Labor Training and Foreign Direct Investment

Evidence shows that most foreign direct investment (FDI) flows from developed to developed countries (North–North) in skilled labor‐intensive industries. This paper builds a model that incorporates labor training into the proximity–concentration tradeoffs to analyze the entry mode of multinationals to a foreign country. Production requires both skilled labor and unskilled labor.. A multinational pursuing FDI needs to provide training to some workers in the host country to equip them with skills that are specific to the production of the firm. Labor training and skill specificity lead to contract friction. It is shown that in skilled labor‐intensive industries, FDI increases along with the economic development level of the host country, whereas in unskilled labor‐intensive industries, the reverse is true. This paper provides a theoretical explanation for the empirical findings on the prevalence of North–North FDI in skilled labor‐industries and North–South FDI in unskilled labor‐intensive industries.     

Manufacturing Skill‐biased Wage Inequality,Natural Resources and Institutions

We use an extensive dataset on occupational wages to measure the manufacturing skill premium and assess, for the first time, the influence of natural resources and institutional quality—in addition to traditional drivers—for advanced and less‐advanced countries and the full sample. The new findings, regarding 21 countries between 1988 and 2008 in the main panel estimations, suggest the premium of advanced countries rises with tertiary enrollment, net foreign direct investment (FDI) and institutional quality, and falls with centralized wage negotiations and geographically diffuse natural resource activities, mainly re‐exportation related. In less‐advanced countries, the premium rises with net FDI, scale effects, centralized wage negotiations and geographically concentrated natural resource activities (absorbing scarce skilled workers), and falls with trade, diffuse natural resource exploration (using mainly unskilled workers) and high‐technology exports, as emerging national low‐end technology industrial exporters may lower skill pay compared with foreign industrial exporters. In the full sample, the premium rises with scale effects, trade, institutional quality and concentrated natural resources, and falls with the relative skilled‐labor supply, centralized wage negotiations and diffuse natural resources. The results account for a wider diversity of situations compared with the previous studies.     

Trans-boundary Pollution and Brain Drain Migration

The economic effects of international brain drain migration in the presence of trans‐boundary pollution are analyzed. In autarky, both skilled and unskilled workers are expected to migrate from the less developed foreign country to the developed home country, if permitted. Surprisingly, under certain conditions, all workers, apart from skilled foreign ones, will gain (lose) from the migration of unskilled (skilled) foreign workers. Moreover, if skilled foreign workers are employed as unskilled domestic workers, then skilled foreign workers will gain but unskilled workers in both countries will lose. Whether or not skilled domestic workers will gain depends on the magnitude of the pollution spillover parameter. Brain drain migration persists under free trade if the demand for manufactured goods is strong.     

A Regional Analysis of the Impact of Trade and Foreign Direct Investment on Wages in Mexico, 1984–2000

The conventional Heckscher–Ohlin model of trade predicts an equalizing effect of trade on wages in developing countries abundant in less‐skilled labor. Contrary to these predictions, skill premiums and skill demand increased in Mexico following trade liberalization. “New” trade theories have offered several channels through which trade can increase relative wages and demand for skilled workers. One such channel is foreign direct investment and outsourcing. Using the Mexican Household Income and Expenditure Survey (ENIGH) covering 1984–2000, the author examines the relationship between the demand for skill and maquiladora employment across regions and states. In contrast to previous studies based on manufacturing data for the 1980s, little evidence is found that growth in maquiladora employment is positively related to the increase in relative wages or wage‐bill share of more educated workers.     

Impact of Chinese growth and trade on labor in developed countries

This paper examines the impacts of growth in China's economy and trade on the skill premium of labor in developed countries. We utilize a unique global dataset that disaggregates workers by occupations to identify impacts across labor categories with different skill sets, complementing the widely used GTAP Data Base in the CGE framework offered by the GTAP model. To study the impacts of China's fast-paced growth, we model the counterfactual, i.e., what if China grew and opened at a more modest rate; we then compare this baseline with China's actual growth. Results indicate that a strong rise in manufacturing exports from China to the US impacts output and employment in the US. The US shifts its production away from light manufacturing sectors to more service-oriented sectors that also tend to engage higher skilled labor. There is a small decrease in the real wages of unskilled labor and a rise in the real wages of skilled labor. Interestingly, not all categories of unskilled labor lose, rather those that are more directly linked with manufacturing sectors are impacted; unskilled ‘service and shop workers’ and the unskilled ‘agricultural workers, machine operators, assemblers, craft workers, and others’ observe a small decline in real wages, while the impact on unskilled ‘clerks’ is insignificant. For all categories of skilled workers, there is an increase in real wages primarily driven by the shift in production to services and high-skilled labor intensive categories, resulting in the rising skill premium. Hence disaggregating the labor data provides greater depth on the understanding of the differential impacts on domestic workers resulting from trade, and thereby guides policy on how these differential impacts can be smoothed through redistribution of benefits. Consistent with other study findings, there is a positive impact on overall growth and welfare in the US, EU and Australasia.     

