International Labor Mobility
In this section, we will show how the specific factors model can be adapted to analyze the
effects of labor mobility. In the modern world, restrictions on the flow of labor are
legion—just about every country imposes restrictions on immigration. Thus labor mobility
is less prevalent in practice than capital mobility. However, the analysis of physical capital
movements is more complex, as it is embedded along with other factors in a multinational’s
decision to invest abroad (see Chapter 8). Still, it is important to understand the
international economic forces that drive desired migration of workers across borders, and
the short-run consequences of those migration flows whenever they are realized. We will
also explore the long-run consequences of changes in a country’s labor and capital endowments
in the next chapter.
In the previous sections, we saw how workers move between the cloth and food sectors
within one country until the wages in the two sectors are equalized. Whenever international
migration is possible, workers will also want to move from the low-wage to the
high-wage country.9 To keep things simple and to focus on international migration, let’s
assume that two countries produce a single good with labor and an immobile factor, land.
Since there is only a single good, there is no reason to trade it; however, there will be
“trade” in labor services when workers move in search of higher wages. In the absence of
migration, wage differences across countries can be driven by technology differences, or
alternatively, by differences in the availability of land relative to labor.
Figure 4-13 illustrates the causes and effects of international labor mobility. It is very
similar to Figure 4-4, except that the horizontal axis now represents the total world labor
force (instead of the labor force in a given country). The two marginal product curves now
represent production of the same good in different countries (instead of the production of
two different goods in the same country). We do not multiply those curves by the prices of
Marginal product
of labor
Home
employment
Total world labor force
Foreign
employment
L2 L1
Migration of
labor from Home
to Foreign
A
B
C
MPL*
MPL
O O*
MPL MPL*
Figure 4-13
Causes and Effects of
International Labor Mobility
Initially workers are
employed in Home, while
workers are employed in Foreign.
Labor migrates from Home to
Foreign until workers are
employed in Home, in
Foreign, and wages are equalized.
L2O*
OL2
L1O*
OL1
9We assume that workers’ tastes are similar so that location decisions are based on wage differentials. Actual
wage differentials across countries are very large—large enough that, for many workers, they outweigh personal
tastes for particular countries.
70 PART ONE International Trade Theory
the good; instead we assume that the wages measured on the vertical axis represent real
wages (the wage divided by the price of the unique good in each country). Initially, we
assume that there are workers in Home and workers in Foreign. Given those
employment levels, technology and land endowment differences are such that real wages
are higher in Foreign (point B) than in Home (point C).
Now suppose that workers are able to move between these two countries. Workers will
move from Home to Foreign. This movement will reduce the Home labor force and thus
raise the real wage in Home, while increasing the labor force and reducing the real wage in
Foreign. If there are no obstacles to labor movement, this process will continue until the
real wage rates are equalized. The eventual distribution of the world’s labor force will be
one with workers in Home and workers in Foreign (point A).
Three points should be noted about this redistribution of the world’s labor force.
1. It leads to a convergence of real wage rates. Real wages rise in Home and fall in Foreign.
2. It increases the world’s output as a whole. Foreign’s output rises by the area under its marginal
product curve from to , while Home’s falls by the corresponding area under its
marginal product curve. (See appendix for details.) We see from the figure that Foreign’s
gain is larger than Home’s loss, by an amount equal to the colored area ABC in the figure.
3. Despite this gain, some people are hurt by the change. Those who would originally
have worked in Home receive higher real wages, but those who would originally have
worked in Foreign receive lower real wages. Landowners in Foreign benefit from the
larger labor supply, but landowners in Home are made worse off.
As in the case of the gains from international trade, then, international labor mobility,
while allowing everyone to be made better off in principle, leaves some groups worse off in
practice. This main result would not change in a more complex model where countries produce
and trade different goods, so long as some factors of production are immobile in the
short run. However, we will see in the following chapter that this result need not hold in the
long run, when all factors are mobile across sectors. We will see how changes in a country’s
labor endowment, so long as the country is integrated into world markets through trade, can
leave the welfare of all factors unchanged. This has very important implications for immigration
in the long run, and has been shown to be empirically relevant in cases where countries
experience large immigration increases.
