Mobility of workers, regional disparities, and immigration policy - - PowerPoint PPT Presentation

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Mobility of workers, regional disparities, and immigration policy

Joachim Jarreau (AMSE) and Giovanni Facchini (Nottingham) FERDI - January 24th, 2013

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Immigration and imperfect mobility

The standard framework in the literature on immigration: one integrated labor market - perfect mobility of workers. ❼ Workhorse model: one-region economy with 2 complementary factors (Borjas, 1995) ❼ More complex models: more factors (Ottaviano Peri, 2008, 2012); different tasks (Peri Sparber, 2009), but still one regional market. ❼ Empirical studies: the factor proportion approach sees immigration as a shock to factor inputs at the global (country) level. → Most of the literature adopts a one-region approach.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Why (imperfect) mobility matters

❼ Host countries are fragmented economies: regional wage disparities persist, i.e. workers are not perfectly mobile ❼ Foreign workers take this into account, when choosing where to settle or re-settle → modifies the impact of immigration on wages, welfare and immigration policy. ❼ Differences in workers’ mobility across host countries: e.g. US workers are more mobile than EU workers. → workers’ mobility smoothes regional cycles more in the US (Blachard and Katz, 1992; Decressin and Fatas 1995).

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Objectives of this paper

Address 3 questions: ❼ Is the impact of immigration different in a country with low mobility, high fragmentation? ❼ Do natives benefit more, or less, from immigration then? ❼ Do they vote for more or less immigration?

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

This paper’s approach

Build a 2-region, 2-factor model of the host economy with imperfect mobility of workers between regions → Idiosyncratic costs of moving across regions Focus on unskilled migration: the contentious issue in host countries. ❼ Immigration impact on natives’ welfare and wages: how does it vary with natives/foreigners’ mobility? ❼ Political equilibrium: consider a quota on entries. How does it depend on mobility / on regional disparities

❼ in a referendum ❼ in a process with political support groups

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Main results

❼ Foreign workers’ mobility increases the net Welfare gain to natives

❼ the gain accrues to skilled workers (the complementary factor).

Unskilled labor loses more.

❼ so mobility increases the polarization of immigration impacts.

❼ In a referendum, the admissible quota ˆ I increases with immigrants’ mobility → voters in the less attractive region have more weight ❼ It is reversed if policy is shaped by support groups bidding for influence.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Literature

❼ Theo. studies on labor market adjustment to immigration: through wages

(Borjas, 2003), employment (d’Amuri et al., 2010), tasks (Peri and Sparber, 2009): all consider an integrated labor market. Empirical studies: endogeneity of immigrants’ location choices well identified since Altonji and Card, 1989. But the “factor proportions approach” ignores frictions across local markets (Borjas and Katz 2007, Ottaviano and Peri 2012).

❼ Political economy of immigration policy: building on a Grossman and

Helpman (1994) framework , as in Facchini and Willmann (2005).

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Literature

❼ Immigration policy in a median voter framework: as in Benhabib (1996),

but focusing on a quota, not on selection.

❼ How does a referendum work in a multi-region country? → impact of

polarization on the policy: regions most impacted by a policy have less influence on the decision. Related to Meltzer and Richard (1981)’s result on inequality and government spending.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

The model

❼ 2 regions, A and B ❼ 2 factors: unskilled and skilled labor - producing one good (price 1). In each region i, production function yi = θif (¯ hi) , ¯ hi = Hi/(Ni + Ii). Standard conditions on f: f ′(¯ hi) > 0,f ′′(¯ hi) < 0. θi: total factor productivity. Regional gap: assume θA = 1 + ǫ, θB = 1 − ǫ ❼ Linear utility.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Human capital distribution

❼ Native workers differ by their human capital (or skill) level h. ❼ Native population N initially split equally across regions. Same distribution G(h) in both populations. ❼ Human capital stock in each region: H =

• h h.dG(h)

Native with human capital h in region i earns an income: Ri(h) = wi + h.ri

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Immigration policy

The government can choose to restrict inflows of foreign workers to a level I. Restrictions have a per-capita cost: c(Imax − I), shared equally among natives. ❼ c′ > 0, c′′ > 0 ❼ c′(Imax) “very high”: blocking entries to 0 is prohibitively costly. ❼ depends on country-level immigration I. Quota chosen by natives. Immigrants do not vote.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Location choices: a Hotelling type model for imperfect mobility

Workers have varying preferences for living in A or B (family links, networks, specific information about jobs...) Each individual draws D, uniform on [0, 1] : represents the relative preference for region A. Settlement costs: in A: γD in B: γ(1 − D) Worker i’s utility: in A: ui = wA − γDi in B: ui = wB − γ(1 − Di) γ: an inverse measure of workers’ spatial mobility.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Location choices

Cost of settling in A / in B

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Location choices

Location choices: case with WA > WB uA(D) = wA − γD uB(D) = wB − γ(1 − D)

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Spatial equilibrium

First case: natives are not mobile (equally split across both regions). Threshold value D: foreign worker indifferent between settling in either region: wA − γ.D = wB − γ(1 − D) Wage levels are given by: wA = (1 + ǫ).

