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

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  • Bright Isaac Ikhenaode
  • Carmelo Pierpaolo Parello

Abstract

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.

Suggested Citation

  • Bright Isaac Ikhenaode & Carmelo Pierpaolo Parello, 2018. "Endogenous Migration in a Two-Country Model with Labor Market Frictions," Working Papers 184, University of Rome La Sapienza, Department of Public Economics.
  • Handle: RePEc:sap:wpaper:wp184
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    References listed on IDEAS

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    More about this item

    Keywords

    North-South migration; Ramsey-Like Growth; International Labor Mobility; Frictional Unemployment;

    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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