L1 L2
OL2 L2O*
OL1 L1O*
Case Study
Wage Convergence in the Age of Mass Migration
Although there are substantial movements of people between countries in the modern
world, the truly heroic age of labor mobility—when immigration was a major source of
population growth in some countries, while emigration caused population
in other countries to decline—was in the late 19th and early
20th centuries. In a global economy newly integrated by railroads,
steamships, and telegraph cables, and not yet subject to many legal
restrictions on migration, tens of millions of people moved long distances
in search of a better life. Chinese people moved to Southeast
Asia and California, while Indian people moved to Africa and the
Caribbean; in addition, a substantial number of Japanese people
moved to Brazil. However, the greatest migration involved people
from the periphery of Europe—from Scandinavia, Ireland, Italy,
CHAPTER 4 Specific Factors and Income Distribution 71
and Eastern Europe—who moved to places where land was abundant and wages were
high: the United States, Canada, Argentina, and Australia.
Did this process cause the kind of real wage convergence that our model predicts?
Indeed it did. Table 4-1 shows real wages in 1870, and the change in these wages up to
the eve of World War I, for four major “destination” countries and for four important
“origin” countries. As the table shows, at the beginning of the period, real wages were
much higher in the destination than in the origin countries. Over the next four decades
real wages rose in all countries, but (except for a surprisingly large increase in Canada)
they increased much more rapidly in the origin than in the destination countries, suggesting
that migration actually did move the world toward (although not by any means
all the way to) wage equalization.
As documented in the Case Study on the U.S. economy, legal restrictions put an end
to the age of mass migration after World War I. For that and other reasons (notably a
decline in world trade, and the direct effects of two world wars), convergence in real
wages came to a halt and even reversed itself for several decades, only to resume in the
postwar years.
TABLE 4-1
Real Wage, 1870
(U.S. = 100)
Percentage Increase
in Real Wage, 1870–1913
Destination Countries
Argentina 53 51
Australia 110 1
Canada 86 121
United States 100 47
Origin Countries
Ireland 43 84
Italy 23 112
Norway 24 193
Sweden 24 250
Source: Jeffrey G. Williamson, “The Evolution of Global Labor Markets Since 1830: Background
Evidence and Hypotheses,” Explorations in Economic History 32 (1995), pp. 141–196.
Case Study
Immigration and the U.S. Economy
As Figure 4-14 shows, the share of immigrants in the U.S. population has varied greatly
over the past century. In the early 20th century, the number of foreign-born U.S. residents
increased dramatically due to vast immigration from Eastern and Southern
Europe. Tight restrictions on immigration imposed in the 1920s brought an end to this
era, and by the 1960s immigrants were a minor factor on the American scene. A new
wave of immigration began around 1970, this time with most immigrants coming from
Latin America and Asia.
72 PART ONE International Trade Theory
How has this new wave of immigration affected the U.S. economy? The most direct
effect is that immigration has expanded the work force. As of 2006, foreign-born workers
make up 15.3 percent of the U.S. labor force—that is, without immigrants the
United States would have 15 percent fewer workers.
Other things equal, we would expect this increase in the work force to reduce wages.
One widely cited estimate is that average wages in the United States are 3 percent lower
than they would be in the absence of immigration.10 However, comparisons of average
wages can be misleading. Immigrant workers are much more likely than native-born
workers to have low levels of education: In 2006, 28 percent of the immigrant labor
force had not completed high school or its equivalent, compared with only 6 percent of
native-born workers. As a result, most estimates suggest that immigration has actually
raised the wages of native-born Americans with a college education or above. Any negative
effects on wages fall on less-educated Americans. There is, however, considerable
dispute among economists about how large these negative wage effects are, with estimates
ranging from an 8 percent decline to much smaller numbers.
What about the overall effects on America’s income? America’s gross domestic
product—the total value of all goods and services produced here—is clearly larger
because of immigrant workers. However, much of this increase in the value of production
is used to pay wages to the immigrants themselves. Estimates of the “immigration
surplus”—the difference between the gain in GDP and the cost in wages paid to
immigrants—are generally small, on the order of 0.1 percent of GDP.11
12
6
8
10
4
2
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
14
16
Figure 4-14
Immigrants as a Percentage of the U.S. Population
Restrictions on immigration in the 1920s led to a sharp decline in the
foreign-born population in the mid-20th century, but immigration has
risen sharply again in recent decades.
10George Borjas, “The Labor Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on
the Labor Market,” Quarterly Journal of Economics 118 (November 2003), pp. 1335–1374.
