2009): “Productivity Differences and The Dynamic Effects of Labor Movements

This paper is about the interaction between differences in TFP and barriers to labor mobility. We use a growth model with endogenous labor movements to provide a quantitative assessment of the effects on output, capital accumulation and welfare of removing barriers to labor mobility. We parameterize this model so that it is broadly consistent with evidence on historical international labor movements, and apply it to two cases: the enlargement of the European Union and the (hypothetical) creation of a common labor market in NAFTA. Our main finding is that there are large resulting gains in terms of output and welfare. In the European case, the output gains after fifty years are about 1.7-4.5%, and in the NAFTA case they are about 1.3-3.0%. Young individuals from “new ” Europe experience a rise in welfare corresponding to an increase in consumption of 2.7-5.9%, whereas young Mexicans gain about 2.0-4.3%. The losses of young residents of rich locations are much smaller. We also find that capital accumulation strongly magnifies the output effects of labor mobility