Labor market integration in the presence of social capital
Labor market integration is typically assumed to improve welfare in the absence of distortions, because it allows labor to move to where returns are highest. The author examines this result in a simple general equilibrium model in the presence of a common property resource: social capital. Drawing on evidence that social capital raises productivity and falls with labor mobility, the author's main findings are that: 1) Labor market integration imposes a negative externality and need not raise welfare. 2) The welfare impact is more beneficial (or less harmful) the greater the difference in endowments is between the integrating regions. 3) Whether positive or negative, the welfare impact is larger the more similar the levels of social capital of the integrating regions are and the lower the migration costs are. 4) Trade liberalization generates an additional benefit -- over and above the standard gains from trade -- by reducing labor mobility and the negative externality associated with it. Trade liberalization is superior to labor market integration. 5) The creation of new private or public institutions in response to labor market integration may reduce welfare. The author shows that the welfare implications depend on two parameters of the model, the curvature of the utility function and the cost of private migration.
|Date of creation:||30 Nov 1999|
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- Narayan, Deepa & Pritchett, Lant, 1999.
"Cents and Sociability: Household Income and Social Capital in Rural Tanzania,"
Economic Development and Cultural Change,
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- Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
- Stephen Knack & Philip Keefer, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1251-1288.
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