Feenstra Taylor Econ CH05

5
MOVEMENT OF LABOR AND CAPITAL BETWEEN COUNTRIES

1 Movement of Labor Between Countries 2 Movement of Capital between Countries 3 Gains from Labor and Capital Flows 4 Conclusions
Introduction
From May to September 1980, boatloads of refugees from Cuba arrived in Miami. This would lead you to believe that these lessskilled workers would drive down wages.
However, this immigration does not appear to have pulled down the wages of other less-skilled workers in Miami. Explaining this effect is one goal of this chapter.
2008 Worth Publishers International Economics Feenstra/Taylor
2 of 114
Introduction
A similar situation occurred with the 1989 emigration of Russian Jews to Israel.
The immigrants were more highly skilled than the existing Israeli population. However, the relative wages of high-skilled workers in Israel actually rose during the 1990s. In other large scale immigrations, the wages of domestic workers did fall.
Compare the predictions of short-run (specific factors) and long-run (Heckscher-Ohlin) models.
3 of 114
Introduction
Then we will consider the effects of movement of capital. Foreign Direct Investment (FDI) occurs when a company from one country owns a company in another country. Finally, we will discuss the gains to the host and destination countries, and to the world, from the movement of labor and capital.
4 of 114
Movement of Labor Between Countries

Migration is the movement of labor from the Foreign country to the Home country. The wages paid to labor and the rentals paid to capital and land are determined by the prices of goods purchased. Prices of goods are determined by the world market for those goods. If prices of goods are fixed, how do the Home wage and rentals paid change as labor moves between countries?
5 of 114

Effects of immigration in the Short Run SpecificFactors Model:
In the short run, only labor is mobile across industries. Remember the resource equation: L = LM + LA
Determining the Wage

Assume the Foreign equilibrium wage, W*, is lower than Home equilibrium wage, W. Workers will migrate from Foreign to Home.
6 of 114

Figure 5.1 Home Labor Market
7 of 114

Effect of Immigration on the Wage in Home
We add the L to figure 5.1, The PAMPLA shifts right by L. The origin for manufacturing has not changed so PMMPLM does not change.
Effect of Immigration on the Wage in Home

The new equilibrium Home wage is at B, at a lower wage. The extra workers are shared between both industries since both industries have more workers, but fixed amounts of capital and land.
The wage declines due to the diminishing marginal product of labor.
2008 Worth Publishers International Economics Feenstra/Taylor 8 of 114

Figure 5.2
The marginal Immigration product of increases total labor curve labor by L, shifts right shifting the also to 0 originby L A
Labor has increased and wages have decreased at new equilibrium, B
9 of 114
Immigration to the New World

APPLICATION
Between 1870 and 1913, 30 million Europeans left their homes in the Old World to emigrate to the New World. The U.S. population increased by 17%. The New World had higher real wages
In 1870, real wages in the New World were nearly 3 times higher than in Europe.
Over time capital accumulated, so real wages in both locations grew, but at a slower rate in the New World.
Immigration to the New World

APPLICATION
Figure 5.3
11 of 114
Immigration to the US and Europe Today

APPLICATION These days, we see migration from developing countries to wealthier ones.
In many cases, the immigration includes a mix of low-skilled workers and high-skilled workers.
In the U.S. much of the recent debate focused on the issue of illegal immigration.
There are about 12 million illegal immigrants in the U.S. This often obscures the fact that the majority of immigrants are legal.
The combination of legal and illegal immigrants in the U.S. creates a U-shaped pattern between the number of immigrants and their educational level.

APPLICATION
Figure 5.4
13 of 114

APPLICATION Illegal immigrants into the U.S. compete primarily with the lowest-educated workers. Legal immigrants compete with workers at the highest educational levels. Under the specific factors model, the greatest impact on labor will be for the lowest and highest educated U.S. workers.
This is supported by the data.
The negative impact of immigration on wages is fairly modest for most workers and is offset with capital moves between industries as discussed later.
14 of 114
EUs New Tack on Immigration

HEADLINES
A new EU-wide green card would allow skilled workers already in the 25-nation bloc to change countries without extra paperwork. Europe's work force is expected to shrink by 20 million between now and 2040.
Businesses complain regularly about a shortage of highly skilled personnel.

