Trade, Firm Structure, and Migration of Talent

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.


2 Responses to Trade, Firm Structure, and Migration of Talent

  1. M.H. says:

    I love this paper! This is how trade theory should be done: A good model that allows to find a clearly testable prediction, and then an appropriate test of it. There are too many idiotic models with reduced form testing in this literature. A refreshing change!

    And to NEP editors: get more such blogs going, they are great!

  2. Farid says:

    paper is very interesting, however, the relationship between migration and trade is still ambiguous (substitutability or complementarity
    model results are used depends on the hypothesis set out.

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