migration and convergence

Danny Shoag

Lecture 8: Migration and Convergence

Overview� We are looking for a framework for how regional economies work

� We attack this by attacking the first order fact – big income gaps & convergence

� We saw that capital was pretty mobile within countries: unlikely that capital accumulation is prevents convergence today

� Looked at the evidence for two –kinds of immobile inputs: agglomeration (knowledge, labor pooling) and market access

� We looked at the spatial equilibrium model both within and across cities

� We saw that labor migration was responsive to unemployment, though it hasn’t closed income gaps

� We saw that housing prices can capitalize differences in amenities, productivity, etc.

� Today we close the loop: why did convergence stop?

Back to Diminishing Marginal Product� What was it?

� Does it apply to labor?

Y = Kα* L1-α

Output Capital Labor

Mariel Boatlift The Peruvian embassy granted asylum to over ten thousand Cubans seeking to leave.

Castro ultimately opened the port of Mariel.

About 100K people left in 1980, 50% of whom stayed in Miami

Card (1990)

Borjas 2003� Suppose education-experience worker types are imperfect

substitutes. How much has increased supply of each type from immigration changed relative wages:

Recap:� The spatial equilibrium implies that “area studies” don’t find

the full effect

� Its very hard to estimate national general equilibrium effects

� My take: Most studies do show downward sloping labor demand

o Where have we seen it before in this semester?

What does this have to do with convergence?� Preview of my paper:

� Recent US history has two periods� Strong convergence + migration to rich places� Weak convergence + no directed migration

� Even though estimating the effect of migration directly is hard, I will show that our models suggest it matters

� We will argue that migration stopped due to increased capitalization / more inelastic housing supply

Pause� We talked about capital convergence in Barro- Sala-i-Martin

� Why didn’t we think that mobility drove convergence there?

= 1LKY

LLK

LY=

1

=LK

LY

A bit more math� The percentage change (or the convergence coefficient) is

� With the observed movements in labor and the standard value of α, migration can only generate about 25% of observed convergence

What’s going on?� Since labor is such a big share of production, diminishing

marginal returns sets in too slowly.

� Back to the original Barro problem?

What’s going on?

� We introduce two new channels:

� Elastic Labor Supply: � Before every person supplies 1 unit of labor even though wages fall. If

fall in wages reduces supply, then there will be more convergence

� We have estimates of this effect in the literature

� Human Capital Migration:� Migration can redistribute human capital

Migration did redistribute human capital

With these channels migration can explain the change in convergence!

Why did Convergence Stop? Model� Two places: Productiveville and Reservationville

� People have different skill types, supply labor, require a home, and consume goods.

Model of Skills : 1 hr of work by guy with skill ψproduces ψ units of labor

Model� Two places: Productiveville and Reservationville

� People have different skill types, supply labor, require a home, and consume goods.

� Housing Prices Are More Important for Low Skilled Workers

Model� Two places: Productiveville and Reservationville

� People have different skill types, supply labor, require a home, and consume goods.

� Housing Prices Are More Important for Low Skilled Workers

� Local labor demand curves are downward sloping

� People choose whether or not to move, face a moving cost.

Model� Two places: Productiveville and Reservationville

� People have different skill types, supply labor, require a home, and consume goods.

� Local labor demand curves are downward sloping

� People choose whether or not to move, face a moving cost. Move if:

Wages in Productiveville* ψ– ΔLand Price >Wages in Reservationville* ψ + Moving Cost* ψ

Predictions1. When housing prices do not capitalize income differences,

there should be migration by all types to productive places

2. When housing supply elasticity falls, net migration to productive places falls and migration becomes skill biased

3. Convergence should continue in places without constrained supply

Why did convergence stop?

There was a change in capitalization

Returns to living in productive places

Recap:� In a spatial equilibrium model, we would expect people to

move in response to income differentials if they weren’t capture in the price:

Utility = Wages – Rent + Amenities – Transportation Costs

Is this a good explanation for convergence?

What are the source of the underlying income differences here?

Broader Recap� Persistent income gaps is a big question – but don’t lose the forest for the trees.

This was the frame to flesh out these regional economic forces:

Persistent Income Gaps Convergence, Capital & Labor mobility, Agglomeration, Market Access,Capitalization & Housing Supply Elasticity Natural Advantages, Institutions, etc.

Hopefully you now have some feel for the forces that shape regional economies

Framework

Determinants of OutputMobileCapitalLabor

ImmobilePopulation Driven

-Knowledge Spillover, Matching

Other:-Market Access, Institutions, Natural Advantages

Framework

Determinants of OutputMobileCapitalLabor

ImmobilePopulation Driven

-Knowledge Spillover, Matching

Other:-Market Access, Institutions, Natural Advantages

Mobile Factors MovementMobile

Capital Market IntegrationSpatial Equilibrium

Housing and Capitalization

Framework

Determinants of OutputMobileCapitalLabor

ImmobilePopulation Driven

-Knowledge Spillover, Matching

Other:-Market Access, Institutions, Natural Advantages

Mobile Factors MovementMobile

Capital Market IntegrationSpatial Equilibrium

Housing and Capitalization

Large Income GapConvergence