1. 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

2. Agenda Aim of the paper Theoretical model Autarky Trade and migration
Costs of migration
East-West calibration

3. 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

4. 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

5. The model - preferences
CES preferences
Demand

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

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

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

9. Autarky – size and productivity

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

11. Autarky – skill distribution

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

13. 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

14. Migration and no trade

15. 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

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

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

18. Costly trade
Partial price convergence, comparative advantage is decreased

19. 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

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

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

22. 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)

23. Reducing legal barriers ( =0.78 )

24. Reducing legal barriers

25. 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)

26. 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