11See Gordon Hanson, “Challenges for Immigration Policy,” in C. Fred Bergsten, ed., The United States and the
World Economy: Foreign Economic Policy for the Next Decade, Washington, D.C.: Institute for International
Economics, 2005, pp. 343–372.
CHAPTER 4 Specific Factors and Income Distribution 73
SUMMARY
1. International trade often has strong effects on the distribution of income within countries,
so that it often produces losers as well as winners. Income distribution effects
arise for two reasons: Factors of production cannot move instantaneously and costlessly
from one industry to another, and changes in an economy’s output mix have
differential effects on the demand for different factors of production.
2. A useful model of income distribution effects of international trade is the specific factors
model, which allows for a distinction between general-purpose factors that can
move between sectors and factors that are specific to particular uses. In this model, differences
in resources can cause countries to have different relative supply curves, and
thus cause international trade.
3. In the specific factors model, factors specific to export sectors in each country gain
from trade, while factors specific to import-competing sectors lose. Mobile factors that
can work in either sector may either gain or lose.
4. Trade nonetheless produces overall gains in the limited sense that those who gain could
in principle compensate those who lose while still remaining better off than before.
5. Most economists do not regard the effects of international trade on income distribution
a good reason to limit this trade. In its distributional effects, trade is no different from
many other forms of economic change, which are not normally regulated. Furthermore,
economists would prefer to address the problem of income distribution directly, rather
than by interfering with trade flows.
6. Nonetheless, in the actual politics of trade policy, income distribution is of crucial
importance. This is true in particular because those who lose from trade are usually a
much more informed, cohesive, and organized group than those who gain.
7. International factor movements can sometimes substitute for trade, so it is not surprising
that international migration of labor is similar in its causes and effects to international
trade. Labor moves from countries where it is abundant to countries where it is
scarce. This movement raises total world output, but it also generates strong income
distribution effects, so that some groups are hurt as a result.
There’s one more complication in assessing the economic effects of immigration:
the effects on tax revenue and government spending. On one side, immigrants pay
taxes, helping cover the cost of government. On the other side, they impose costs on the
government, because their cars need roads to drive on, their children need schools to
study in, and so on. Because many immigrants earn low wages and hence pay low
taxes, some estimates suggest that immigrants cost more in additional spending than
they pay in. However, estimates of the net fiscal cost, like estimates of the net economic
effects, are small, again on the order of 0.1 percent of GDP.
Immigration is, of course, an extremely contentious political issue. The economics
of immigration, however, probably doesn’t explain this contentiousness. Instead, it may
be helpful to recall what the Swiss author Max Frisch once said about the effects of immigration
into his own country, which at one point relied heavily on workers from other
countries: “We asked for labor, but people came.” And it’s the fact that immigrants are
people that makes the immigration issue so difficult.
74 PART ONE International Trade Theory
KEY TERMS
budget constraint, p. 64
diminishing returns, p. 53
marginal product of labor, p. 53
mobile factor, p. 51
production function, p. 52
production possibility
frontier, p. 53
specific factor, p. 51
specific factors model, p. 51
U.S. Trade Adjustment
Assistance program, p. 67
PROBLEMS
1. In 1986, the price of oil on world markets dropped sharply. Since the United States is
an oil-importing country, this was widely regarded as good for the U.S. economy. Yet
in Texas and Louisiana, 1986 was a year of economic decline. Why?
2. An economy can produce good 1 using labor and capital and good 2 using labor and
land. The total supply of labor is 100 units. Given the supply of capital, the outputs of
the two goods depend on labor input as follows:
Labor Input
to Good 1
Output
of Good 1
Labor Input
to Good 2
Output
of Good 2
0 0.0 0 0.0
10 25.1 10 39.8
20 38.1 20 52.5
30 48.6 30 61.8
40 57.7 40 69.3
50 66.0 50 75.8
60 73.6 60 81.5
70 80.7 70 86.7
80 87.4 80 91.4
90 93.9 90 95.9
100 100 100 100
a. Graph the production functions for good 1 and good 2.
b. Graph the production possibility frontier. Why is it curved?
3. The marginal product of labor curves corresponding to the production functions in
problem 2 are as follows:
Workers Employed MPL in Sector 1 MPL in Sector 2
10 15.1 15.9
20 11.4 10.5
30 10.0 8.2
40 8.7 6.9
50 7.8 6.0
60 7.4 5.4
70 6.9 5.0
80 6.6 4.6
90 6.3 4.3
100 6.0 4.0
a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically
the wage rate and the allocation of labor between the two sectors.