EU commissioner Franco Frattini has a vision:
A North African engineer could go to work in Europe, earn good money, and return regularly to his hometown to start and maintain a business. Mr. Frattini uses the term brain circulation instead of the accusatory term brain drain.

Other Effects of Immigration in the Short Run
U.S. and Europe have both welcomed foreign workers in specific industries: agriculture and high-tech. Why do they do so if those foreign workers compete with domestic workers in those industries. Answer: Immigration increases rental rates on capital and land.
Rentals on Capital and Land

Given this, it should not be surprising that owners of capital and land often support more open borders.

Need to consider the political economy of immigration: lobby groups. Effect of Immigration on Industry Output
We showed before that immigration led to an increased labor force in each industry. With more workers and the same amount of capital and land, output rises in both industries. Immigration leads to an outward shift in the PPF. This result depends on the short-run nature of the specific factors model.
If land and capital are not fixed, as in the long run, one industry's output will rise while the other will fall.

Figure 5.5
Immigration causes an increase in home labor which shifts out the PPF, increasing production from A to B,
18 of 114
Effects of Immigration in the Long Run

In the long run, all factors are free to move between industries.
We now use the Heckscher-Ohlin model from before, except that labor can move between countries.
Total capital: K = KA + KM earning rental R. Total labor: L = LA + LM earning wage W. Computers are capital intensive and shoes are labor intensive.
As before: LS/KS > LC/KC and KC/LC > KS/LS
How is equilibrium affected by the inflow of labor into Home due to migration?

Figure 5.6
20 of 114

Box Diagram
Figure 5.7 shows a new box diagram to help us answer our question. Length is total amount of labor at Home, L. The vertical axes measure the total amount of capital, K, at home, in each industry. OSA shows the amount of labor and capital used in shoes and OCA in computers. The capital-labor ratio in each industry is the slope of the respective industry line.
OSA is flatter, so capital-labor ratio in shoes is less than in computers.
21 of 114

Figure 5.7
Total Amount of Capital in the Economy Labor allocated to computers L LC 0C KC Capital allocated to computers
K
A Capital allocated to shoes KS 0S LS Labor allocated to shoes Total Amount of Labor in the Economy L K
22 of 114

Determination of the Real Wage and Real Rental
Remember: W = P*MPL and R=MPK If there is a higher capital-labor ratio, then MPL is higher and MPK is lower. Because each line in the box diagram is a particular capital-labor ratio, it is also a particular wage and rental rate.
Increase in the Amount of Home Labor

Immigration leads to increase in the amount of Home labor to L = L + L. Instead of allocating the extra labor to both industries, we allocate it all to shoesthe labor intensive industry.

Increase in the Amount of Home Labor
Because both labor and capital increase in shoes, the capital-labor ratio is unchanged.
Notice the slopes of the lines have not changed.
Since the capital-labor ratios are unchanged, so are the marginal products. Therefore the wages and rentals are unchanged. When capital can move freely between industries, immigration in the long run has no impact on the wage and rental rates.

Figure 5.8 Increase in Home Labor
4. Decrease in Labor in the Computer industry L L 0C
3. Increase in Capital in the Shoe industry
2. Decrease in Capital in the Computer industry
1. Increase in Home labor due to immigration: additional labor (L) allocated to shoes
0S L
0S
5. Additional increase in Labor in the Shoe industry
25 of 114

Effect of Immigration on Industry Outputs
Since the factors of production both increase or decrease, it makes sense that output will follow the same trend.
Since labor and capital moved to shoes, shoe output expands and capital production contracts.
On our PPF, due to the increase in labor, the PPF shifts out more in the direction of shoes. Since prices are unchanged, the economy moves to equilibrium at point B in Figure 5.9.
More shoe production and less computer production
This only holds in the long run.