International factor mobility,environmental pollution and skilled–unskilled wage inequality in developing countries

This paper establishes a static three-sector general equilibrium model by accommodating environmental pollution to investigate the impact exerted by skilled immigrants and foreign direct investment on the skilled–unskilled wage inequality. Environment is treated as an input for agricultural production. The production process of the urban low-skill sector generates environmental pollution, which deteriorates the rural environment and thereby influences agricultural production. The present paper highlights the role of environmental pollution in the determination of the skilled–unskilled wage inequality due to skilled immigrants and foreign direct investment.     

Skilled–unskilled wage inequality and offshore outsourcing with asymmetric adjustment costs

We present a model that can capture the effects of offshore outsourcing on the wedge between the wages of skilled and unskilled workers when costs of adjustment are asymmetric. We identify conditions under which offshore outsourcing activities widen the skilled–unskilled wage inequality in the presence of asymmetric adjustment costs. We show how a higher cost of adjustment in the import-competing sector can magnify the offshore outsourcing induced gap between the wages of the skilled and unskilled workers. We also demonstrate the sensitivity of the effects of offshore outsourcing, on the skilled–unskilled wage gap, to asymmetries in the costs of adjustment.     

International Outsourcing and R&D: Long‐Run Implications for Consumers*

We show that international outsourcing and R&D by the outsourced firm may be either substitutes or complements. Outsourcing increases the R&D investment in small markets and in highly competitive product markets, whereas it decreases the R&D investment in large markets. If the outsourced firm can be technologically very efficient under exporting, outsourcing can make the consumers worse off by reducing the R&D investment. If there is skill differential in the production process and outsourcing occurs only in the unskilled activities, R&D‐reducing outsourcing occurs in a relatively low‐skilled industry. If outsourcing of the unskilled jobs reduces the effective cost of the skilled workers by increasing the productivities of the skilled workers, outsourcing provides further disincentive for R&D compared to the situation where outsourcing of the unskilled jobs does not affect the effective cost of the skilled workers.     

A Schumpeterian North–South Growth Model of Trade and Wage Inequality*

The paper presents a dynamic general‐equilibrium model of interindustry North–South trade that is used to analyze the effects of trade liberalization on the Northern wage distribution. Both countries have a low‐tech sector where consumer goods of constant quality are produced by use of unskilled labor. The North also has a high‐tech sector that employs skilled labor and features a quality‐ladder model structure with endogenous growth. Both innovation and skill acquisition rates are endogenously determined. In a balanced trade equilibrium, it is found that Southern‐originated (Northern‐originated) trade liberalization leads to an increase (decrease) in Northern wage inequality both between skilled and unskilled workers and within the group of skilled workers. The endogenous change in the Southern terms of trade determines the direction of change in unskilled wages in both the North and the South.     

Second‐Best Taxation of Incomes and Non‐Labor Inputs in a Model with Endogenous Wages

This paper considers a Mirrleesian optimal income tax model wherein labor inputs are not perfect substitutes and their wages are determined endogenously. It shows: (i) If skilled and unskilled workers are Edgeworth complements, skilled workers will necessarily face a marginal subsidy and unskilled workers a marginal tax on their incomes (these may not be the case if skilled and unskilled workers are Edgeworth substitutes); and (ii) redistributive concerns call for taxation of those inputs whose elasticity of complementarity with skilled labor is larger than with unskilled labor, and subsidization of those whose elasticity of complementarity is smaller.     

A SEARCH‐EQUILIBRIUM APPROACH TO THE EFFECTS OF IMMIGRATION ON LABOR MARKET OUTCOMES

We analyze the impact of the U.S. skill‐biased immigration influx that took place between 2000 and 2009 within a search and matching model that allows for skill heterogeneity, differential search cost, and capital‐skill complementarity. We find that although the skill‐biased immigration raised the overall net income to natives, it had distributional effects. Specifically, unskilled native workers gained in terms of both employment and wages. Skilled native workers, however, gained in terms of employment but lost in terms of wages. Nevertheless, in an extension where skilled natives and immigrants are imperfect substitutes, even the skilled wage rises.     

Wage Inequality and Human Capital Formation under Migration Possibilities

I examine the problem in the relationship between wage inequality and human capital formation under migration possibilities. Unlike previous analyses, I incorporate the education market and the education price into the analysis, and assume that workers bear the pecuniary cost for receiving education. Given such an assumption, migration possibilities do not necessarily increase education demand since the larger demand for education raises the education price and lowers the net return on education. By modelling an economy where workers in the home country (the labour‐sending country) comprise skilled and unskilled workers and they can migrate to the foreign country (the labour‐receiving country), I show that brain gain and brain drain occur simultaneously in the home country. In particular, if wage inequality is larger in the foreign country than in the home country, skilled workers experience brain gain and unskilled workers experience brain drain in the home country. On the other hand, if wage inequality is sufficiently larger in the home country, brain drain occurs in skilled workers and brain gain in unskilled workers.     