CHAPTER 4 Specific Factors and Income Distribution 75
b. Using the graph drawn for problem 2, determine the output of each sector. Then
confirm graphically that the slope of the production possibility frontier at that point
equals the relative price.
c. Suppose that the relative price of good 2 falls to 1.3. Repeat (a) and (b).
d. Calculate the effects of the price change from 2 to 1.3 on the income of the specific
factors in sectors 1 and 2.
4. Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital)
and 2 (with labor and land) according to the production functions described in problems
2 and 3. Initially, both countries have the same supply of labor (100 units each),
capital, and land. The capital stock in Home then grows. This change shifts out both the
production curve for good 1 as a function of labor employed (described in problem 2)
and the associated marginal product of labor curve (described in problem 3). Nothing
happens to the production and marginal product curves for good 2.
a. Show how the increase in the supply of capital for Home affects its production
possibility frontier.
b. On the same graph, draw the relative supply curve for both the Home and the
Foreign economy.
c. If those two economies open up to trade, what will be the pattern of trade (i.e.,
which country exports which good)?
d. Describe how opening up to trade affects all three factors (labor, capital, land) in
both countries.
5. In Home and Foreign there are two factors each of production, land, and labor used to
produce only one good. The land supply in each country and the technology of production
are exactly the same. The marginal product of labor in each country depends
on employment as follows:
Number of Workers
Employed
Marginal Product
of Last Worker
1 20
2 19
3 18
4 17
5 16
6 15
7 14
8 13
9 12
10 11
11 10
Initially, there are 11 workers employed in Home, but only 3 workers in Foreign.
Find the effect of free movement of labor from Home to Foreign on employment,
production, real wages, and the income of landowners in each country.
6. Using the numerical example in problem 5, assume now that Foreign limits immigration
so that only 2 workers can move there from Home. Calculate how the movement
of these two workers affects the income of five different groups:
a. Workers who were originally in Foreign
b. Foreign landowners
c. Workers who stay in Home
d. Home landowners
e. The workers who do move
7. Studies of the effects of immigration into the United States from Mexico tend to find
that the big winners are the immigrants themselves. Explain this result in terms of the
example in the question above. How might things change if the border were open,
with no restrictions on immigration?
FURTHER READINGS
Avinash Dixit and Victor Norman. Theory of International Trade. Cambridge: Cambridge University
Press, 1980. The problem of establishing gains from trade when some people may be made worse
off has been the subject of a long debate. Dixit and Norman show it is always possible in principle
for a country’s government to use taxes and subsidies to redistribute income in such a way that
everyone is better off with free trade than with no trade.
Douglas A. Irwin, Free Trade under Fire, 3rd edition. Princeton, NJ: Princeton University Press,
2009. An accessible book that provides numerous details and supporting data for the argument
that freer trade generates overall welfare gains. Chapter 4 discusses the connection between
trade and unemployment in detail (an issue that was briefly discussed in this chapter).
Charles P. Kindleberger. Europe’s Postwar Growth: The Role of Labor Supply. Cambridge: Harvard
University Press, 1967. A good account of the role of labor migration during its height in Europe.
Robert A. Mundell. “International Trade and Factor Mobility.” American Economic Review 47 (1957),
pp. 321–335. The paper that first laid out the argument that trade and factor movement can substitute
for each other.
Michael Mussa. “Tariffs and the Distribution of Income: The Importance of Factor Specificity,
Substitutability, and Intensity in the Short and Long Run.” Journal of Political Economy 82
(1974), pp. 1191–1204. An extension of the specific factors model that relates it to the factor
proportions model of Chapter 5.
J. Peter Neary. “Short-Run Capital Specificity and the Pure Theory of International Trade.”
Economic Journal 88 (1978), pp. 488–510. A further treatment of the specific factors model that
stresses how differing assumptions about mobility of factors between sectors affect the model’s
conclusions.
Mancur Olson. The Logic of Collective Action. Cambridge: Harvard University Press, 1965. A
highly influential book that argues the proposition that in practice, government policies favor
small, concentrated groups over large ones.
David Ricardo. The Principles of Political Economy and Taxation. Homewood, IL: Irwin, 1963.
While Ricardo’s Principles emphasizes the national gains from trade at one point, elsewhere in
his book the conflict of interest between landowners and capitalists is a central issue.