• wN − 2µi(D − 1/2)
• wB

= (1 − ǫ).

• wN + 2µi(D − 1/2)
• wN: benchmark wage level (for θA = θB = 1).

µ: wage/labor elasticity i immigration ratio, i =

I N+I

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Spatial equilibrium

Solving yields the wage gap and mobility rate at equilibrium: D = 1/2 + ǫwN γ + µwNi ∆w = 2ǫwN 1 + µ wN

γ i

❼ Polarization of foreign-born workers increases with the productivity differential ǫ, the spatial flexibility of immigrants 1/γ, decreases with the wage elasticity µ. ❼ The wage gap is higher when immigrants are less flexible.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Welfare impact of mobility

Native welfare in each region: W A

N = ¯

W + (1 + ǫ)µ wN N + I

• (D − 1/2).I

2 W B

N = ¯

W − (1 − ǫ)µ wN N + I

• (D − 1/2).I

2 Immigration yields a surplus to natives, quadratic in the number of new workers entering the market (Borjas, 1995). Total native welfare: WN = 2 ¯ W + 2ǫµ wN N + I

• (D − 1/2).I

2 ⇒ WN is increasing in D − 1/2, the foreigners’ polarization: there is a mobility surplus.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Immigration surplus

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Welfare impact of mobility

Two effects behind this surplus: ❼ efficiency: higher mobility ⇒ foreign workers go to the high-productivity region A - increases total GDP and natives’ share. ❼ surplus sharing: the welfare gain in each region is quadratic in immigration DI ((1 − D)I). Skilled workers gain more when immigrants concentrate in one region, where the impact on wages is larger. Note: the mobility surplus is captured by owners of the complementary factor (skilled workers) in the rich region A.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Gain polarization

Average welfare level of native with skill h: W (h) = ¯ w + h¯ r = wN + hrN + µǫ2 γ/wN + µi h ¯ h − 1

• i
• mobility gain/loss

−c(Imax − I) ⇒ skilled workers gain more from immigration, unskilled workers lose more when foreign workers are more mobile across regions. In addition, skilled workers in region A capture more of the gains; unskilled workers in A face larger wage losses.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Immigration policy

First case: referendum on I Each voter with human capital h has a preferred immigration level, solution of: Max

ˆ I

wj(ˆ I) + h.rj(ˆ I) − c(Imax − ˆ I) ❼ Skewed distribution of capital ⇒ median voter is unskilled (hm < ¯ h). ❼ Voters in A are more adverse to immigration (wages more impacted) → 2 pivotal voters hA

m, hB m, with hA m > hB m :

¯ h − hA

m

¯ h − hB

m

= (1 − ǫ)(1 − D) (1 + ǫ)D

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Pivotal voters

R′

A(I) = ∂wA

∂I + h.∂rA ∂I R′

B(I) = ∂wB

∂I + h.∂rB ∂I

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Pivotal voters

Coalitions of voters: ❼ a majority in A + a minority in B wanting less Immig. ❼ a minority in A + a majority in B wanting more Immig.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Impact of mobility

With a more mobile foreign workforce: polarization of the wage effects ❼ unskilled workers in A become more adverse, in B more open to I. ❼ overall impact:

∂ˆ I ∂γ < 0, ∂ˆ I ∂ǫ > 0 : quota ˆ

I increases with mobility, regional gap.

Conditions: G ′(hB

m)

G ′(hA

m) > (1 − ǫ)(1 − D)2

(1 + ǫ)D2 G ′(hB

m)

G ′(hA

m) > 1 − ǫ

1 + ǫ (1 − D) D 1 +

ǫ 1+ǫ D 1−D + ǫ 1−ǫ

These conditions hold for a log-normal distribution G(h) and small values of ǫ.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Impact of mobility

Displacement of pivotal workers when γ ց (mobility ր)

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Impact of mobility

Intuition: polarization of the wage impacts ⇒ unskilled workers in rich region A are marginalized: they are too far away from the pivotal voter → Even if the median voters are unskilled workers, immigrants’ mobility increases the quota level, bringing policy closer to skilled workers’

• ptimum

A referendum leads to a policy in line with natives’ global welfare, but contrary to unskilled workers’ interests.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

The case with lobby groups

Political groups (business and labor) influence immigration policy (Hanson, 2010; Facchini, Mayda and Mishra 2011). What if interest groups in each region bid for protection from the impacts

• f immigration on wages?