Dynamic effects of changes to Japanese immigration policy

This paper uses a single-sector dynamic stochastic general equilibrium model with heterogeneous households to analyse Japanese immigration policy. We examine the effects on output, consumption, factor prices, and utility. We do this for both steady states and transition paths. We find that: (a) aggregate output, investment, and consumption in Japan are likely to rise with any sort of loosening of immigration restrictions; (b) allowing more skilled immigration generates greater aggregate changes; (c) raising skilled immigration relative to unskilled immigration drives down skilled workers’ wages, consumption, and utility, while cutting the skilled to unskilled immigration share has the opposite effects; and (d) such immigration policy changes have small effects compared to those that occur naturally due to business cycle fluctuations     

Capital–skill complementarity and the immigration surplus

We build a neoclassical growth model with overlapping dynasties and capital–skill complementarities to evaluate changes in immigration policy. Calibrating the model using US data, we quantify the differential effects of skilled and unskilled immigration on factor returns and on the welfare of different sectors of the population. An influx of high-skilled immigrants lowers the wages of skilled workers, raises the wages of unskilled workers, and because of the relative complementarity between capital and skilled labor, substantially raises the rate of return to native-owned capital. By contrast, an influx of unskilled immigrants produces an opposite effect on wages, and has only a negligible effect on the return to capital. Because of capital–skill complementarity, an increase in the number of skilled immigrants generates an immigration surplus—the overall welfare benefit accruing to the native population—that is approximately ten times larger than the immigration surplus generated by an identical increase in the number of unskilled immigrants. This differential welfare effect is far higher than can be accounted for by the disparity between the productivities of each type of worker.     

Factor price overshooting with trade liberalization: theory and evidence

This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.     

Wage inequality and skill supplies in a globalised world

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results combine the insights of simple labour market and trade models. In countries that trade, relative wages respond inversely to variation in skill supplies, but the response decreases with the degree of openness to trade and is small in very open countries. To reconcile our results with standard estimates of the elasticity of substitution between skilled and unskilled workers, we allow also for the influence of directed technical change and income elasticity of demand for skill-intensive goods.     

Tariff Elimination and the Wage Gap in an Industrial Specific Factors Model*

A specific factors model of 458 US manufacturing industries simulates the effects of eliminating manufacturing tariffs on unskilled and skilled wages. The model assumes constant elasticity substitution, industry‐specific capital inputs, and mobile unskilled and skilled labor. Tariff elimination slightly lowers both unskilled and skilled wages, and increases the skilled wage gap. Industry outputs and capital returns absorb the negative impact of the falling tariffs with losses concentrated in more highly protected industries and most industries enjoying small positive outcomes.     

International immigration and economic welfare in an efficiency wage model: The co-existence case of both legal and illegal foreign workers

Abstract. In the developed countries some native workers are unemployed while there exist illegal unskilled (legal skilled) foreign workers who are complementary to (substitutable for) natives and their wages are usually lower than (equal to) that of natives. Reflecting this situation, we introduce two types of immigrant in an efficiency wage model. It is shown that domestic government should exclude illegal foreign workers but welcome legal ones if the total number of illegal immigrants is small enough and well controlled. On the other hand, legal immigration should be restricted if the flood of illegal immigration is out of control.     

Industry estimates of the elasticity of substitution and the rate of biased technological change between skilled and unskilled labour

We estimate the elasticity of substitution between skilled and unskilled labour and the pace of skill-biased technological change at the industry level. The data is compiled from the March extract of the Current Population Survey (CPS) from 1968 to 2006. Industry information provided by the survey is used to group workers into 13 industry categories and education levels are used to dichotomize workers as skilled or unskilled. We construct measures of the ratio of skilled to unskilled employment and the ratio of skilled to unskilled wages in each industry. Using a relationship implied by profit maximizing behaviour on the part of representative firms, this data generates estimates of structural parameters. We find considerable differences across industries in the elasticity of substitution between skilled and unskilled labour. Furthermore, while most industries have experienced skill-biased technological change, the pace of this change has varied widely across industries.     

Nutritional efficiency wages and child labor

This paper formally analyzes the incidence of child labor by employing an overlapping-generations general-equilibrium model of a small open economy. An individual's ability determines whether or not he/she becomes a skilled worker. The supply side of the economy is composed of two sectors: a modern sector that produces a homogeneous good using skilled labor and physical capital; and an agrarian sector that produces a traditional good using unskilled adult labor, child labor, and land. An increase in foreign direct investment and improvements in education reduce the incidence of child labor. Emigration of skilled (unskilled) workers reduces (raises) the supply of child labor, while trade sanctions reduce the demand for child labor. Child wage subsidies have an ambiguous effect on the incidence of child labor while education subsidies are effective in reducing the incidence of child labor. Simulation analysis is used to investigate the welfare effects of the aforementioned policies.