Trade, Firm Structure, and Migration of Talent

November 17, 2009

By Maroula Khraiche

Throughout economic history there have been episodes in which the liberalization of trade has been accompanied by a positive flow of migrants. Such phenomena are notable because they contradict the basic Heckscher-Ohlin conclusion that trade and labor mobility are substitutes. Also notable is the fact that migrants to the U.S. have been largely skilled rather than unskilled. This paper links these two phenomena by pointing out the simple fact that increased trade can involve different types of firm structures and different types of goods being traded, which in turn have different effects on skilled and unskilled labor. The interaction between different frictions that impact labor movements, specifically the interaction between capital adjustment costs and trade costs, has a significant effect on the gap between the returns to labor in the South and North. Although the decrease in trade costs and increase in trade dampens labor movements, the existence of asymmetric capital adjustment costs in the North and South increases it. To show these results formally, this paper calibrates and solves a two-country, two-sector model of trade and migration, in which countries differ in skill endowments and capital adjustment costs and sectors differ in structures and capital intensities. Empirical analysis is then provided, with results supporting the main qualitative implications of the model.

This paper expands the traditional analysis of the link between migration and trade by including the structure of trading firms and the types of goods traded. In the absence of capital-adjustment costs, an increase in the trade volume of labor-intensive goods resulting from decreased trade costs leads to an increase in skilled migration and a decrease in the migration of the unskilled. On the other hand, an increase in the trade volume of capital-intensive goods decreases skill migration. But when asymmetric adjustment cost of capital is introduced in the two countries, a decrease in trade costs in the capital-intensive sector leads to an increase in skill migration. Therefore, skill follows capital where it is more abundant. This is an important step in understanding the observed link between movements of goods and movements of factors beyond the basic Heckscher-Ohlin conclusions that trade and labor mobility are substitutes.


The NEP-INT Blog

November 15, 2009

This blog is an experiment to explore the feasibility of scientific discussion on an Economics blog. NEP-INT disseminates every week new working papers in the field of International Trade. Among them, the NEP-INT editor selects one to be discussed. Everyone is invited to comment. Try to stay civil, or your comments will be removed. And encourage others to read or join in the discussion.