Offshoring and unemployment: The role of search frictions labor mobility

In a two-sector, general-equilibrium model with labor-market search frictions, we find that the wage increases and sectoral unemployment decreases upon offshoring in the presence of perfect intersectoral labor mobility. If, as a result, labor moves to the sector with the lower (or equal) vacancy costs, there is an unambiguous decrease in economywide unemployment. With imperfect intersectoral labor mobility, unemployment in the offshoring sector can rise, with an unambiguous unemployment reduction in the non-offshoring sector. Imperfect labor mobility can result in a mixed equilibrium in which only some firms offshore, with unemployment in the offshoring sector rising.     

Financial liberalization, structural change, and real exchange rate appreciations

The last twenty years have witnessed periods of sustained appreciations of the real exchange rate in emerging economies. The case of Mexico between 1988 and 2002 is representative of several episodes in Latin America and Central and Eastern Europe in which countries opening to capital flows experienced large appreciations accompanied by a significant reallocation of workers towards the non-tradable sector. We account for these facts using a two sector dynamic general equilibrium model of a small open economy with frictions to labor reallocation and two driving forces: (i) A decline in the cost of borrowing in foreign markets, and (ii) differential productivity growth across sectors. These two mechanisms account together for 60% of the decline in the domestic relative price of tradables in Mexico and for a large fraction of the observed reallocation of labor across sectors. The decline in the interest rate faced by Mexico in international markets is quantitatively the most important channel. Our results are robust to the inclusion of terms of trade into the model.     

Migration and trade: Theory with an application to the Eastern-Western European integration

The remarkable increase in trade flows and in migratory flows of highly educated people are two important features of globalization of the last decades. This paper extends a two-country model of inter- and intra-industry trade to a rich environment featuring technological differences, skill differences and the possibility of international labor mobility. The model is used to explain the patterns of trade and migration as countries remove barriers to trade and to labor mobility. We parameterize the model to match the features of the Western and Eastern European members of the EU and analyze first the effects of the trade liberalization which occurred between 1989 and 2004, and then the gains and losses from migration which are expected to occur if legal barriers to labor mobility are substantially reduced. The lower barriers to migration would result in significant migration of skilled workers from Eastern European countries. Interestingly, this would not only benefit the migrants and most Western European workers but, via trade, it would also benefit the workers remaining in Eastern Europe.     

International trade and child labor: Cross-country evidence

We explore the relationship between exposure to trade (as measured by openness) and child labor in a cross-country setting. Our methodology accounts for the fact that trade flows are endogenous to child labor (and labor standards more generally) by examining the relationship between child labor and variation in trade based on geography. We find that countries that trade more have less child labor. At the cross-country means, the data suggest an openness elasticity of child labor of − 0.7. For low-income countries, the elasticity of child labor with respect to trade with high-income countries is − 0.9. However, these relationships appear to be largely attributable to the positive association between trade and income. We consistently find a small and statistically insignificant association between openness and child labor when we control for cross-country income differences in the full sample, when we split the sample into different country groups, consider only trade between high- and low-income countries, or focus on exports of unskilled-labor intensive products from low-income countries. Thus, the cross-country data do not substantiate assertions that trade per se plays a significant role in perpetuating the high levels of child labor that pervade low-income countries.     

Persistent real exchange rates

Over the past decades, product market deregulation has typically preceded labor market reforms in OECD countries. This paper incorporates labor market rigidities in a model of footloose capital in order to study how globalization might affect the trade-offs generated by labor market regulation and put pressure on labor market institutions. In this two-sector model, globalization ultimately reduces labor market rigidities through either one of two channels: capital mobility triggers a re-allocation of resources, which trade integration amplifies, away from the high-rent / highly-unionized sector; the threat of costly relocations encourages labor market deregulation. The latter channel is more efficient because it avoids sub-optimal sectoral specialization.     

Welfare implications of trade liberalization and fiscal reform: A quantitative experiment

This paper studies the welfare implications of revenue-neutral trade liberalization and fiscal reform programs for developing economies using a multi-sector dynamic general equilibrium model of a small open economy. We analyze how different combinations of tariffs – on imported consumption goods, intermediate inputs, and capital goods – and taxes – on consumption, labor income and capital income – affect the transitional and long-run welfare. We report three main findings. First, trade liberalization programs financed by consumption and labor income taxes tend to result in substantial welfare gains, but financing the lost tariff revenue through capital income taxes can have an adverse impact on welfare. Second, a significant fraction of welfare changes is due to transitional effects stemming from the allocation of resources in response to changes in tariffs and taxes. Third, trade liberalization and fiscal reform programs often translate into much larger welfare gains in countries that are more open to international financial markets.     

