Education, Institutions, Migration, Trade, and The Development of Talent
This paper proposes a theory of free movement of goods and labor between two large economies with imperfect labor contracts. Each country is incompletely specialized in producing two final goods that differ in their complexity of production. The most complex good is produced by workers and managers who pair up with each other according to an efficient matching process, where the most talented manager matches with the most talented worker. The least complex good is produced by firms that consist of one individual. The most talented individual is defined as the one with the highest level of optimal job training. The heart of our analysis lies in the determinants of talent development. We show that in a world economy with two otherwise similar countries that have different institutional quality, or/and a different system of early education, a country that has the best quality of institution, combined with the best early educational system, will be the host country of immigrants. Under free trade and labor, the best institutions and the best early educational system can serve as complementary sources of comparative advantage in the most complex industries. Consequently, the host country of immigrants will export the most complex goods produced by the most talented individuals. The economic progress of a source country will be shown to be related to its ability to improve its quality of institutions and its early educational system. It also is shown that individuals’ decisions to emigrate are related to the fixed costs of migration, such as language barriers. Finally, emigration affects the income of both countries via an indirect effect on individuals’ incentives to invest in their job training and a direct effect on prices of goods.
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