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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.
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
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.
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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
These kinds of details with regard to historical issues that may be found in Chapter 6
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Note that an important assumption of these theories and analysis for both the short- and
long-run models is that world prices of goods are constant and determined by world
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
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demand.
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
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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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
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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
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
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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
Since the European Union (EU) has expanded to include much of Eastern Europe and
free migration across the EU is supported by the Schengen Agreement, controlling
in the hope of a better and more peaceful existence. But, the numbers are overwhelming
to the host countries in Europe and the ability of the governments to cope with the
migrants and provide the needed social assistance has begun to tear at their social fabric.
The sheer numbers of refugees have threatened not just border management and the
economies of Europe, but cultural assimilation as well. The Schengen policies have only
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The pattern between the number of immigrants and educational level is shown in Figure
5-4 for the United States. The graphical analysis indicates that contrary to the substance
of public debates, immigrants scarcely compete with most domestic workers with mid-
United States resulted in a drop in wages among high school dropouts by 9%. The wages
of college graduates fell by 5%, whereas most U.S. workers with mid-level educations
saw their wages fall by 1% to 2.4%, respectively, for those with some college versus a
high school diploma.
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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
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
because the increase in labor hired in each industry raises the marginal product of both
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
Research by Giovanni Peri of the University of California Davis and Mette Foged of the
University of Copenhagen suggests that the influx of lower-wage arrivals could result in
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allowing for specialization, increased productivity, and thus overall growth of the
economy. This increased productivity allowed refugees to act as an engine for growth in
the economy and provided more opportunities for local workers in the host countries.
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
Effects of Immigration in the Long Run
We will now determine the long-run effects of the movement of labor between countries.
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To simplify the model, we assume only two factors of production (capital and labor),
both of which are freely mobile between two industries (computers and shoes). The total
amount of capital available at Home is denoted by , where KC units of capital are
allocated to the production of computers and KS units are used in producing shoes. Since
capital is fully mobile, it must earn the same rental R in both industries in the long run.
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.
Reading from the bottom left-hand corner, 0SL units of labor (horizontal axis) and 0SK
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right corner, 0CL units of labor and 0CK units of capital are used in the production of
computers. In other words, the line 0SA represents the quantity of labor and capital
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
learned that wages and rentals are determined by their marginal products, which, in turn,
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
immigration will not impact the real earnings of labor and capital.
Suppose the inflow of foreign workers is given by the amount ∆L; then the total available
labor at Home is now higher at
′
= + ∆L > . The increase in amount of labor is
illustrated by the expansion on the left-hand side of the horizontal axis in Figure 5-7. In
the long run, capital and labor are mobile, and industry output is able to adjust. The
labor devoted to the production of shoes is given by 0
′
and 0
′
, respectively. Given
the new equilibrium at point B, the endowments dedicated to shoe production have
′K
′L
Because the movement of labor and capital between shoes and computers leaves the
′B parallels the line 0SA and therefore has 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