76 PART ONE International Trade Theory
In this section, we will show how the specific factors model can be adapted to analyze the
effects of labor mobility. In the modern world, restrictions on the flow of labor are
legion—just about every country imposes restrictions on immigration. Thus labor mobility
is less prevalent in practice than capital mobility. However, the analysis of physical capital
movements is more complex, as it is embedded along with other factors in a multinational’s
decision to invest abroad (see Chapter 8). Still, it is important to understand the
international economic forces that drive desired migration of workers across borders, and
the short-run consequences of those migration flows whenever they are realized. We will
also explore the long-run consequences of changes in a country’s labor and capital endowments
in the next chapter.
In the previous sections, we saw how workers move between the cloth and food sectors
within one country until the wages in the two sectors are equalized. Whenever international
migration is possible, workers will also want to move from the low-wage to the
high-wage country.9 To keep things simple and to focus on international migration, let’s
assume that two countries produce a single good with labor and an immobile factor, land.
Since there is only a single good, there is no reason to trade it; however, there will be
“trade” in labor services when workers move in search of higher wages. In the absence of
migration, wage differences across countries can be driven by technology differences, or
alternatively, by differences in the availability of land relative to labor.
Figure 4-13 illustrates the causes and effects of international labor mobility. It is very
similar to Figure 4-4, except that the horizontal axis now represents the total world labor
force (instead of the labor force in a given country). The two marginal product curves now
represent production of the same good in different countries (instead of the production of
two different goods in the same country). We do not multiply those curves by the prices of
Marginal product
of labor
Home
employment
Total world labor force
Foreign
employment
L2 L1
Migration of
labor from Home
to Foreign
A
B
C
MPL*
MPL
O O*
MPL MPL*
Figure 4-13
Causes and Effects of
International Labor Mobility
Initially workers are
employed in Home, while
workers are employed in Foreign.
Labor migrates from Home to
Foreign until workers are
employed in Home, in
Foreign, and wages are equalized.
L2O*
OL2
L1O*
OL1
9We assume that workers’ tastes are similar so that location decisions are based on wage differentials. Actual
wage differentials across countries are very large—large enough that, for many workers, they outweigh personal
tastes for particular countries.
70 PART ONE International Trade Theory
the good; instead we assume that the wages measured on the vertical axis represent real
wages (the wage divided by the price of the unique good in each country). Initially, we
assume that there are workers in Home and workers in Foreign. Given those
employment levels, technology and land endowment differences are such that real wages
are higher in Foreign (point B) than in Home (point C).
Now suppose that workers are able to move between these two countries. Workers will
move from Home to Foreign. This movement will reduce the Home labor force and thus
raise the real wage in Home, while increasing the labor force and reducing the real wage in
Foreign. If there are no obstacles to labor movement, this process will continue until the
real wage rates are equalized. The eventual distribution of the world’s labor force will be
one with workers in Home and workers in Foreign (point A).
Three points should be noted about this redistribution of the world’s labor force.
1. It leads to a convergence of real wage rates. Real wages rise in Home and fall in Foreign.
2. It increases the world’s output as a whole. Foreign’s output rises by the area under its marginal
product curve from to , while Home’s falls by the corresponding area under its
marginal product curve. (See appendix for details.) We see from the figure that Foreign’s
gain is larger than Home’s loss, by an amount equal to the colored area ABC in the figure.
3. Despite this gain, some people are hurt by the change. Those who would originally
have worked in Home receive higher real wages, but those who would originally have
worked in Foreign receive lower real wages. Landowners in Foreign benefit from the
larger labor supply, but landowners in Home are made worse off.
As in the case of the gains from international trade, then, international labor mobility,
while allowing everyone to be made better off in principle, leaves some groups worse off in
practice. This main result would not change in a more complex model where countries produce
and trade different goods, so long as some factors of production are immobile in the
short run. However, we will see in the following chapter that this result need not hold in the
long run, when all factors are mobile across sectors. We will see how changes in a country’s
labor endowment, so long as the country is integrated into world markets through trade, can
leave the welfare of all factors unchanged. This has very important implications for immigration
in the long run, and has been shown to be empirically relevant in cases where countries
experience large immigration increases.
