1. MOVEMENT OF LABOR AND CAPITAL BETWEEN COUNTRIES5 1
Movement of Labor Between Countries 2
Movement of Capital between Countries 3
Gains from Labor and Capital Flows 4
Conclusions
MOVEMENT OF LABOR AND CAPITAL BETWEEN COUNTRIES

2. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
Introduction
From May to September 1980, boatloads of refugees from Cuba arrived in Miami.
This would lead you to believe that these less-skilled 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.
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3. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
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.
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4. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
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.
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5. 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?
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6. Movement of Labor Between Countries
Effects of immigration in the Short Run Specific-Factors 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.
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7. Movement of Labor Between Countries
Figure 5.1 Home Labor Market
Figure 5.1 Home Labor Market The Home wage is determined at point A, the intersection of the marginal product of labor curves PM • MPLM and PA • MPLA in manufacturing and agriculture, respectively. The amount of labor used in manufacturing is measured from left to right, starting at the origin 0M, and the amount of labor used in agriculture is measured from right to left, starting at the origin 0A. At point A, 0ML units of labor are used in manufacturing and 0AL units of labor are used in agriculture.
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8. Movement of Labor Between Countries
Effect of Immigration on the Wage in Home
We add the ΔL to figure 5.1,
The PAMPLA shifts right by ΔL.
The origin for manufacturing has not changed so PMMPLM does not change.
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.
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9. Movement of Labor Between Countries
The marginal product of labor curve shifts right also by L
Immigration increases total labor by L, shifting the origin to 0A’
Figure 5.2
Labor has increased and wages have decreased at new equilibrium, B
Figure 5.2 Increase in Home Labor When the amount of labor at Home increases by the amount L, the origin for agriculture shifts to the right by that amount, from OA to OA'. The marginal product of labor curve in agriculture also shifts right by the amount L. Equilibrium in the Home labor market is now at point B: wages have fallen to W' and the amount of labor has increased in manufacturing (to OML') and in agriculture (to OAL').
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10. Immigration to the New World
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.
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11. Immigration to the New World
Figure 5.3
Figure 5.3 Wages in Europe and the New World Large-scale migration from Europe to the New World in America and Australia closed the wage gap between the two locations. In 1870 wages in the New World were almost three times as high as wages in Europe, whereas in 1910 they were about twice as high. Migration also slowed the growth of wages in the New World relative to what they would have been without migration and allowed for slightly faster growth of wages in Europe.
Source: Alan M. Taylor and Jeffrey G. Williamson, 1997, “Convergence in the Age of Mass Migration,” European Review of Economic History, 1, April, 27–63.
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12. Immigration to the US and Europe Today
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.
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13. Immigration to the US and Europe Today
Figure 5.4
Figure 5.4 Share of Foreign-Born Workers in U.S. Workforce, 2004 This figure shows the share of foreign-born workers in the U.S. workforce, categorized by educational level. For example, among workers with only 0 to 8 years of education, about 70% were foreign born; for those with 8 to 11 years of education, slightly more than 20% were foreign born. At the other end of the spectrum, the foreign born make up 17% of workers with master’s and professional degrees and 30% of those with PhD’s. In the middle educational levels (high school and college graduates), there are much smaller shares of foreign-born workers, ranging from 10% to 15%. In contrast, only about 10% of U.S.-born workers are categorized in each of the low-education and high-education groups; most U.S.-born workers are either high school graduates or college graduates.
Source: Giovanni Peri, “Rethinking the effects of immigration: Labor market, skills, and wages,” UC Davis, May 2006.
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14. Immigration to the US and Europe Today
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.
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15. EU’s New Tack on Immigration
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.”
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16. Movement of Labor Between Countries
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.
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17. Movement of Labor Between Countries
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.
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18. Movement of Labor Between Countries
Figure 5.5
Immigration causes an increase in home labor which shifts out the PPF, increasing production from A to B,
Figure 5.5 Shift in Home Production Possibilities Curve With the increase in labor at Home from immigration, the production possibilities frontier shifts outward and the output of both industries increases, from point A to point B. Output in both industries increases because of the short-run nature of the specific-factors model; in the short run, land and capital do not move between the industries, and the extra labor in the economy is shared between both industries.
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19. 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?
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20. Effects of Immigration in the Long Run
Figure 5.6
Figure 5.6 Production Possibilities Frontier Shown here is the production possibilities frontier (PPF) between two manufactured goods, computers and shoes, with initial equilibrium at point A. Domestic production takes place at point A, which is the point of tangency between the world price line and the PPF.
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21. Effects of Immigration in the Long Run
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.