Figure 5.9
The Long-Run Effect on Industry Outputs of an Increase in Home Labor

Output of Shoes, QS Relative Price of Computers, PC/PS
Shift in Home PPF due to immigration
An increase of both capital and labor in shoe production causes an increase in shoe output and a decrease in computer output
Output of Computers, QC
27 of 114

Rybczynski Theorem:
In the Heckscher-Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry.
Factor Price Insensitivity:

In the Heckscher-Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices.
28 of 114
The Effects of the Mariel Boat Lift on Industry Output in Miami APPLICATION
Figure 5.10 panel (a) shows real value added in the apparel industry for Miami and the average of comparison cities.
Adjust for city size by looking at value added per capita. The industry decline in Miami is slightly slower than in comparison cities after 1980.
Panel (b) shows the output of a group of skillintensive industries.

These industries fell more rapidly in Miami after 1980.
These results support the Rybczynski Theorem

The Effects of the Mariel Boat Lift on Industry Output in Miami APPLICATION Figure 5.10 (a)
30 of 114
The Effects of the Mariel Boat Lift on Industry Output in Miami APPLICATION Figure 5.10 (b)
31 of 114
The Effects of the Mariel Boat Lift on Industry Output in Miami APPLICATION Wages did not really change during this time. Is this also from the Rybczynski Theorem? During this time, computer use in manufacturing was increasing significantly. This increase was much slower in Miami than in similar cities. One explanation is that firms employed the Mariel refugees and other low-skilled workers rather than switching to computer technologies. This is just another example of how the refugees could be absorbed across many industries.
Immigration and US Wages, 1990 - 2004

APPLICATION
There has been slightly more than a doubling of foreign-born persons in the U.S. in 25 years. Table 5.1 reports the estimated impact of immigration over 1990-2004 on wages of various workers, distinguished by education level. When we allow capital to grow in each industry to accommodate the inflow of immigrants (second approach), total U.S. immigration has a negative impact on only the lowest and highest-educated workers.
Immigration and US Wages, 1990 - 2004

APPLICATION Table 5.1
34 of 114
Movement of Capital between Countries: Foreign Direct Investment

We can now look at how capital moves from one country to another through foreign direct investment (FDI).
When a firm from one country owns a company in another country.
U.S. Department of commerce uses a 10% rule to determine FDI.

If a foreign country acquires 10% or more of a U.S. firm, that is FDI inflow to the U.S. If a U.S. company acquires 10% or more of a foreign firm then that is FDI outflow from the U.S.
Movement of Capital between Countries: Foreign Direct Investment

Greenfield FDIwhen a company builds a plant in a foreign country. Acquisition FDI (or brownfield FDI) when a firm buys an existing foreign plant. Our focus here will be on Greenfield investment FDI in the Short Run: Specific Factors Model
Manufacturing uses capital and labor. Agriculture uses land and labor. As capital moves into the economy, it will be used in manufacturing, raising the marginal product of labor.
Therefore it will shift out the curve PMMPLM
FDI in the Short Run: Specific Factors Model

Increase in the Capital Stock in the Short Run
Wage, W
PA MPLA
Equilibrium shifts to An inflow of capital point B, into the increasing wages and labor manufacturing used in manufacturing. sector shifts out the Labor is product of marginal pulled out of agriculture in labor labor curve so that in that sector falls. sector
PM MPLM
PM MPLM
0M LM
0A LA
Total Labor in the Economy, L
Figure 5.11 (a)

37 of 114

Effect of FDI on the Wage
The equilibrium wage increases to W More workers are drawn in to manufacturing, decreasing labor in the agricultural sector.
Effect of FDI on the Industry Outputs

Since land has not changed, output of agriculture falls. Since labor and capital increase in manufacturing, output must increase. No change in prices of goods. As PPF increases, equilibrium shifts to B.
38 of 114

Increase in the Capital Stock in the Short Run
Figure 5.11 (b)


Effect of FDI on the Rentals
Fewer workers are employed in agriculture, as each acre of land cannot be used as intensively.
Marginal product of land falls, therefore RT = PAMPTA must fall.
More capital and labor are used in manufacturing

RK = PMMPKM Increases in labor and capital have opposing effects on MPKM Ambiguous effect
We can use another method for rental on capital.

