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1
5 Movement of Labor and Capital Between Countries
Notes to Instructor
Chapter Summary
The objective of this chapter is to consider the effect on earnings from the factors of
production and output from movement of all the factors of production across industries
and countries.
Two models are used to explain the effect on earnings and output. The short- and long-
run models rely, respectively, on Chapter 3’s specific-factors model and Chapter 4’s
Heckscher–Ohlin model. We will find that the effect on earning and output differs in the
short and long run.
The Ricardian, related short-run specific-factors, and long-run Heckscher‒Ohlin models
assume that all markets (goods and factors) are perfectly competitive. The next two
chapters will relax this assumption.
The chapter begins by considering the short-run specific-factors model from Chapter 3 in
which labor is mobile across industries, while capital and land remain specific to the
industries considered.
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The specific-factors model, as in Chapter 3, predicts lower wages in the country where
workers are arriving. The owners of capital and land benefit from the reduction in wages
due to migration. When wages fall, left-over earnings benefit rentals on land and capital.
wages to home labor.
This change in industry outputs is the main finding of the Rybczynski theorem, which
informs us of how the long run fundamentally differs from the short run.
In the long-run Heckscher–Ohlin model with two goods and two factors, an increase in
the amount of one factor found in an economy will result in an increase in the output of
the industry using that factor intensively and will simultaneously result in a decrease in
the output of the other industry that does not use this immigration factor intensively. This
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Instead, industry outputs can adjust according to the Rybczynski theorem so that the extra
capital is fully employed without any change in the wage or rentals.
When industries in the long run have more time to respond by adjusting their outputs, it
turns out the economy can absorb the new workers or capital without changing the wage
or rents for existing workers or capital.
In addition, the long-run Heckscher‒Ohlin model assumes the following:
• Countries have identical production technologies.
4
Comments
This chapter bridges the gap between the short-run model (the specific-factors model
from Chapter 3) and the long-run model (the Heckscher‒Ohlin model from Chapter 4).
This allows an optional discussion of policy issues early on. Immigration is not often
discussed in textbooks and might be very interesting and relevant to today’s economic
issues.
As part of the lecture on FDI, it may be useful to read out loud Paul Krugman’s article
“The Myth of Asia’s Miracle.” Students may start off thinking the article is about a newly
elected President Bill Clinton and the race between East and West, where the East is
Asia. However, toward the end of the reading, they will realize that the article actually
These kinds of details with regard to historical issues that may be found in Chapter 6
bring to life the significant impact that immigration and FDI can have on economies and
the important role that economic theories and research can assume in governmental
policy.
This chapter covers two new important theories of international trade: the Rybczynski
theorem and its corollary, the factor price insensitivity theorem.
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Lecture Notes
Introduction
It has long been assumed that immigration causes lower wages in the home country
receiving significant migrants. This chapter opens with two counterexamples.
During May and September, 1980, 125,000 Cubans left the port of Mariel, Cuba, for
Miami, which increased the host city’s population by about 7%. Despite the large supply
of low-skilled immigrants from Cuba, and contrary to predicted economic theories, the
wages of low-skilled workers in Miami did not vary much relative to the national trend.
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1 Movement of Labor Between Countries
We begin with an analysis of the short-run impact of migration on wages and rentals paid
to capital and land in the host country. We will rely on the specific-factors model
presented in Chapter 3. We begin with the case in which capital and land are fixed and
specific to the industries in question, while labor is mobile between industries and
countries. We assume that the prices of goods, determined by the world markets, are
fixed.
Effects of Immigration in the Short Run: Specific-Factors Model
Similarly to Chapter 3, we assume that the economy has two sectors: agriculture, where
land is the specific factor, and manufacturing, which uses capital as the specific factor.
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Figure 5-1 shows that the total amount of labor in the economy, = LM + LA, is divided
between the two industries, with the amount of labor used in manufacturing, LM,
measured from left (0M) to right; whereas the amount used in agriculture, LA, is measured
from right (0A) to left.
Determining the Wage The curve representing the value of the marginal product of
labor in manufacturing (agriculture) comes from multiplying the marginal product of
labor in manufacturing (agriculture) with the good’s price, PM(PA). The curve is
8
Effect of Immigration on the Wage in Home We assume that the wage in Foreign, W*,
is less than that at Home, W, which triggers immigration. The higher wage entices
Foreign workers to move to Home, thereby increasing the Home workforce by the
number of immigrants, ∆L. The increase in the amount of labor from Foreign is shown as
the expansion of the right-hand side of the horizontal axis in Figure 5.2, where the origin
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APPLICATION
Immigration to the New World
In 1870, the real wages of the “New World,” which included countries in North and
South America and Australia, were nearly three times higher than those in the “Old
World,” or Europe, as illustrated in Figure 5-3. Encouraged by the high wages and new
opportunities, about 30 million Europeans migrated to the New World between 1870 and
1913. Due to the large influx of new workers, the wages in the New World grew slower
relative to those of the Old World. By 1913, European wages increased to half those of
10
APPLICATION
Immigration to Europe Today
Immigration continues to take place today, but rather than from Europe to the New
World, workers are moving from developing countries to wealthier countries. Policies
toward immigration have changed over the years in the wealthier host countries. For
example, during the 1960s and 1970s, some European countries welcomed and recruited
workers to fill shortages in unskilled jobs, referred to as gastarbeiters in West Germany.