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22. Effects of Immigration in the Long Run
Figure 5.7
Labor allocated to computers LC L 0C
Capital allocated to computers
Total Amount of Capital in the Economy KC K
Capital allocated to shoes K A
Figure 5.7 Allocation of Labor and Capital in a Box Diagram The top and bottom axes of the box diagram measure the amount of labor in the economy, and the side axes measure the amount of capital. At point A, 0SL units of labor and 0SK units of capital are used in shoe production, and 0CL units of labor and 0CK units of capital are used in computers. The K/L ratios in the two industries are measured by the slopes of 0SA and 0CA, respectively. KS 0S LS L
Labor allocated to shoes
Total Amount of Labor in the Economy
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23. Effects of Immigration in the Long Run
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 + ΔL.
Instead of allocating the extra labor to both industries, we allocate it all to shoes—the labor intensive industry.
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24. Effects of Immigration in the Long Run
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.
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25. Effects of Immigration in the Long Run
Figure 5.8
4. Decrease in Labor in the Computer industry
Increase in Home Labor L L’ 0C
2. Decrease in Capital in the Computer industry
3. Increase in Capital in the Shoe industry K’ K’ B K K A
Figure 5.8 Increase in Home Labor With an increase in Home labor, the origin for the shoe industry shifts from 0S to 0S’. At point B, O’S L’ units of labor and O’S
K ’ units of capital are used in shoes, while OC L’ units of labor and OC K ’ units of capital are used in computers. In the long run, industry outputs adjust so that the capital/labor ratio in each industry at point B (the slopes of OS’B and OCB) are unchanged from the initial equilibrium at point A (the slopes of OSA and OCA). To achieve this outcome, all new labor resulting from immigration is allocated to the shoe industry, and capital and additional labor are transferred from computers to shoes, keeping the capital/labor ratio in both industries unchanged.
5. Additional increase in Labor in the Shoe industry ΔL
1. Increase in Home labor due to immigration: additional labor (ΔL) allocated to shoes
0’S 0S L L’ L
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26. Effects of Immigration in the Long Run
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.
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27. Effects of Immigration in the Long Run
The Long-Run Effect on Industry Outputs of an Increase in Home Labor
Figure 5.9
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
Figure 5.9 The Long-Run Effect on Industry Outputs of an Increase in Home Labor With an increase in the amount of labor at Home, the PPF shifts outward. The
output of shoes increases while the output of computers declines as the equilibrium moves from point A to B. The prices of goods have not changed, so the slopes of the PPFs at points A and B (i.e., the relative price of computers) are equal.
Output of Computers, QC
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28. Effects of Immigration in the Long Run
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.
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29. The Effects of the Mariel Boat Lift on Industry Output in Miami
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 skill-intensive industries.
These industries fell more rapidly in Miami after 1980.
These results support the Rybczynski Theorem
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30. The Effects of the Mariel Boat Lift on Industry Output in Miami
Figure 5.10 (a)
Figure 5.10 Industry Value-Added in Miami Shown here are real value-added in the apparel industry for Miami and an average of comparison cities. In panel (a), with the inflow of refugees from Cuba in 1980, real value-added in the apparel industry in Miami rose from 1983 to 1984, and the trend decline of this industry in Miami was slower (i.e., value-added did not fall as fast) after 1980 than in the comparison cities.
Source: Ethan Lewis, 2004, “How Did the Miami Labor Market Absorb the Mariel Immigrants?” Federal Reserve Bank of Philadelphia Working Paper No. 04–3.
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31. The Effects of the Mariel Boat Lift on Industry Output in Miami
Figure 5.10 (b)
Figure 5.10 Industry Value-Added in Miami Shown here are real value-added in high-skilled industries (measured relative to the city population), for Miami and an average of comparison cities. In panel (b), real value-added in Miami in high-skilled industries fell faster after 1980 than in the comparison cities. Both of these findings are consistent with the Rybczynksi theorem.
Source: Ethan Lewis, 2004, “How Did the Miami Labor Market Absorb the Mariel Immigrants?” Federal Reserve Bank of Philadelphia Working Paper No. 04–3.
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32. The Effects of the Mariel Boat Lift on Industry Output in Miami
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.
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33. Immigration and US Wages, 1990 - 2004
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 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.
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34. Immigration and US Wages, 1990 - 2004
Table 5.1
Table 5.1 Immigration and Wages in the United States This table shows the estimated effect of immigration on the wages of workers, depending on their educational level. Immigration has the greatest impact on workers with very low or high levels of education and only a small impact on those workers with middle levels of education (12–15 years). The impact is even smaller in the long run, when capital adjusts to keep the real return to capital fixed in each industry.
Source: Gianmarco I.P. Ottaviano and Giovanni Peri, 2005 “Rethinking Gains from Immigration: Theory and Evidence from the U.S.”
