Efficiency Wages and International Migration of Labor

Using a two-country macroeconomic model where nominal wages are determined by the efficiency wage hypothesis, we investigate how workers move between two countries and how migration affects the workerreceiving and worker-sending countries. For this purpose, we assume that a firm in each country determines nominal wages to keep workers from shirking, given the effort exerted by the workers in that country. We also assume that workers move between two countries due to differences in real-consumption wages (nominal wages divided by the consumer price index). We show that nominal wages are higher in the country where workers exert higher effort, and the workers move from the country whose workers exert lower effort to the country whose workers exert higher effort. We also show that the unemployment rate in the home country becomes higher as the workers in the home country exert more effort and the workers in the foreign country exert less effort. Under non-cooperation between policy authorities, the unemployment rate and the consumer price index are higher in the receiving country than in the sending country, implying that the policy authority in the receiving country has the lower utility than the one in the sending country, while the real-consumption wages are higher in the receiving country than in the sending country