Calculate the revenue earned in manufacturing and subtract the payments to labor. If wages are higher, and all else is the same, there must be a reduced amount of funds left over as earnings of capital, so rental rate is lower.

Effect of FDI on the Rentals
We start at original equilibrium point A in Figure 5.12.
Assume capital stock expands from FDI. Wages are held constant. Labor used in manufacturing expands up to point C. The capital-labor ratio for manufacturing is identical at A and Ctherefore MPKM and RK must also be equal
If the manufacturing wage increases while holding capital constant in that sector, we move from C to B.
With less labor on each machine, the MPK and RK must fall. Because the rental rate on capital is the same at A and C but lower at B than C, the overall effect of the FDI inflow is to reduce the rental on capital.

Stock on the Rental on Capital
Wage, W Increase in Home MPLM due to FDI PA MPLA
B C PM MPLM
Moving from A In the movement to C, wages from C to B, and hence the wages increase capital/labor and so does the ratio do not capital/labor From this we change ratio can conclude that rental on capital is lower at B than A.
Therefore rental on capital falls when the capital stock increases through FDI
PM MPLM
0M
0A
LM
LA
Figure 5.12
42 of 114
FDI in the Long Run

We continue with the same assumptions as before.
Computers (shoes) are capital (labor) intensive.
Effect of FDI on Outputs and Factor Prices

Capital increase due to FDI. Box panel sides expand with new origin at OC OSB is shorter than OSA so less labor and less capital are used in the production of shoes and output falls. OCB is longer than OCA so more labor and more capital are used and the output of computers rises.
43 of 114
FDI in the Long Run

Effect of FDI on Outputs and Factor Prices
Change in output is from point A to B in panel (b). As the Rybczynski Theorem states, the increase in capital through FDI has increased the output of the capital-intensive industry and reduced the output of the labor-intensive industry. Because capital-labor ratios are unchanged, the wage and the rental on capital are also unchanged. In the long run model, an inflow of either factor of production will leave factor prices unchanged. For immigration, we found actual cases where wages were reduced (short run) and where wages were constant (long run). There are fewer studies for FDI.
The Effect of FDI on Rentals and Wages in Singapore APPLICATION Singapore has encouraged foreign firms to establish subsidiaries within its borders, especially in the electronics industry. Singapore has the fourth-largest amount of FDI in the world. What has happened to the rental rate and the wage? Table 5.2, part A, shows much of this.
MPK has fallen due to diminishing returns. Each worker has more capital, so MPL increases. These are consistent with specific factors model.
The Effect of FDI on Rentals and Wages in Singapore APPLICATION Table 5.2 (a)
46 of 114
The Effect of FDI on Rentals and Wages in Singapore APPLICATION Second approach to calculating the rental on capital.
If capital was rented instead of purchased, what would the rental be? If it invests PK at interest rate i, could expect PKi We must also consider depreciation on capital. R PK Real rental is: (i d )
P P Table 5.2 part B shows the growth rate in the real rental computed from this formula.
Real wages grow over time. This is not expected from our long run model.
47 of 114
The Effect of FDI on Rentals and Wages in Singapore APPLICATION
This is an indication of productivity growth

This leads to an increase in the MPL and in the real wage. Table 5.2 (b)
48 of 114
The Effect of FDI on Rentals and Wages in Singapore APPLICATION In part B productivity growth is positive, but in part A it is negative. The idea that Singapore might have no productivity growth contradicts what many believe about its economy and that of other fast-growing Asian countries. If there was no productivity growth then all growth is due to capital accumulation.
FDI has no spillover benefits.
Most economists believe that productivity increased but that belief is challenged by part A.
Gains from Labor and Capital Flows

Foreign investment and immigration are both controversial policy issues. Most countries have at some point controlled FDI but later became open to foreign investment. However, almost all countries impose limits on immigration. U.S. immigration controls were established by the Quota Law of 1921.
Allows a limited number of persons arriving annually from each country of origin See text for more of immigration law history.