L1 L2
OL2 L2O*
OL1 L1O*
Case Study
Wage Convergence in the Age of Mass Migration
Although there are substantial movements of people between countries in the modern
world, the truly heroic age of labor mobility—when immigration was a major source of
population growth in some countries, while emigration caused population
in other countries to decline—was in the late 19th and early
20th centuries. In a global economy newly integrated by railroads,
steamships, and telegraph cables, and not yet subject to many legal
restrictions on migration, tens of millions of people moved long distances
in search of a better life. Chinese people moved to Southeast
Asia and California, while Indian people moved to Africa and the
Caribbean; in addition, a substantial number of Japanese people
moved to Brazil. However, the greatest migration involved people
from the periphery of Europe—from Scandinavia, Ireland, Italy,
CHAPTER 4 Specific Factors and Income Distribution 71
and Eastern Europe—who moved to places where land was abundant and wages were
high: the United States, Canada, Argentina, and Australia.
Did this process cause the kind of real wage convergence that our model predicts?
Indeed it did. Table 4-1 shows real wages in 1870, and the change in these wages up to
the eve of World War I, for four major “destination” countries and for four important
“origin” countries. As the table shows, at the beginning of the period, real wages were
much higher in the destination than in the origin countries. Over the next four decades
real wages rose in all countries, but (except for a surprisingly large increase in Canada)
they increased much more rapidly in the origin than in the destination countries, suggesting
that migration actually did move the world toward (although not by any means
all the way to) wage equalization.
As documented in the Case Study on the U.S. economy, legal restrictions put an end
to the age of mass migration after World War I. For that and other reasons (notably a
decline in world trade, and the direct effects of two world wars), convergence in real
wages came to a halt and even reversed itself for several decades, only to resume in the
postwar years.
TABLE 4-1
Real Wage, 1870
(U.S. = 100)
Percentage Increase
in Real Wage, 1870–1913
Destination Countries
Argentina 53 51
Australia 110 1
Canada 86 121
United States 100 47
Origin Countries
Ireland 43 84
Italy 23 112
Norway 24 193
Sweden 24 250
Source: Jeffrey G. Williamson, “The Evolution of Global Labor Markets Since 1830: Background
Evidence and Hypotheses,” Explorations in Economic History 32 (1995), pp. 141–196.
Case Study
Immigration and the U.S. Economy
As Figure 4-14 shows, the share of immigrants in the U.S. population has varied greatly
over the past century. In the early 20th century, the number of foreign-born U.S. residents
increased dramatically due to vast immigration from Eastern and Southern
Europe. Tight restrictions on immigration imposed in the 1920s brought an end to this
era, and by the 1960s immigrants were a minor factor on the American scene. A new
wave of immigration began around 1970, this time with most immigrants coming from
Latin America and Asia.
72 PART ONE International Trade Theory
How has this new wave of immigration affected the U.S. economy? The most direct
effect is that immigration has expanded the work force. As of 2006, foreign-born workers
make up 15.3 percent of the U.S. labor force—that is, without immigrants the
United States would have 15 percent fewer workers.
Other things equal, we would expect this increase in the work force to reduce wages.
One widely cited estimate is that average wages in the United States are 3 percent lower
than they would be in the absence of immigration.10 However, comparisons of average
wages can be misleading. Immigrant workers are much more likely than native-born
workers to have low levels of education: In 2006, 28 percent of the immigrant labor
force had not completed high school or its equivalent, compared with only 6 percent of
native-born workers. As a result, most estimates suggest that immigration has actually
raised the wages of native-born Americans with a college education or above. Any negative
effects on wages fall on less-educated Americans. There is, however, considerable
dispute among economists about how large these negative wage effects are, with estimates
ranging from an 8 percent decline to much smaller numbers.
What about the overall effects on America’s income? America’s gross domestic
product—the total value of all goods and services produced here—is clearly larger
because of immigrant workers. However, much of this increase in the value of production
is used to pay wages to the immigrants themselves. Estimates of the “immigration
surplus”—the difference between the gain in GDP and the cost in wages paid to
immigrants—are generally small, on the order of 0.1 percent of GDP.11
12
6
8
10
4
2
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
14
16
Figure 4-14
Immigrants as a Percentage of the U.S. Population
Restrictions on immigration in the 1920s led to a sharp decline in the
foreign-born population in the mid-20th century, but immigration has
risen sharply again in recent decades.
10George Borjas, “The Labor Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on
the Labor Market,” Quarterly Journal of Economics 118 (November 2003), pp. 1335–1374.
