Question

How would a free capital movement and immigration policy, a model deviating from Heckscher-Ohlin model, affect the wages in home and host country.

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Answer 1

THE IMMIGRATION SURPLUS IN A TWO-GOODS ECONOMY

Borjas (1995) made the important point that we focus on those who lose from immigration despite the fact that there are also those who benefit. In a stylish exposition, Borjas then showed that even in simple situations it is possible that the benefits created by immigration outweigh the losses. This is the "immigration surplus." Before assessing how the global environment might influence this conclusion, I present Borjas's idea. His original exposition was in terms of a single good, but because international trade requires at least two goods (exports and imports) I need an extension of his results. I do this using the specific factors model of international trade (Mayer, 1974; Mussa, 1974).

Let x and y be two industries. Each has a stock of an industry-specific factor (K_x and K_y) that has no value except when employed in its own industry. It may be capital, the industry-specific portion of a worker's human capital, union rents, etc. The other factor is labor. Labor is mobile between industries and earns wage w in both industries. The economy-wide labor supply is L of which L_x is em-

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Suggested Citation:"6 Immigrants and Natives in General Equilibrium Trade Models." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.

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ployed in industry x and L_y in industry y. Let MP_x (K_x, L_x) be the marginal product of labor in industry x. Labor demand in industry x is calculated from the value of the marginal product of labor, p_x MP_x (K_x, L_x). Panel (a) of Figure 6-1 illustrates labor demand functions for industries x and y. Industry x (y) demand is read from the left (right) origin and the length of the figure's base is the supply of labor in the economy. At wage w, labor supply (L) equals the sum of the industry labor demands (L_x + L_y). The income generated by industry x is the area bounded by O_xL_xMN of which O_xL_xMw goes to labor and wMN goes to the specific factor. Industry y's income of O_yL_xMP is similarly divided between labor and the specific factor.

The impact of migration on native welfare depends on whether a specific factor or labor is migrating. The case of migrating labor is shown in panel (b) of Figure 6-1 as an increase in the base of the graph. Δ immigrants arrive. Industry y labor demand shifts right by Δ from py MP_y to p_yMP_y´ so that it is unchanged relative to its new origin O_y´. Δ_x immigrants find employment in industry x and Δ — Δ_xfind employment in industry y. Competition between native labor and immigrants drives down the wage to w´, thus transferring income (w — w')L from native labor to the specific factors. Native labor loses at the expense of capital. Against this is an efficiency gain. Because immigrants complement the specific factors, immigration increases the specific factors' incomes. Net of the transfer from labor, the increases are given by the two shaded areas in Figure 6-1(b), one for industry x and one for industry y. These triangles are Borjas's "immigration surplus" generalized to two industries. Immigration of an industry-specific factor also creates an immigration surplus. In fact, that analysis is very similar to Borjas's analysis of immigrant externalities.¹Immigration in this setting thus appears unambiguously beneficial .

The Heckscher-Ohlin Model

If workers' wages are the same across countries then there is no incentive for migration. In the jargon of international trade economists, trade is a substitute for migration (see Markusen, 1983). However, it remains possible that immigration is beneficial to natives.

An output expansion path giving the combination of skilled and unskilled worker pairs that minimize costs at wages w_S and w_U. With constant returns to scale, an output expansion path is a ray through the origin whose slope depends only on the ratio of factor prices w_S/w_U. plots the x and y output expansion paths for the United States.

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Suggested Citation:"6 Immigrants and Natives in General Equilibrium Trade Models." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.

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FIGURE 6-3

Factor price equalization.

Point E₀ illustrates the U.S. endowment of skilled and unskilled labor. In a full employment equilibrium all these workers must be employed. This occurs only if industry x employs the combination of skilled and unskilled workers given by x₀ and industry y employs the combination of workers given by E₀-x₀. Suppose the United States allows immigration of unskilled Mexican labor so that E₀ moves to E₁ and x₀ moves to x₁. Figure 6-4 illustrates what happens in Mexico. Assume initially that factor price equalization holds so that the Mexican and U.S. expansion paths are identical. Because Mexican emigrants are U.S. immigrants, E₁ - E₀ equals E₀^* - E₁^*. Assume momentarily that the migration leaves wages and hence expansion paths unaltered. Then x₀ + x₀^* must equal x₁ + x₁^*; likewise in the y industry.² That is, total inputs into each industry are unaltered. Consequently, so are total outputs. Because earnings are the same, product markets clear at the old product prices. But if product prices do not change, then factor prices do not change [see proof of factor price equalization in Figure 6-2(b)]. Migration is consistent with unchanged product and factor prices. Thus,

2	For the y industry (E0 - x0) + (E0* - x0*) must equal (E1 - x1) + (E1* - x1*). FIGURE 6-4 Migration in a Heckscher-Ohlin model. in this model, immigration has zero welfare implications for both natives and immigrants. The immigration surplus is zero. Thanking you.??????