World trade patterns and prices: The role of productivity and quality heterogeneity

This paper analyzes the role of product quality and labor efficiency in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Recent empirical literature identifies two groups of evidence — the product lines evidence on different export strategies and sources of competitiveness across product groups and countries, and the aggregate trade flows evidence on a positive relation between the income per capita and both export and import prices (also conditional on the exporter). We attempt to provide a theoretical background for these findings and focus on the North–South productivity differences in a four country North–South trade model with two dimensions of firm heterogeneity. Differences in the firms' product quality and cost efficiency impose different competitiveness sources when entering more difficult markets and result in the observed export and import prices and consumption bundles across the rich and poor countries.     

Remittances,investment and growth in sub-Saharan Africa

Several studies have examined the impact of remittances on economic growth, yet the results remain largely inconclusive. I present an analysis of the relationship between remittances and per capita growth, and investigate whether the impact of remittances on growth is through capital accumulation or other mechanisms. Using data for sub-Saharan African countries and dynamic empirical models, I find that there is a positive relationship between remittances and growth, as well as a positive interaction effect between remittances and financial depth on growth. The findings also reveal threshold values for two main indicators of financial development, above which the total effect of remittances on growth is positive. The results further provide evidence for the existence of an investment channel through which remittances affect growth, and indirect evidence that remittances contribute towards a stable macroeconomic environment, and hence, growth, through a consumption smoothing effect.     

Consumers and the brain drain: Product and process design and the gains from emigration

We consider the welfare effects of skilled worker emigration in a context where skilled labor plays a role in product or process design. We show such emigration can benefit the residents left behind, even when consumers' tastes exhibit a form of home bias. This is because emigration improves the design of goods designed by skilled emigrants but consumed in the sending country. In contrast to existing models of beneficial brain drain, our results do not require agglomeration economies, education-related externalities, remittances, return migration, or an emigration “lottery”. Instead, they are driven purely by differences in market size that induce skilled emigrants to design better products or production processes abroad than at home.     

Trade and imperfect competition in general equilibrium

This paper employs a multi-industry general equilibrium model of oligopolistic competition, free market entry and trade in which capital is used to establish firms and labor is used for production. We show that both absolute and relative endowments matter for the pattern of trade. We demonstrate that market entry to each industry is either too excessive or too moderate while the effect on firm size is ambiguous. If countries are sufficiently symmetric, trade will increase the wage–rental ratio in both countries. Furthermore, trade will increase per-capita consumption in capital-intensive industries and reduce it in labor-intensive industries. Nevertheless, trade will be mutually welfare-improving under relatively mild conditions.     

Economic informality and the venture funding impact of migrant remittances to developing countries

In developing countries, weak institutional capacity to observe and regulate the economy discourages foreign capital inflows vital to venture investment. This informality effect may differ for migrant remittances, inflows less reliant on formal arrangements. We use institutional and transaction cost theories to propose that informality shifts migrant remittances toward venture funding. Analyses in 48 developing countries observed from 2001 to 2009 support our proposition. When the informal sector exceeds approximately 46% of GDP, remittances increase venture funding availability. Migrants and their remittances are vital to funding new businesses and entrepreneurially-led economic growth in developing countries where substantial informality deters other foreign investors.     

The effects of offshoring on the elasticity of labor demand

In this paper, I use detailed plant-level data to analyze the relationship between offshoring and labor demand elasticities in the U.S. manufacturing sector during the 1972-2001 period. The results suggest that conditional demand elasticities for production workers are positively associated with increased exposure to offshoring both in the short-run and in the long-run. This relationship holds both for the unbalanced panel of plants and, for plants which continue their operations throughout the sample period. Controlling for skill biased technical change does not alter the magnitude or the significance of the estimated positive relationship between offshoring and labor demand elasticities.     

Private capital flows, capital controls, and default risk

What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging market capital flows more efficient? If not, can controls on capital flows improve welfare? This paper shows that the answers depend on the form of default risk. When private loans are enforceable, but there is the risk that the government will default on behalf of all residents, private lending is inefficient and capital controls are potentially Pareto-improving. However, when private agents may individually default, capital flow subsidies are potentially Pareto-improving.     

The effect of trade liberalization on child labor

The question of how trade liberalization affects the employment of children in developing economies is at the core of the debate on globalization. Trade theory predicts that an increase in the price of an exported good could either increase or decrease child labor depending on the magnitudes of the substitution and income effects. In this paper, we study the relationship between changes in the relative price of an exported commodity and child labor using household-level data from within a poor country. In particular, we relate child labor to regional and intertemporal variation in the real price of rice surrounding national and international rice market integration in Vietnam. We find that higher rice prices are associated with declines in child labor. Income effects play an important role in this relationship. Rice price increases are associated with the largest declines in child labor in households that are large net producers of rice. These findings show that greater market integration can be associated with less child labor. Moreover, our results suggest that the use of punitive trade sanctions on exports from developing countries to eradicate child labor is unlikely to yield the desired outcome.     