11See Gordon Hanson, “Challenges for Immigration Policy,” in C. Fred Bergsten, ed., The United States and the
World Economy: Foreign Economic Policy for the Next Decade, Washington, D.C.: Institute for International
Economics, 2005, pp. 343–372.
CHAPTER 4 Specific Factors and Income Distribution 73
SUMMARY
1. International trade often has strong effects on the distribution of income within countries,
so that it often produces losers as well as winners. Income distribution effects
arise for two reasons: Factors of production cannot move instantaneously and costlessly
from one industry to another, and changes in an economy’s output mix have
differential effects on the demand for different factors of production.
2. A useful model of income distribution effects of international trade is the specific factors
model, which allows for a distinction between general-purpose factors that can
move between sectors and factors that are specific to particular uses. In this model, differences
in resources can cause countries to have different relative supply curves, and
thus cause international trade.
3. In the specific factors model, factors specific to export sectors in each country gain
from trade, while factors specific to import-competing sectors lose. Mobile factors that
can work in either sector may either gain or lose.
4. Trade nonetheless produces overall gains in the limited sense that those who gain could
in principle compensate those who lose while still remaining better off than before.
5. Most economists do not regard the effects of international trade on income distribution
a good reason to limit this trade. In its distributional effects, trade is no different from
many other forms of economic change, which are not normally regulated. Furthermore,
economists would prefer to address the problem of income distribution directly, rather
than by interfering with trade flows.
6. Nonetheless, in the actual politics of trade policy, income distribution is of crucial
importance. This is true in particular because those who lose from trade are usually a
much more informed, cohesive, and organized group than those who gain.
7. International factor movements can sometimes substitute for trade, so it is not surprising
that international migration of labor is similar in its causes and effects to international
trade. Labor moves from countries where it is abundant to countries where it is
scarce. This movement raises total world output, but it also generates strong income
distribution effects, so that some groups are hurt as a result.
There’s one more complication in assessing the economic effects of immigration:
the effects on tax revenue and government spending. On one side, immigrants pay
taxes, helping cover the cost of government. On the other side, they impose costs on the
government, because their cars need roads to drive on, their children need schools to
study in, and so on. Because many immigrants earn low wages and hence pay low
taxes, some estimates suggest that immigrants cost more in additional spending than
they pay in. However, estimates of the net fiscal cost, like estimates of the net economic
effects, are small, again on the order of 0.1 percent of GDP.
Immigration is, of course, an extremely contentious political issue. The economics
of immigration, however, probably doesn’t explain this contentiousness. Instead, it may
be helpful to recall what the Swiss author Max Frisch once said about the effects of immigration
into his own country, which at one point relied heavily on workers from other
countries: “We asked for labor, but people came.” And it’s the fact that immigrants are
people that makes the immigration issue so difficult.
74 PART ONE International Trade Theory
KEY TERMS
budget constraint, p. 64
diminishing returns, p. 53
marginal product of labor, p. 53
mobile factor, p. 51
production function, p. 52
production possibility
frontier, p. 53
specific factor, p. 51
specific factors model, p. 51
U.S. Trade Adjustment
Assistance program, p. 67
PROBLEMS
1. In 1986, the price of oil on world markets dropped sharply. Since the United States is
an oil-importing country, this was widely regarded as good for the U.S. economy. Yet
in Texas and Louisiana, 1986 was a year of economic decline. Why?
2. An economy can produce good 1 using labor and capital and good 2 using labor and
land. The total supply of labor is 100 units. Given the supply of capital, the outputs of
the two goods depend on labor input as follows:
Labor Input
to Good 1
Output
of Good 1
Labor Input
to Good 2
Output
of Good 2
0 0.0 0 0.0
10 25.1 10 39.8
20 38.1 20 52.5
30 48.6 30 61.8
40 57.7 40 69.3
50 66.0 50 75.8
60 73.6 60 81.5
70 80.7 70 86.7
80 87.4 80 91.4
90 93.9 90 95.9
100 100 100 100
a. Graph the production functions for good 1 and good 2.
b. Graph the production possibility frontier. Why is it curved?
3. The marginal product of labor curves corresponding to the production functions in
problem 2 are as follows:
Workers Employed MPL in Sector 1 MPL in Sector 2
10 15.1 15.9
20 11.4 10.5
30 10.0 8.2
40 8.7 6.9
50 7.8 6.0
60 7.4 5.4
70 6.9 5.0
80 6.6 4.6
90 6.3 4.3
100 6.0 4.0
a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically
the wage rate and the allocation of labor between the two sectors.