They often remained and are no longer considered guests. Today, there is more of a mix
of low-skilled and highly skilled workers immigrating. By 1994, there were some 2.1
million foreigners in Western Germany, with the largest groups coming from Turkey,
Yugoslavia, Greece, and Italy.
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As a small example, in 2012, some 58,000 migrants left Africa to escape unrest. The
massive inflow of these migrants overwhelmed the host countries as each attempted to
provide the needed social assistance to overflowing refugee camps. Now with the civil
wars in the Middle East and Africa, the situation has become dire. In 2015, millions of
The policy toward immigration is also being hotly debated in the United States. Although
most of the focus has been on the influx of illegal immigrants to the country, many
unskilled workers enter under the special visa programs to fill voids in the agriculture
sector as crop harvesters. In addition, a number of skilled workers such as engineers and
scientists are granted special privileges to work in the United States.
12
Using an extension of the specific-factors model to accommodate for labor with different
educational levels, we find that between 1990 and 2004, the inflow of workers to the
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H E A D L I N E S
Brussels Resumes Policy Push to Share Out Refugees Across EU
This article discusses the 2015 influx of refugees from the Middle East and Africa into
Europe. It covers the challenges faced by Europe from the massive influx of immigrants
seeking asylum.
The European Commission offered a proposal that has been hotly debated by member
states of the EU. That proposal—to share any sudden influx of refugees across the
European states—has been flatly rejected by some. Germany specifically has threatened
that the entire border-free Schengen Agreement may collapse if it is not significantly
reformed.
Other Effects of Immigration in the Short Run
Rentals on Capital and Land We can compute the effect of immigration on the earnings
of capital and land by subtracting the payment to labor from the revenue earned in each
sector. Because wages are lower due to the influx of foreign workers, the rentals to
capital and land are higher. Additionally, the rise in the rentals on capital and land occurs
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H E A D L I N E S
Refugees Can Be an Investment, Rather Than a Burden
Refugees are often thought of as a burden. This perspective was well shared by the
German vice chancellor Sigmar Gabriel. Just as Europe was struggling with a new severe
inflow of refugees, some 160,000 migrants from the war-torn areas of Syria and Iraq, the
German vice chancellor outlined a new proposal that he described as just a “drop in the
ocean.”
But, it is not always true that these kinds of numbers act as a drain on government coffers
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Effect of Immigration on Industry Output In addition to the impact on returns to
capital and land, the inflow of workers with a given supply of capital and land increases
total output in both agriculture and manufacturing, as shown in Figure 5-4. Given our
Effects of Immigration in the Long Run
We will now determine the long-run effects of the movement of labor between countries.
We rely on the Heckscher‒Ohlin model, where all factors are free to move across
industries. It differs from the Chapter 4 model in that labor and capital will move across
countries as well.
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17
Box Diagram Figure 5-6 illustrates a “box diagram” where the horizontal (vertical) axis
measures the total amount of Home labor, (capital, ). This box diagram is used to
analyze the effect of immigration.
18
Determination of the Real Wage and Real Rental In addition to determining the long-
run amount of capital and labor used in each industry, we will determine earnings or
wages and rent in each industry.
We can rely on the capital‒labor ratios to inform us of the real wage. From Chapter 3, we
Increase in the Amount of Home Labor Now that we know the slopes represent a
specific capital‒labor ratio that, in turn, determines the earnings for labor and capital, let
us consider what happens when immigration occurs. We will show that even though the
amounts of capital and labor change, the ratios will not. If the ratios do not change, then
immigration will not impact the real earnings of labor and capital.
The new allocation of labor is illustrated in Figure 5-7, where the amount of capital and
labor devoted to the production of shoes is given by 0
′K
′
and 0
′L
′
, respectively. Given
the new equilibrium at point B, the endowments dedicated to shoe production have
increased (0
′K
′
> 0SK and 0
′L
′
> 0SL). By contrast, the units of capital (0CK
′
) and labor
(0CL
′
) employed in the computer industry have declined (0CK
′
< 0CK and 0CL
′
< 0CL).
Because the movement of labor and capital between shoes and computers leaves the
Effect of Immigration on Industry Outputs Furthermore, in the short run, in which the
specific factors are fixed, an increase in the supply of labor leads to an increase in the
output of both goods. By comparison, because the increase in labor endowment is
