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 Costs of migration East-West calibration

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

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

The model - preferences CES preferences Demand

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

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

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

Autarky – size and productivity

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

Autarky – skill distribution

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

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

Migration and no trade

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

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

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

Costly trade Partial price convergence, comparative advantage is decreased

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

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

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

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)

Reducing legal barriers ( =0.78 )

Reducing legal barriers

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)

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