CHAPTER 4 Specific Factors and Income Distribution 75
b. Using the graph drawn for problem 2, determine the output of each sector. Then
confirm graphically that the slope of the production possibility frontier at that point
equals the relative price.
c. Suppose that the relative price of good 2 falls to 1.3. Repeat (a) and (b).
d. Calculate the effects of the price change from 2 to 1.3 on the income of the specific
factors in sectors 1 and 2.
4. Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital)
and 2 (with labor and land) according to the production functions described in problems
2 and 3. Initially, both countries have the same supply of labor (100 units each),
capital, and land. The capital stock in Home then grows. This change shifts out both the
production curve for good 1 as a function of labor employed (described in problem 2)
and the associated marginal product of labor curve (described in problem 3). Nothing
happens to the production and marginal product curves for good 2.
a. Show how the increase in the supply of capital for Home affects its production
possibility frontier.
b. On the same graph, draw the relative supply curve for both the Home and the
Foreign economy.
c. If those two economies open up to trade, what will be the pattern of trade (i.e.,
which country exports which good)?
d. Describe how opening up to trade affects all three factors (labor, capital, land) in
both countries.
5. In Home and Foreign there are two factors each of production, land, and labor used to
produce only one good. The land supply in each country and the technology of production
are exactly the same. The marginal product of labor in each country depends
on employment as follows:
Number of Workers
Employed
Marginal Product
of Last Worker
1 20
2 19
3 18
4 17
5 16
6 15
7 14
8 13
9 12
10 11
11 10
Initially, there are 11 workers employed in Home, but only 3 workers in Foreign.
Find the effect of free movement of labor from Home to Foreign on employment,
production, real wages, and the income of landowners in each country.
6. Using the numerical example in problem 5, assume now that Foreign limits immigration
so that only 2 workers can move there from Home. Calculate how the movement
of these two workers affects the income of five different groups:
a. Workers who were originally in Foreign
b. Foreign landowners
c. Workers who stay in Home
d. Home landowners
e. The workers who do move
7. Studies of the effects of immigration into the United States from Mexico tend to find
that the big winners are the immigrants themselves. Explain this result in terms of the
example in the question above. How might things change if the border were open,
with no restrictions on immigration?
FURTHER READINGS
Avinash Dixit and Victor Norman. Theory of International Trade. Cambridge: Cambridge University
Press, 1980. The problem of establishing gains from trade when some people may be made worse
off has been the subject of a long debate. Dixit and Norman show it is always possible in principle
for a country’s government to use taxes and subsidies to redistribute income in such a way that
everyone is better off with free trade than with no trade.
Douglas A. Irwin, Free Trade under Fire, 3rd edition. Princeton, NJ: Princeton University Press,
2009. An accessible book that provides numerous details and supporting data for the argument
that freer trade generates overall welfare gains. Chapter 4 discusses the connection between
trade and unemployment in detail (an issue that was briefly discussed in this chapter).
Charles P. Kindleberger. Europe’s Postwar Growth: The Role of Labor Supply. Cambridge: Harvard
University Press, 1967. A good account of the role of labor migration during its height in Europe.
Robert A. Mundell. “International Trade and Factor Mobility.” American Economic Review 47 (1957),
pp. 321–335. The paper that first laid out the argument that trade and factor movement can substitute
for each other.
Michael Mussa. “Tariffs and the Distribution of Income: The Importance of Factor Specificity,
Substitutability, and Intensity in the Short and Long Run.” Journal of Political Economy 82
(1974), pp. 1191–1204. An extension of the specific factors model that relates it to the factor
proportions model of Chapter 5.
J. Peter Neary. “Short-Run Capital Specificity and the Pure Theory of International Trade.”
Economic Journal 88 (1978), pp. 488–510. A further treatment of the specific factors model that
stresses how differing assumptions about mobility of factors between sectors affect the model’s
conclusions.
Mancur Olson. The Logic of Collective Action. Cambridge: Harvard University Press, 1965. A
highly influential book that argues the proposition that in practice, government policies favor
small, concentrated groups over large ones.
David Ricardo. The Principles of Political Economy and Taxation. Homewood, IL: Irwin, 1963.
While Ricardo’s Principles emphasizes the national gains from trade at one point, elsewhere in
his book the conflict of interest between landowners and capitalists is a central issue.
76 PART ONE International Trade Theory
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