National Bureau of Economic Research working paper no
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35. 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.
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36. Movement of Capital between Countries: Foreign Direct Investment
Greenfield FDI—when 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
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37. FDI in the Short Run: Specific Factors Model
Increase in the Capital Stock in the Short Run
Wage, W
Equilibrium shifts to point B, increasing wages and labor used in manufacturing. Labor is pulled out of agriculture so labor in that sector falls.
PA· MPLA
An inflow of capital into the manufacturing sector shifts out the marginal product of labor curve in that sector B
PM· MPL’M W’ L’ W A
Figure 5.11 (a) Effect on Labor Allocation and Wage In panel (a), an inflow of capital into the manufacturing sector shifts out the marginal product of labor curve in that sector. The equilibrium in the labor market moves from point A to B, and the wage increases from W to W ’. Labor used in the manufacturing industry increases from OML to OML’. These workers are pulled out of agriculture, so the labor used there shrinks from OAL to OAL’.
PM· MPLM 0M L 0A LM LA
Total Labor in the Economy, L
Figure 5.11 (a)
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38. FDI in the Short Run: Specific Factors Model
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.
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39. FDI in the Short Run: Specific Factors Model
Increase in the Capital Stock in the Short Run
Figure 5.11 (b) Effect on Industry Outputs In panel (b), with the inflow of capital into manufacturing, and the extra labor used in that sector, the output of manufacturing increases. Because labor has been drawn out of agriculture, the output of that sector falls. These changes in outputs are shown by the outward shift of the PPF (due to the increase in capital) and the movement from point A to point B.
Figure 5.11 (b)
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40. FDI in the Short Run: Specific Factors Model
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.
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41. FDI in the Short Run: Specific Factors Model
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 C—therefore 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.
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42. FDI in the Short Run: Specific Factors Model
Stock on the Rental on Capital
Increase in Home MPLM due to FDI
In the movement from C to B, wages increase and so does the capital/labor ratio
Moving from A to C, wages and hence the capital/labor ratio do not change
Wage, W
PA· MPLA W’ L’ B
PM· MPL’M
From this we can conclude that rental on capital is lower at B than A. W C A
Therefore rental on capital falls when the capital stock increases through FDI
Figure 5.12 Stock on the Rental on Capital By carefully tracing through how the capital-labor ratio in manufacturing is affected by the movement from A to C (where wages
and hence the capital-labor ratio do not change), and then the movement from C to B (where wages and the capital-labor ratio both increase), we conclude that the rental on capital is lower at point B than at point A. Therefore, the rental on capital declines when the capital stock increases through FDI.
PM· MPLM 0M L 0A LM LA
Figure 5.12 L
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43. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
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 O’C
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.
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44. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
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.
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45. The Effect of FDI on Rentals and Wages in Singapore
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.
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46. The Effect of FDI on Rentals and Wages in Singapore
Table 5.2 (a)
Table 5.2 Real Rental and Wages in Singapore This table shows the growth rate in the real rental and real wages in Singapore, depending on the method used to construct these factor prices. In part A, a production function approach is used to construct the factor prices, and the real rental falls over time because of the growth in capital. As a result, implied productivity growth is negative. In part B, the rental and wages are constructed from data on payments to capital and labor in Singapore, and real wages grow over time, while the real rental either grows or falls slightly. As a result, implied productivity growth is positive.
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47. The Effect of FDI on Rentals and Wages in Singapore
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.
Real rental is:
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.
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48. The Effect of FDI on Rentals and Wages in Singapore
This is an indication of productivity growth
This leads to an increase in the MPL and in the real wage.
Table 5.2 (b)
Table 5.2 Real Rental and Wages in Singapore This table shows the growth rate in the real rental and real wages in Singapore, depending on the method used to construct these factor prices. In part B, the rental and wages are constructed from data on payments to capital and labor in Singapore, and real wages grow over time, while the real rental either grows or falls slightly. As a result, implied productivity growth is positive.
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49. The Effect of FDI on Rentals and Wages in Singapore
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.
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50. 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.
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51. Gains from Labor and Capital Flows
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.
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52. 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 right—on the horizontal axis.
We can see how many workers are located in each country.
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53. Gains from Immigration
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.
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54. Gains from Immigration
World Labor Market
Foreign Wage
Workers move from Foreign to Home until equilibrium is reached at C, full migration, with wages equalized at W’
Wage, W
The Home wage, W determined by A, is higher than the Foreign Wage W* at A*
The gains to Home and Foreign from migration can be shown.
