The Effects of International Movement of Labor

The effects of international movements of labor

Introduction

Is implementing barriers on labor mobility between countries a big issue? Do they have a big influence on the productivity of countries? Will removing these barriers, hence allowing international movement of labor, affect the output and welfare of countries? Actually, we can notice that there are large differences in productivity between countries. And these differences coexist beside large labor movement barriers which are restricting labors from flowing from relatively low productive countries or locations to relatively high productive countries or locations. So barriers are preventing these labors from moving which is causing labor misallocation across countries. These types of labor barriers exist long time ago. It has been found in the United States since 1920 (Klein, 2009).

There are many historical and present evidence on labor migration. For example; there was a huge labor movement from Europe to the U.S, Canada and Latin American countries in the 19th and early 20th century. Approximately more than 25 million people migrated from Europe to these countries between 1890 and 1915. The total yearly migration to these countries was about 0.7% of the total population in these countries between 1850 and 1913 (1, 2, 4).

Sweden was one of the largest immigrants source to the US. It had a 0.7% yearly emigration rate between 1850 and 1875. Two other countries that were also large sources of immigrants were Ireland and Italy (3, 4).

This large amount of immigration affected the destination countries significantly. For example; in the US, the immigration rate between 1900 and 1913 was nearly equal to the US population rate which is 1%. In Argentina, the immigration rate was 2.9 % between the same dates. This means it's a serious issue which should be addressed. However, countries started putting migration barriers and the amount of immigrants decreased substantially. For example; in the US, migration policies started at the end of the First World War in 1917. As a result, immigration to the United States reduced by 58% and stayed low for nearly 10 years. The rate of immigration to the US is still very low until now mainly because of those immigration policies (Klein, 2009).

Many economists studied the issue of labor mobility across countries and its effects on the output and welfare of these countries. Some studied it by creating models and equations to help him/her find the affect of such events. Few of these studies and their results will be mentioned in this paper and a brief discussion and conclusion about the issue will be stated

Studies about the issue

A growth model with labor movement was created to help study the effects of removing labor barriers between countries on the welfare of countries. This means that labor can move across countries. The assumptions of the model were that there is only 1 good and this good is produced using three factors of production (labor, capital and land). Capital can move freely between countries and land is fixed all under constant returns to scale. Labor is mobile however, but imperfectly due to different migration costs. This cost can be monetary cost or a psychic cost associated from leaving the home country (Klein, 2009).

This gravity model is adjusted to be consistent with labor movement evidences and it is used to study the consequences of the European Union's huge growth and the effects of the common labor market created by NAFTA. The study found that if labor barriers are removed, thus allowing labor movement, overall output will increase by 8% for the first case (EU case). And will increase by 10.5% in the second case (NAFTA case). As for the welfare, domestic labor in poor, low productivity locations gained approximately 4.3% in the EU case and 3.2% in the NAFTA case. Although domestic labor in rich locations lost, their losses were very small compared to the gains of the winners. Thus, the study indicated that there are large welfare gains that can be achieved by removing labor barriers. Adding to that, the study gave good incentive for further studies about this issue (Klein, 2009).

The study also found that labor barriers, which will reduce labor movement, can concentrate labor and capital in countries with high productivity. Therefore, allowing international movement of labor will redistribute these resources efficiently across countries. The study further showed that such barriers are like capital income tax rates which are unwanted. Allowing labor movement across countries will have larger effects on the welfare and output of countries compared to having a larger EU or having a common labor market. All this shows that allowing labor movement across countries is good and it benefits the world economy in a whole. Although some arguments supporting labor barriers exist (e.g. public goods congestion), it is doubtful whether these arguments are convincing enough to work (Klein, 2009).

Another study was done using a general equilibrium model which is used to determine the advantages and disadvantages of labor movement on the participating countries. The model defines less productive countries as south and high productive countries as north. Similar to the first model, this model assumes one good, but the factors of production are labor and capital. Adding to that, the model also assumes that one country has a perfectly elastic supply of labor and the other's supply is inelastic. Also each country specializes in its production(Wooton,1985).

The study found out that labor movement across countries can be very beneficial, especially in the long run. While the immigration country makes gains from production, the emigration country perceives high demand on its produced goods. Moreover, the study shows that no limits will be applied on immigration even if the income of migrant people has been taxed (Wooton,1985). All this shows that allowing international labor movement is beneficial for both participating countries.

Discussion and conclusions

The large difference in average income among countries is a good evidence that allowing more international