Why is immigration so controversial?
Some groups oppose the spending of public funds on immigration. Other groups fear the competition for jobs created by an inflow of workers.
Immigration benefits the host country in the specific factors model.

If immigrant earnings with Foreign income are included then emigration benefits the Foreign country, too.
Gains from Immigration

To measure gains from immigration we will use the specific-factors model. We look at the total world labor with the Home and Foreign labor together: L + L*.
Home workers are measured from the left and Foreign workers are measured from the righton the horizontal axis. We can see how many workers are located in each country.

Gains for the Home Country
Even though all workers are paid the same wage. W, the first worker had an MPL equal to W Thus, MPL*P>W; immigrants raise the value of output more than they are paid in wages.
Gains for the Foreign Country

We need to include the wages received by the migrants who left when calculating Foreign income.
These wages are often returned to their families.
The difference between the wage earned by the migrants and their Foreign marginal products is the gain to Foreign.

World Labor Market
Wage, W Foreign Wage Gains to Home
Workers move from The Home to Home and The gains wage, W Foreign to Home until determined by A, is Foreign from migration equilibrium is reached at higher than the Foreign can migration, C, fullbe shown. with Wage W* at A* wages equalized at W
W*
A* Gains to Foreign Home Wage 0 L*
0 L
World amount of labor
Figure 5.14
54 of 114
Immigrants and Their Remittances

SIDE BAR
Immigrants often send a substantial portion of their earnings back homeremittances. The International Monetary Fund (IMF) estimates that remittances were $126 billion in 2004, up from $72.3 million in 2001. The income sent home by immigrants is a larger source of income than is official aid (Table 5.3).
55 of 114

SIDE BAR Table 5.3
56 of 114
Immigrants and Their Remittances

SIDE BAR The fact that immigrants return some of their income back home may not be enough to compensate their home countries for the loss of their labor. To calculate the gains, we need to include all the earnings of the immigrants in their home countries income.
In the case of highly-educated migrants, unless these migrants return most of their earnings back home those countries lose from the outflow of these workers.
Jagdish Bhagwati, an economist, has proposed that countries impose a brain drain tax on the outflow of educated workers.

World Gains from Migration
Combining the gains to the Home and Foreign countries we obtain the triangular region ABA*, the world gains due to immigration. One way to think about world gains from migration is that it equals the increase in world GDP due to immigration. In practice, however, there are other costs that immigrants bear
Moving costs, payments to traffickers of illegal immigrants.
These costs must be subtracted from the increase in GDP in order to obtain the net gains.
How Large are Moving Costs?

SIDE BAR
Illegal immigrants are often willing to make high payments to traffickers to move from one country to another.
Payments to traffickers are in Table 5.4.
Even legal immigrants face some costs of migration, paying for transportation, legal expenses, wage discrimination, prejudice, etc. So moving costs are a lower-limit on the extra income they expect to receive, added up over the years they will be away.

