Movement of Labor and Capital Between Countries
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Questions to Consider
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1. Does immigration lower wages?
2. Which industries expand because of immigration?
3. Who gains when foreign companies move in?
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Introduction (part 1)
In this chapter, we will study the movement of labor across countries by explaining the case in which immigration leads to a fall in wages, as we normally expect.
• First, we use the specific-factors model, the short-run model introduced in Chapter 3, in which labor moves between industries.
• Next, we use the long-run Heckscher–Ohlin model, from Chapter 4, in which capital and land can also move between industries.
• In the long run, an increase in labor will not lower the wage, as industries have more time to respond to the inflow of workers.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Introduction (part 2)
• After studying what happens in the short run and long run when labor moves across countries, we study the effects of foreign direct investment (FDI), the movement of capital across countries.
• We conclude the chapter by discussing the gains to the source and destination countries, and to the world, from the movement of labor or capital between countries.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 1)
Effects of Immigration in the Short Run: Specific-Factors Model
Determining the Wage 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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 2)
Effects of Immigration in the Short Run: Specific-Factors Model Effect of Immigration on the Wage in Home
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 0A to 0A′.
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 0ML′) and in agriculture (to 0′AL′).
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: Immigration to the
FIGURE 5-3 Wages in Europe and the
Migration also slowed the growth of wages in the relative to what they would have been without migration and allowed for slightly faster growth of wages in Europe.
Large-scale migration from Europe to the in America and Australia closed the wage gap between the two locations. In 1870 wages in the were almost three times as high as wages in Europe, whereas in 1910 they were about twice as high.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 3)
Other Effects of Immigration in the Short Run
Rentals on Capital and Land
• The United States and Europe have both welcomed foreign workers in specific industries: agriculture and high-tech.
• They do this even though those foreign workers compete with domestic workers in those industries.
• Therefore, there must be benefits to the industries.
• We can measure these potential benefits by the payments to capital and land, which we refer to as “rentals.”
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 4)
Other Effects of Immigration in the Short Run
Rentals on Capital and Land
• Under the first method for computing the rentals, we take the revenue earned in either manufacturing or agriculture and subtract the payments to labor.
• If wages fall, then there is more left over as earnings of capital and land, so these rentals are higher.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 5)
Other Effects of Immigration in the Short Run
Rentals on Capital and Land
• Under the second method for computing rentals, capital and land earn their marginal product in each industry times the price of the industry’s good.
• As more labor is hired in each industry (because wages are lower), the marginal products of capital and land both increase. The increase in the marginal product occurs because each machine or acre of land has more workers available to it, and that machine or acre of land is therefore more productive.
• So under the second method, too, the marginal products of capital and land rise and so do their rentals.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 6)
Other Effects of Immigration in the Short Run
Rentals on Capital and Land
• We should not be surprised that owners of capital and land often support more open borders, which provides them with foreign workers who can be employed in their industries.
• The restriction on immigration in a country should be seen as a compromise between the following:
• Entrepreneurs and landowners might welcome the foreign labor.
• Local unions and workers view migrants as a potential source of competition leading to lower wages.
• Immigrant groups themselves, if they are large enough (such as the Cuban population in Miami), might also have the ability to influence the political outcome on immigration policy.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 7)
Other Effects of Immigration in the Short Run Effect of Immigration on Industry Output FIGURE 5-4 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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
SIDE BAR Who Is a Foreign-Born Person?
• In the United States, the U.S. Census Bureau defines a native-born person as anyone who is a U.S. citizen at birth, which means they are either:
– Born in the United States
– Born in Puerto Rico
– Born in a U.S. Island Area
– Born abroad of U.S. citizen parent(s)
• A foreign-born person is anyone who is not a U.S. citizen at birth but who is living in the United States, which means they are either:
– Naturalized U.S. citizens (U.S. passport, right to vote)
– Legal permanent residents ( )
– Temporary migrants (student, temporary work visas)
– Humanitarian migrants (refugees)
– Unauthorized migrants (undocumented)
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Political Economy of Migration (part 1)
FIGURE 5-5
Share of Foreign-Born Workers in U.S. Workforce, 2017 This figure shows the share of foreign-born workers in the U.S. workforce. Among workers with 0‒11 years of education, close to 40% were foreign-born. At the other end of the spectrum, the foreign-born make up nearly 20% of workers with master’s and professional degrees, and slightly more than 30% of those with Ph.Ds. In the middle educational levels (high school and college graduates), there are smaller shares of foreign-born workers, ranging from 10% to 15%.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Political Economy of Migration (part 2)
FIGURE 5-6
Border Apprehensions at the United States Border, 2000‒2018 This figure shows the annual number of apprehensions of illegal migrants at or near the U.S. border from 2000 to 2018 and the number of persons who were Mexican citizens. The number of border apprehensions fell from a high of over 1.6 million in 2000 to about 400,000 annually since 2011. Up until 2011 most of those apprehended were citizens of Mexico, but since that time there has been a growing number from Guatemala, Honduras, and El Salvador.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Political Economy of Migration (part 3)
FIGURE 5-7
Applications for Asylum Filed and Granted, 2008‒2019 This figure shows the annual number of applications for asylum from persons in the United States from 2008 to 2019. The number of applications has been growing rapidly since 2014 and exceeded 200,000 in 2019. The number of applications granted was around 25,000 annually up to 2017. More recent data are not available, but another data source shows that the number of asylum cases granted an initial review increased from 10,000 in 2017 to 19,000 in 2019, well below the number of requests.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Political Economy of Migration (part 4)
Applications and Approved Cases of Asylum Status, Europe, 2016‒2018 (thousands) This table shows the number of applications for and approved cases of asylum status in the 10 European countries with the largest number of refugees, from 2016 to 2018. In 2016, the total number of applications for asylum status peaked in the European Union at 1.1 million.
