Endogenous Migration in a Two-Country Model with Labor Market Frictions

We present a dynamic North-South model with search frictions and endogenous labor migration to study the long-run implications of labor factor mobility on labor market conditions and welfare. In the model, the high-TFP country (North) acts as the destination country for migration, while the low-TFP country (South) acts as the origin country. We prove that there always exists a unique steady-state equilibrium for the world economy, and find that a permanent increase in migration effort causes per capita income to rise in North and to fall in the South. However, our simulations also show the existence of a job displacement effect in the host country that makes domestic employment fall in the long-run. In an extension of the baseline model, we test the long-run effects of a pro-employment protectionist policy of the destination country consisting in imposing a distortionary tax on the domestic firms hiring migrant workers. Our analysis shows that a positive tax rate on foreign employment can increase natives welfare, but only at the expense of losses in national production and employment. These results are robust across different degrees of substitutability between migrant and native workers.