SIDE BAR Table 5.4
60 of 114

SIDE BAR
When the costs of moving are high, then immigrants need to work abroad for enough years to more than cover these costs. In order to both have the income needed to pay costs and have enough working years left to make immigration worthwhile we expect immigrants to be middle-aged.
This supports evidence that immigrants are often in their 30s or 40s.
61 of 114
Gains from Migration

APPLICATION
How large are the gains from migration? Net gains to the U.S. in this case equal the increase in U.S. GDP.
Table 5.5
62 of 114
Gains from Migration

APPLICATION
Table 5.5
63 of 114

Gains from Foreign Direct Investment
Figure 5.15 shows the world amount of capital on the horizontal axis: K + K*. Foreign rental is higher than Home so capital will flow from Home to Foreign.
As capital enters Foreign, the marginal product of capital will fall as will its rental. As capital leaves Home, the marginal product will rise as will the rental. World gains are A* BA.
Gains from Foreign Direct Investment

World Capital Market
Rental, R Gains to Foreign R* B A* Foreign Rental
Home rentalwith full is Equilibrium rate (R) Gains to Foreign and lower than Foreign with capital can be at B (R*). Home flow is shown rents equalized at R Capital will move from Home to Foreign to receive a higher rental
C
Gains to Home
A Home Rental 0 K K K K* 0
Figure 5.15
World amount of Labor
65 of 114

Feenstra Taylor Econ CH05

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Feenstra Taylor Econ CH05

Hochgeladen von

Copyright:

Verfügbare Formate

5

MOVEMENT OF LABOR AND CAPITAL BETWEEN COUNTRIES

2008 Worth Publishers International Economics Feenstra/Taylor

2008 Worth Publishers International Economics Feenstra/Taylor

2008 Worth Publishers International Economics Feenstra/Taylor

Movement of Labor Between Countries

2008 Worth Publishers International Economics Feenstra/Taylor

Movement of Labor Between Countries

Determining the Wage

2008 Worth Publishers International Economics Feenstra/Taylor

Movement of Labor Between Countries

2008 Worth Publishers International Economics Feenstra/Taylor

Movement of Labor Between Countries

Effect of Immigration on the Wage in Home

Movement of Labor Between Countries

Labor has increased and wages have decreased at new equilibrium, B

2008 Worth Publishers International Economics Feenstra/Taylor

Immigration to the New World

Immigration to the New World

2008 Worth Publishers International Economics Feenstra/Taylor

Immigration to the US and Europe Today

Immigration to the US and Europe Today

2008 Worth Publishers International Economics Feenstra/Taylor

Immigration to the US and Europe Today

2008 Worth Publishers International Economics Feenstra/Taylor

EUs New Tack on Immigration

Businesses complain regularly about a shortage of highly skilled personnel.

Movement of Labor Between Countries

Rentals on Capital and Land

Movement of Labor Between Countries

Movement of Labor Between Countries

2008 Worth Publishers International Economics Feenstra/Taylor

Effects of Immigration in the Long Run

Effects of Immigration in the Long Run

2008 Worth Publishers International Economics Feenstra/Taylor

Effects of Immigration in the Long Run

2008 Worth Publishers International Economics Feenstra/Taylor

Effects of Immigration in the Long Run

2008 Worth Publishers International Economics Feenstra/Taylor

Effects of Immigration in the Long Run

Increase in the Amount of Home Labor

Effects of Immigration in the Long Run

Effects of Immigration in the Long Run

3. Increase in Capital in the Shoe industry

2. Decrease in Capital in the Computer industry

5. Additional increase in Labor in the Shoe industry

2008 Worth Publishers International Economics Feenstra/Taylor

Effects of Immigration in the Long Run

This only holds in the long run.

Effects of Immigration in the Long Run

The Long-Run Effect on Industry Outputs of an Increase in Home Labor

Shift in Home PPF due to immigration

2008 Worth Publishers International Economics Feenstra/Taylor

Effects of Immigration in the Long Run

Factor Price Insensitivity:

2008 Worth Publishers International Economics Feenstra/Taylor

Panel (b) shows the output of a group of skillintensive industries.

These results support the Rybczynski Theorem

2008 Worth Publishers International Economics Feenstra/Taylor

2008 Worth Publishers International Economics Feenstra/Taylor

Immigration and US Wages, 1990 - 2004

Immigration and US Wages, 1990 - 2004

2008 Worth Publishers International Economics Feenstra/Taylor