2016: Applications (1,000)
2016: Approved (1,000)
2017: Applications (1,000)
2017: Approved (1,000)
2018: Applications (1,000)
2018: Approved (1,000)
European Union (total)
Switzerland
United Kingdom
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 8)
Effects of Immigration in the Long Run FIGURE 5-8 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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 9)
Effects of Immigration in the Long Run
FIGURE 5-9 Allocation of Labor and Capital in a Box Diagram
The top a�nd bottom axes of the box diagram measure the amount of labor, 𝐿𝐿,�in the economy, and the side axes measure the amount of capital, 𝐾𝐾.
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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 10)
Effects of Immigration in the Long Run
Determination of the Real Wage and Real Rental
• To determine the wage and rental in the economy, we use the marginal products of labor (MPL) and capital (MPK), which are determined by the capital–labor ratio in either industry.
• If there is a higher capital–labor ratio (more machines per worker), then by the law of diminishing returns, the MPK and the real rental must be lower.
• Having more machines per worker means that the MPL (and hence the real wage) is higher because each worker is more productive.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 11)
Effects of Immigration in the Long Run Increase in the Amount of Home Labor FIGURE 5-10 Increase in Home Labor
With an increase in Home labor from L to L + ∆L, the origin for the shoe industry shifts from 0S to 0S′.
At point B, 0′SL′ units of labor and 0′SK′ units of capital are used in shoes, while 0CL′ units of labor and 0CK′ units of capital are used in computers.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 12)
Effects of Immigration in the Long Run Increase in the Amount of Home Labor FIGURE 5-10 Increase in Home Labor (continued)
In the long run, industry outputs adjust so that the capital–labor ratios in each industry at point B (the slopes of 0′ SB and 0CB) are unchanged from the initial equilibrium at point A (the slopes of 0SA and 0CA). 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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 13)
Effects of Immigration in the Long Run
Effect of Immigration on Industry Outputs
FIGURE 5-11 The Long-Run Effect on Industry Outputs of an Increase in Home Labor
With an increase in the amount of labor in 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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 14)
The Rybczynski theorem states that, 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.
• We have proved the Rybczynski theorem for the case of immigration, where labor in the economy grows.
• Later we will show that the same theorem holds when capital in the economy grows: in this case, the industry using capital intensively expands and the other industry contracts.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Movement of Labor Between Countries: Migration (part 15)
Effect of Immigration on Factor Prices
Factor prices do not need to change as a result of immigration.
• The reason that factor prices do not need to change is that the economy can absorb the extra amount of a factor by increasing the output of the industry using that factor intensively and reducing the output of the other industry.
• The finding that factor prices do not change is sometimes called the factor price insensitivity result.
Factor Price Insensitivity Theorem
The factor price insensitivity theorem states that: in the H–O 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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Effects of the Mariel Boat Lift on Industry Output in Miami (part 1)
FIGURE 5-12 (1 of 2) Industry Value-Added in Miami
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.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Effects of the Mariel Boat Lift on Industry Output in Miami (part 2)
FIGURE 5-12 (2 of 2) Industry Value-Added in Miami
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 Rybczynski theorem.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: The Effect of Migration on Wages
TABLE 5-2 Immigration and Wages in the United States
PERCENTAGE CHANGE IN THE WAGE OF WORKERS WITH EDUCATIONAL LEVEL: Less Than 12 Years
PERCENTAGE CHANGE IN THE WAGE OF WORKERS WITH EDUCATIONAL LEVEL: High School Graduates
PERCENTAGE CHANGE IN THE WAGE OF WORKERS WITH EDUCATIONAL LEVEL: Some College
PERCENTAGE CHANGE IN THE WAGE OF WORKERS WITH EDUCATIONAL LEVEL: College Graduates
PERCENTAGE CHANGE IN THE WAGE OF WORKERS WITH EDUCATIONAL LEVEL: Overall Average
Part A: Effect of Immigration on All U.S. Workers
Part B: Long-Run Effect of Immigration, by Type of Worker
Type of Worker:
Foreign born
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Movement of Capital Between Countries: Foreign Direct Investment (part 1)
• We turn now to look at how capital can move from one country to another through foreign direct investment (FDI).
• FDI occurs when a firm from one country owns a company in another country.
• According to the Department of Commerce, if a foreign company acquires 10% or more of a U.S. firm, that is counted as an FDI inflow to the United States, and if a U.S. company acquires 10% or more of a foreign firm, that is counted as an FDI outflow for the United States.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Movement of Capital Between Countries: Foreign Direct Investment (part 2)
• Our focus in this section will be on greenfield investment, that is, the building of new plants abroad.
• We model FDI as a movement of capital between countries, just as we modeled the movement of labor between countries.
• The key question we ask is: How does the movement of capital into a country affect the earnings of labor and capital there?
• This question is similar to the one we asked for immigration, so the earlier graphs that we developed can be modified to address FDI.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Movement of Capital Between Countries: Foreign Direct Investment (part 3)
FDI in the Short Run: Specific-Factors Model
FIGURE 5-13 (1 of 2) Increase in the Capital Stock in the Short Run
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 0ML to 0ML′. These workers are pulled out of agriculture, so the labor used there shrinks from 0AL to 0AL ′.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Movement of Capital Between Countries: Foreign Direct Investment (part 4)
FDI in the Short Run: Specific-Factors Model
FIGURE 5-13 (2 of 2) Increase in the Capital Stock in the Short Run
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 outpu
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