • Note that , and

  9. Autarky – size and productivity

  10. Graphical representation M( ) ↑→N↑→ Px↓ Cx↑→ ↓ and Wx↑

  11. Autarky – skill distribution

  12. Graphical representation gx↑→ Cx↓→ ↑ and Px↓ Cx↓→Wx↓ gx ↑→Wx↑

  13. East - West • Country 1 (West) vs. country 2 (East) • Larger population • Higher total productivity • Higher relative productivity in sector X, , lower in sector Y, • Larger share of highly educated workers • Migration costs modeled as a proportion of the wages

  14. Migration and no trade

  15. Migration and no trade • Supply of highly educated workers increases in West and decreases in East • In the absence of trade, Propositions 1-4 make the following predictions: • 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

  16. Trade • Demand for home production and imports • Price levels • World market-clearing conditions

  17. Costless trade • Price (and cost) equalization in sector X • Comparative advantage (relative productivity differences) causes the two countries to specialize

  18. Costly trade • Partial price convergence, comparative advantage is decreased

  19. Trade and migration • Migration costs: • Loss of skill (productivity loss ) • Psychological cost (real income loss ) • Legal barriers (fixed cost ) • New migration cut-off point from equalizing cost-adjusted real wages

  20. Application to West-East • Parameterization of the model using data from previous studies • Poland and Germany as representatives (1989)

  21. Trade and no migration • Income per capita East = 42% • Total trade = 9% of GDP (2004) • Share of differentiated goods = 77.9% (81.5%)

  22. Trade and migration • 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)

  23. Reducing legal barriers ( =0.78 )

  24. Reducing legal barriers

  25. Conclusions • 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)

  26. Criticism • 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

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