Capital Flows and Economic Growth in Ghana

ABSTRACT

The study examines the differential effects of capital flows on economic growth in Ghana over the period 1970–2014 using autoregressive distributed lag (ARDL). Breakpoint unit root tests are employed to cater for structural change and breaks in time series. Afterwards, these break dates are fed into the ADRL model as dummy variables to allow for the computation of a more robust cointegrating vector. The findings indicate that in both the short and long run capital flows (i.e. FDI, aid, and external debt) have negative effects on economic growth. However, remittances exhibit positive insignificant elasticity in all the regressions. Further, the empirical results show that while the impact of trade, gross capital formation and population growth on growth are mixed, that of inflation is negative. The results of the study are consistent with the idea that the impact of capital flows in Africa has been exaggerated.     

Identifying macro-determinants of remittance flows to a developing country: The case of Uganda

This paper employs minimum Lagrange Multiplier (LM) unit root tests for endogenous structural breaks combined with ARCH and GARCH models to investigate how key macrovariables impact diaspora remittances. Since remittances can reverse-cause exchange rate movements and domestic income, we use changes in the world price of oil denominated in U.S. dollars to proxy movements in the Uganda shilling nominal effective exchange rate. To control for endogenous bias between remittances and income, we use rainfall shocks as proxies for income shocks in a non-oil-producing developing economy dominated by agricultural sector and its related activities. In addition, large movements in oil price and rainfall shocks typically cause large supply shocks that can significantly impact size of remittance inflows. We control for interest rate differential, political business cycles and seasonality. Results indicate that accounting for structural change in intercepts (levels) and slopes (trends) of key macroeconomic determinants of remittances around their major structural break points significantly increases their explanatory power. In particular, positive (negative) innovations in income and depreciation (appreciation) in the currency of a recipient developing country are negatively (positively) correlated with remittance inflows. These results are robust across different model specifications.     

Why do migrants remit?

This paper examines primary incentives of remitting. Using estimated bilateral data on remittances, this paper demonstrates that a rise in the home (remittance‐receiving) country's gross national income (GNI) per capita leads to fewer remittances and that a rise in the host (remittance‐sending) country's GNI per capita motivates migrants to remit more. Real exchange rates and real interest rates have no effect on remittances. These results indicate that altruism is an important and critical component of motivations behind remittances. However, altruism alone does not appear to be a sufficient explanation of the motivations behind remittances. Other incentives such as loan repayment and investment play a non‐negligible role in this regard as well. The degree of altruism is higher for migrants from developing countries in comparison with migrants from developed countries, and it is higher when we define remittances as “personal transfers” rather than “personal transfers and compensation of employees.” The results of the vector error correction model show if remittances deviate from the equilibrium relationship, they will eventually revert.     

Trade policy under firm-level heterogeneity in a small economy

We explore the effect of trade policy on productivity and welfare in the now standard model of firm-level heterogeneity and product differentiation with monopolistic competition. To obtain sharp results, we restrict attention to an economy that takes as given the price of imports and the demand schedules for its exports (a “small economy”). We first establish that welfare can be decomposed into four terms: productivity, terms of trade, variety and curvature, where the last is a term that captures heterogeneity across varieties. We then show how a consumption subsidy, an export tax, or an import tariff allows our small economy to deal with two distortions that we identify and thereby reach its first-best allocation. We also show that an export subsidy generates an increase in productivity, but given the negative joint effect on the other three terms (terms of trade, variety, and curvature), welfare falls. In contrast, an import tariff improves welfare in spite of the fact that productivity falls.     

Remittances and Development in Latin America

Flows of workers’ remittances have become a major source of external finance for developing countries and are particularly important in Latin America and the Caribbean, where they are estimated to have reached $40 billion in 2004. Not surprisingly, academics, policymakers and development practitioners in general have been devoting increasing attention to the potential development impact that these flows may have on receiving countries. This paper contributes to this debate along four dimensions. First, it reviews the evolution of remittances flows to Latin America, using Balance of Payments data, and compares these statistics with estimates of remittances income based on Household Surveys. Second, the paper describes the varying profile of remittances recipients in ten Latin American countries. Third, the paper reviews the few macro‐ and microeconomic studies that have estimated the impact of remittances on poverty and inequality. Finally, the paper expands some of the existing works to investigate the extent to which that impact is different in Latin America and varies across countries in the region.