The Immigration Debate Studies on the Economic, Demographic, and Fiscal Effects of Immigration (1998) / Chapter Skim
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6 Immigrants and Natives in General Equilibrium Trade Models
6 Immigrants and Natives in General Equilibrium Trade Models
Pages 206-238
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labor force that is reeling from three decades of rising wage inequality. As is well known, U.S.
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In the final section I present a new factor content study whose results significantly differ from those of previous research and point to a large negative impact of changing trade flows on America's least skilled workers. I then offer some caveats about how the lack of a well-defined policy experiment underlying the existing trade-and-wages empirical work has often led to the misinterpretation of that work.
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Restated, the model does not impose the long-run equilibrium condition of zero profits. In this section I present three long-run general equilibrium models of international trade: the Heckscher-Ohlin model with its factor price equalization theorem, the Ricardian model, and a model of increasing returns to scale.
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209 \ it\ ~ \ \ \ \' o.
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Like all good theories, factor price equalization uses extreme assumptions to isolate just one of several determinants of international wage differences, namely, the tendency for trade with developing countries to place downward pressure on U.S. wages.
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illustrates an output expansion path giving the combination of skilled and unskilled worker pairs that minimize costs at wages WS and wu. 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 WS /WU .
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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)
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Modified Factor Price Equalization and the Heckscher-Ohlin Model The previous model can be modified to allow for international differences in factor quality and technology. Let me be a measure of productivity in country c and let me fg (S,U)
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O~Lanka Bangladesh ,0Yugoslavia o -' 1 1 1 ~1 -- : ~1 / / OSwitzuland 0 0.2 0.4 0.6 0.S ~I.2 Labor Productivity Pavanes ~ FIGURE 6-5 Modified factor price equalization.
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If w/pg = 1/ag then the home country produces good g, not the foreign country. If w/pg > 1/ag then the
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There are no downwardsloping labor demand functions as in Borjas's analysis, only general equilibrium industrial reallocations between countries in response to changes in the terms of trade.7 External Increasing Returns to Scale Increasing returns to scale potentially generate an immigration surplus. One sees this in the opening up of prairie agriculture: without mass immigration there would not have been large enough grain production to warrant investment in transportation infrastructure.
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There are many equilibria in this model including ones that display factor price equalization and the Heckscher-Ohlin result that immigration has no impact on native welfare (see Appendix Table 6-A1 for a description of such an equilibrium)
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This assumption of consumption similarity is central to general equilibrium trade models for a simple reason. A country's industrial output is either consumed domestically or exported.
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CHANGING INCENTIVES FOR MIGRATION: EVIDENCE ON FACTOR PRICE CONVERGENCE Given the central role of factor price equalization in determining whether there is an immigration surplus, it is worth reviewing the extent to which wages differ across countries and whether there is any tendency for wages or skill prices to converge over time. We do not know exactly how unequal the wages are because we do not have comprehensive data on international wage differences purged of human capital and other effects.
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In contrast, Japanese earnings averaged $5,000, and Japan accounted for 13 percent of world manufacturing employment. The 1964 data document substantial international earnings differences.
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In 1964 the standard error of log earnings across the 75 countries was 62 log points. This is comparable in size with the 70-30 log wage differential in the United States (Murphy and Welch, 1993~.
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At any rate, this is the only evidence I have presented so far of earnings convergence. Human and Physical Capital Formation In the absence of labor force surveys of worker characteristics and manufacturing surveys of capital and other nonlabor inputs, it is impossible to adequately purge the earnings data of the human and physical capital effects that contribute to international earnings differences.
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The mainstream view among economists of the sources of rising wage inequality is that skill upgrading was far more important than immigration, which in turn was somewhat more important than international trade. The capital deepening hypothesis has not yet been investigated adequately.
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This raises the average skill level of processes that remain in the United States and exposes unskilled U.S. workers to greater foreign competition (i.e., offshore sourcing explains within-industry skill upgrading and rising wage inequality)
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These appear in the four "direct" columns. The key column is that associated with "net imports, 19921972." For example, the all-labor factor content of net imports rose by 0.2 percentage points between 1972 and 1992, indicating that changing trade patterns have augmented the U.S.
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Offshore sourcing sends the low-skill processes abroad so that imports are produced with much less skilled labor than are exports. For trade with developing countries, the factor content of trade is thus biased up for skilled labor and biased down for unskilled labor.
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228 Cq a' ·_4 be ¢ o ¢ x · ~ o ;^ ¢ o v ;^ so o C)
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for the adjusted factor content calculations, i.e., for the AFT(i) given by the Table 6-2 column labeled "net imports, 1992-1972, adjusted." Because elasticities are not known with certainty, I report results for different estimates.
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Because net imports of capital have increased by only 0.1 percentage points over the period, trade has not led directly to capital deepening. If capital is a substitute for unskilled labor and a complement for skilled labor, my implicit assumption of zero elasticities leads to overstated wage impacts.
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The comparative advantage safety valve suggests that immigration has a more adverse consequence than trade. Import levels are not indicative of all the potentially harmful labor market consequences of trade.
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so that trade patterns are to some degree driven by immigration policies! This raises doubts about the meaning of, among other things, factor content studies.
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Unfortunately, the argument unravels when imbedded in long-run models of international trade. Borjas's immigration "surplus" is zero in the Heckscher-Ohlin model with its factor price equalization theorem.
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ACKNOWLEDGMENTS I am indebted to my students at the Harris School for pursuing many of the ideas in this chapter as term papers, to Edgard Rodriguez for data on Filipino migrants, to Huiwen Lad for his research assistance, to Chris Thornberg for data from the 1972 Current Population Survey, and to Michael Baker and Alysious Slow for helpful comments. The third section of this chapter borrows from work in progress with Joe Hotz.
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Notes: The figure illustrates the impact of an immigration-induced rise in the industry x specific factor Kx by an amount lox. A discussion of why industry x labor demand shifts as drawn appears in Dixit and Norman (1980:Figure 2.6~.
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Hanson 1996 "Globalization, Outsourcing, and Wage Inequality." American Economic Review Papers and Proceedings 86 (May)
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1991 "Income Redistribution in a Common Labor Market." American Economic Review 81 (September)
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