Gains to Home A A* W W* L B W’ C L’
Gains to Foreign
Figure 5.14 World Labor Market Initially, Home has OL workers and Foreign has O*L workers. The Home wage is W, as determined at point A, which is higher than the Foreign wage W * at A*. Workers will move from Foreign to Home to receive higher wages. The equilibrium with full migration is at point C, where wages are equalized at W ′. The gain to Home from migration is measured by triangle ABC, and triangle A*BC represents the gains to Foreign.
Home Wage 0’ L L*
Figure 5.14
World amount of labor
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55. Immigrants and Their Remittances
Immigrants often send a substantial portion of their earnings back home—remittances.
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).
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56. Gains from Immigration
Table 5.3
Table 5.3 Workers’ Remittances and Net Foreign Aid, 2005 Shown here are the remittances received by various countries from their citizens working abroad. In many cases, these remittances are larger than the official aid received by the countries. An exception was Sudan, which was experiencing a humanitarian crisis in 2005 so that aid was high.
Source: World Development Indicators, The World Bank.
© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

57. Immigrants and Their Remittances
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.
© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

58. Gains from Immigration
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.
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59. How Large are Moving Costs?
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.
© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

60. How Large are Moving Costs?
Table 5.4
Table 5.4 Payments to Traffickers for Selected Migration Routes Shown here are the payments made to traffickers to illegally move a person from one country to another. The payments to traffickers are a part of the moving costs of immigrants, which can be sizable.
Source: Frank Laczko and David Thompson, eds., 2000, Migrant Trafficking and Human Smuggling in Europe, International Organization for Migration, p. 96.
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61. How Large are Moving Costs?
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.
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62. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
Gains from Migration
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
Table 5.5 Gains from Immigration The results from several studies of immigration are shown in this table. The second column shows the amount of immigration (as a percentage of the Home labor force), and the third column shows the increase in Home GDP or the increase in GDP of the region.
NA: Not available from the study.
Sources: George Borjas, 1995, “The Economic Benefits from Immigration,” Journal of Economic Perspectives, 9(2), 3–22. George Borjas, 1999, “The Economic Analysis of Immigration,” in Orley Ashenfelter and David Card, eds., Handbook of Labor Economics, vol. 3A, Amsterdam: North Holland, pp. 1697–1760. Paul Klein and Gustavo Ventura, 2006, “Productivity Differences and the Dynamic Effects of Labour Movements,” University of Western Ontario and Pennsylvania State University. Michael Kremer and Stanley Watt, 2006, “The Globalization of Household Production,” Harvard University. Terrie Louise Walmsley and L. Alan Winters, 2005, “Relaxing the Restrictions on the Temporary Movement of Natural Persons: A Simulation Analysis,” Journal of Economic Integration, 20(4), December, 688–726.
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63. © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor
Gains from Migration
Table 5.5
Table 5.5 Gains from Immigration The results from several studies of immigration are shown in this table. The second column shows the amount of immigration (as a percentage of the Home labor force), and the third column shows the increase in Home GDP or the increase in GDP of the region.
NA: Not available from the study.
Sources: George Borjas, 1995, “The Economic Benefits from Immigration,” Journal of Economic Perspectives, 9(2), 3–22. George Borjas, 1999, “The Economic Analysis of Immigration,” in Orley Ashenfelter and David Card, eds., Handbook of Labor Economics, vol. 3A, Amsterdam: North Holland, pp. 1697–1760. Paul Klein and Gustavo Ventura, 2006, “Productivity Differences and the Dynamic Effects of Labour Movements,” University of Western Ontario and Pennsylvania State University. Michael Kremer and Stanley Watt, 2006, “The Globalization of Household Production,” Harvard University. Terrie Louise Walmsley and L. Alan Winters, 2005, “Relaxing the Restrictions on the Temporary Movement of Natural Persons: A Simulation Analysis,” Journal of Economic Integration, 20(4), December, 688–726.
© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor

64. Gains from Labor and Capital Flows
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.
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65. Gains from Foreign Direct Investment
World Capital Market
Foreign Rental
Rental, R
Home rental rate (R) is lower than Foreign (R*).
Capital will move from Home to Foreign to receive a higher rental
Equilibrium with full capital flow is at B with rents equalized at R’
Gains to Foreign and Home can be shown
Gains to Foreign A A* R* R K K’ C R’ B
Gains to Home
Figure 5.15 World Capital Market With 0K units of capital at Home, the Home rental is R, at point A. The remaining capital 0*K is in Foreign, and the Foreign rental is R*, at point A*. Capital will move from Home to Foreign to receive a higher rental. The equilibrium with full capital flows is at point B, where rentals are equalized at R′. Triangle ABC measures the gains to Home from the capital outflow, and triangle A*BC measures the gains to Foreign.
Home Rental 0’ K K*
Figure 5.15
World amount of Labor
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