Take: ❼ A framework as in “Protection for Sale” (Grossman and Helpman, 1994) ❼ to keep it simple: assume only unskilled labor is organized in political groups

Observed restrictions consistent with unskilled labor having more weight in the policy choice

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

The political game

Each group in region i = A, B proposes a contribution schedule to the government so as to maximize welfare net of contributions: Max

I

Wi − Ci(I) ⇒ C ′

i (I) = NU

∂wi(I) ∂I The government’s objective function: Max

I

a [CA(I) + CB(I)] + (N/2).

• wA + rA.¯

hN

A − c(Imax − I)

• +
• wB + rB.¯

hN

B − c(Imax − I)

• hN

A , hN A : average human capital level of natives in region A, B

a : relative weight of lobbies’ contributions.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Solution of the political game

Solution to the gov’t program ˆ I is defined by: −α (1 + ǫ)[aNU − Dˆ I]D

• mg. impact on wA

− α (1 − ǫ)

• aNU − (1 − D)ˆ

I

• (1 − D)
• mg. impact on wB

= – (aNU + N)c′(Imax − ˆ I)

• mg. cost of restrictions

One obtains the result: The equilibrium quota level ˆ I decreases with workers’ mobility 1/γ and with the inter-regional productivity gap ǫ.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Solution of the political game

Intuition: Immigration I has a bigger impact on wages in region A. Thus A’s contribution schedule is steeper. When mobility increases:

∂CA(I) ∂I

↑ , ∂CB(I)

∂I

↓ (in abs. value) ; the effect on CA(I) is larger. i.e. opposition to I grows more in A than it decreases in B. This time, polarization gives those most negatively impacted (unskilled workers in A) more influence on policy.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Adding natives’ mobility

2 reasons to add natives’ mobility to the picture: ❼ Potential substitution between immigrants and natives mobility (saving mobility costs) ❼ We would like to compare countries by relative mobility, γN/γI Note: whether γN > γI depends on context (Schuendeln 2007, Boman 2011).

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Changes in the modeling

Take a simple distribution of factor ownership among natives: ❼ NU unskilled workers ❼ NS skilled workers Like immigrants, natives draw a value of D, uniformly distributed on [0, 1]. 2 threshold values, DU and DS, defined by: w A

U − γNDU

= w B

U − γN(1 − DU)

w A

S − γNDS

= w B

S − γN(1 − DS)

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Internal migration equilibrium

Equilibrium is solution of: γN(2DS − 1) = ∆wS γN(2DU − 1) = ∆wU γI(2DI − 1) = ∆wU with labor demand equations: ∆wU = 2ǫw N

U + β.(2DS − 1)NS − α

• (2DI − 1)I + (2DU − 1)NU
• ∆wS

= 2ǫw N

S + β

• (2DI − 1)I + (2DU − 1)NU
• − δ.(2DS − 1)NS

α, β, δ second derivatives of production function F: α = − ∂2F ∂U2 , β = ∂2F ∂U∂S , δ = − ∂2F ∂S2

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Internal migration equilibrium

Defining the mobility ratio m = γN

γI , one shows that:

∂(∆wU) ∂m < 0 ∂(∆wS) ∂m > 0∂DU ∂m < 0 (1) More mobile immigrants (relatively): ❼ reduce the unskilled wage gap, and unskilled natives’ migration ❼ increase the skilled wage gap.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Welfare impact of mobility

One more term in natives’ welfare: mobility costs. WU = DUwA + (1 − DU)wB

• income

− γN 2

• D2

U + (1 − DU)2

• mobility costs

(2) But the impact of immigrants’ mobility on WU remains negative, as before: ❼ an increases in m decreases average unskilled wages ❼ but reduces mobility costs incurred by them. The net welfare effect is negative.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Welfare impact: skilled workers

Symmetrically: immigrants’ mobility ❼ increases average skilled wages ❼ increases mobility costs for skilled workers. The net welfare effect is positive.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Political equilibrium

❼ Consider the case with political influence groups ❼ Assume native workers are represented by the group of their region

• f residence

Results from the first part are valid, i.e.: ❼ an increase in relative mobility of immigrants m reduces the chosen quota level ˆ I ❼ an increase in regional gap ǫ has the same effect.

Introduction Model structure Welfare impact Impact on Policy Mobility of natives

Summary of results

How is the immigration impact on wages, welfare, and immigration policy modified by the regional fragmentation of the host economy? ❼ the wage impact of immigration is more polarized in a fragmented economy ❼ the net welfare impact is positive, benefiting skilled workers but hurting substitutable (unskilled) workers ❼ when workers’ groups shape immigration policy, restrictions will increase with fragmentation.