Economic Welfare, International Factor Mobility and Non-tradeable Goods

Rübel, Gerhard Article Economic Welfare, International Factor Mobility and Nontradeable Goods Zeitschrift für Wirtschaftsund Sozialwissenschaften (ZWS) - Vierteljahresschrift der Gesellschaft für Wirtschaftsund Sozialwissenschaften, Verein für Socialpolitik Provided in Cooperation with: Duncker & Humblot, Berlin Suggested Citation: Rübel, Gerhard (1994) : Economic Welfare, International Factor Mobility and Nontradeable Goods, Zeitschrift für Wirtschaftsund Sozialwissenschaften (ZWS) - Vierteljahresschrift der Gesellschaft für Wirtschaftsund Sozialwissenschaften, Verein für Socialpolitik, ISSN 0342-1783, Duncker & Humblot, Berlin, Vol. 114, Iss. 1, pp. 25-40, https://doi.org/10.3790/schm.114.1.25 This Version is available at: https://hdl.handle.net/10419/291811 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Sozialwissenschaften (ZWS) 114 (1994), S. 25-40 Duncker & Humblot, Berlin Economic Welfare, International Factor Mobility and Non-tradeable Goods By Gerhard Riibel Using a simple model of a small open economy producing both tradeable and nontradeable goods, it is shown how immigration of labor affects the utility of the existing residents. The size of the chance in the old residents' welfare is dependent on two factors, whose influence is explicitly discussed in the paper. One of these is the existence of remittance of part of the immigrants' earnings to their countries of origin, the other is the factor intensity relationship in the production of the two types of good. 1. The Problem The extensive discussion of the economic effects of international factor movements has predominantly focussed on movements of international capital. (Overview in Ruff in, 1984) The movement of labor, however, has also been, and still is, extremely important for the world economy. The industrial countries of northern Europe have been dependent on foreign labor, especially in the 60's and 70's,1 Workers from Mexico and the Caribbean are employed in the USA, and the oil producing countries of the middle east could not have carried out their ambitious development projects without the help of foreign labor - especially from Asia. Just recently, following the opening up of eastern Europe to the west, a new aspect of the international movement of labor has emerged. The effects of this movement, which has many of the characteristics of a population migration, have been most strongly felt in the Federal Republic of Germany. Germany's experience of the influx of foreign workers goes back to the end of the 50's. At that time foreign labor was already beginning to be recruited for the growing domestic market, mainly from southern European countries. As a result, the number of foreign workers in Germany rose suddenly, from 100,000 in 1957 to around 2.5 million in 1973. Initially it was thought that these 'guestworkers' would stay for only a short time, the employers' associations had even planned to introduce a compulsory rotation of workers though these plans were never put into effect. In 1973 over 60 % of foreign workers stayed for less than three years and only 9 % stayed 1 In Switzerland in 1970, for example, foreign workers made up more than 30 % of total employment. Cf. Ruff in 1984. ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 26 Gerhard Rübel for longer than ten years. (Blitz 1977, Mehrländer 1976) Outward indications of this situation were the extremely poor living conditions in the host country and the remittance of a considerable proportion of the guestworkers' earnings to family members in the home country. Guestworkers sent over 25% of their earnings back home in 1973. (Blitz 1977) From the early 1970's, however, this situation began to change. Increasingly the workers were being followed by family members and the number of foreigners who said they wanted to stay permanently was growing. What was occurring was in fact immigration. (Mehrländer 1976) Associated with this was a fall in the proportion of income being sent back to the countries of origin. Today many of the German-born children of the first generation of guestworkers have themselves reached working age. The characteristics of the most recent influx of people into Germany, and the circumstances that caused it to increase dramatically, are different from those associated with the guestworker phenomenon of the 50's and 60's. The changes in the political situation in eastern Europe have resulted in the movement of whole families, mostly of German ancestry, who, from the start, intended to settle permanently in Germany. When these people are integrated into the workforce, the proportion of their earnings that they will send back to their countries of origin will be negligible. This flow of migrants not only has different effects on Germany as recipient country, its consequences for the countries of origin are also different. The countries that the earlier guestworkers came from were mostly suffering from high unemployment, and it was mostly unskilled workers who left. The people who remained benefitted both from reduced pressure in the domestic labor market and from the remittances sent back by the foreign workers to their families. Foreign exchange earnings from remittances were higher than from export of goods to Germany.2 The causes of the inflow from the East are different. These people tend to be highly skilled and have relatively little difficulty in finding jobs in Germany, especially where there is no language problem. The countries of origin suffer a permanent loss of human capital which is not even partly offset by the remittance of some of the migrants' earnings. The differing effects, briefly outlined here, that can result from international labor movements have received some attention in the literature. There has been a series of contributions which considers the problems faced by the home countries when skilled workers emigrate and human capital is therefore lost. Labor mobility has also been considered in models of international trade. Topics here are the consequences for international welfare, whether 2 For Turkey, for example, the amount of foreign exchange earnings from remittances was 255% of the earnings from exporting goods to Germany. Cf. Hierwitz/ Schatz 1977. ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 Economic Welfare and International Factor Mobility 27 the effects of capital and labor mobility are symmetrical and whether factor mobility can be a substitute for trade in goods.3 The most usual assumptions made in these discussions are that the workers continue to be citizens of their home countries and that all the goods produced are tradeable. The latest developments, however, mean that, when discussing international factor movements, it is necessary to assume first, that workers are not going to return to their countries of origin and secondly that both tradeable and non-tradeable goods are produced. The latter assumption is justified by the fact that the share of services - mostly non-tradeables - in the national product of industrial countries has been increasing continuously. One of the first studies that recognized the importance of non-tradeable goods for the discussion of international labor movements was that of Rivera-Batiz 1982. (See also Krauss 1976, 1979; Srinivasan 1983) He showed that those who are left behind when part of the population migrates permanently become worse off in cases where non-tradeable goods exist. Other contributions have followed which have discussed this result and its applicability. Important aspects here are the modifications necessary when some of the earnings generated in the host country are sent back to the country of origin, whether the emigrants are owners of capital, and, if so, whether this capital also leaves the country when the people leave (Thompson 1984, River a-Batiz 1984, Djajic' 1986, Quibria 1988). This discussion has, however, been limited to effects on the country of origin. The present contribution goes beyond this and looks at the possible welfare effects on the recipient country when there is an inflow of both labor and capital and when both non-tradeable and tradeable goods are produced.4 A further distinction is made between the case where the migrants are temporary residents and therefore remit part of their income and the case where they become permanent residents and consume the whole of their income in their new country. It is shown that the welfare effects on old residents are influenced by the remittance of part of the earnings of the migrants. These influences depend on the relative factorintensities of the tradeable and non-tradeable goods. The model will be set out in Section 2, the case where the non-tradeable good is relatively laborintensive is discussed in Section 3.1. and 3.2. It will be shown here how the welfare effects on the old residents differ when migrants spend the whole of their income in their new country compared to the case where they send some back to their country of origin. The same comparison will be made in Section 3.3. for the case where the tradeable good is relatively labor-intensive. The results are summarized in Section 4. 3 Cf. an overview in Ethier 1985 and the references listed there. 4 This article restricts itself solely to one particular aspect of immigration. One should therefore be cautious when interpreting the results, since unemployment, the social problems associated with integration and similar issues are not taken into account. ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 28 Gerhard Riibel 2. The Model Supply: There are two bundles of goods - one consisting of tradeable goods (T) and the other of non-tradeable goods (N). Capital (K) and labor (A) are used to produce both types of goods, these factors are fully employed and internally completely mobile. The amount of the factors is exogenously given, markets are perfectly competitive. The linear-homogeneous production-functions are: T = TAf(Tk) and N = NAg(Nk), Tk: Capital-intensity in the production of tradeable goods, Nk: Capital-intensity in the production of non-tradeable goods. If t stands for the price of the tradeable goods and n for the price of the non-tradeable goods, with the relative price p defined as n/t, then, where firms are profit maximizers, the following supply functions are obtained: (1) T = T(p,K,A); Tp < 0; TK = 0 and TA = 0 for Tk = NK\ (2) N = N(p,K,A); Np > 0; NK | 0 and NA = 0 for Tk | Nk. The well-known relations for real wages (w) and real interest rates (r) apply: (3) r = r(p); rp | 0 for Tk | Nk\ (4) w = w(p)\ wp = 0 for Tk = Nk. Demand: The demand side of the economy is determined by a utility function U, which, for simplicity, is assumed to be homothetic. U = U(NC,TC). If E represents the minimum nominal expenditure necessary to achieve a certain level of utility, then it follows, in functional form, that: ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 Economic Welfare and International Factor Mobility 29 (5) E = E(t,n, 17), with: Et = tC(£, n, 17), £n = NC(t,n, 17), EJJ\ expenditure equivalent of a change in utility. To simplify the analysis, the country is assumed to have no external debt in the initial situation. Remittances (R) of part of foreign workers' earnings to their home countries consist of tradeable goods. In each period, aggregate consumption expenditure must equal the value of the aggregate output of goods minus possible remittances. (6) E(t,n, U) = t (T - R) + nN. The domestic market for a non-tradeable good always clears. (7) N = NC. The equilibrium condition for the traded goods sector follows from (6) and (7): Because one of the two equilibrium conditions (7) and (8) is redundant, equations (1) to (7) determine the seven endogenous variables T, N> r, w, E, 17, and n. The price of the tradeable good, t, is determined in the world market and, in what follows, will be set at one. To analyze the welfare effects of immigration of labor on old residents of a country, the following scenario is assumed: the immigrants have the same homothetic utility function as the existing residents. The production of nontradeable goods is relatively labor-intensive and the immigrants remit none of their earnings to their countries of origin. The immigration of labor is accompanied by an import of capital. If o stands for the percentage growth of capital relative to the percentage intake of labor, it holds that: (8) T = tC-R. 3. Immigration of labor 3.1. The case of no remittances when the production of the non-tradeable good is relatively labor-intensive (9) G dK dA K A ' or dK = ok dA. ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 30 Gerhard Rùbel In what follows, it is assumed that overall capital-intensity (/c) falls as a result of the labor immigration and, in this case, a < 1. Fig. 1 In figure 1, AA is the country's transformation curve before immigration takes place. Only the goods of the tradeable sector can be traded internationally. When the country is neither a creditor nor debtor, the point of tangency P of the aggregate transformation curve and a community indifference curve shows both production and consumption relationships between the two sectors. The price of the tradeable goods is determined in the world market, the price of the non-tradeable goods is determined by domestic supply and demand. The equilibrium relative price between the tradeable and non-tradeable goods before immigration is therefore tg a. If, as a result of the inflow of labor and capital, overall capital-intensity falls, and if the non-tradeable good is relatively labor-intensive, then there is an outward shift of the aggregate transformation curve to GG. The new production and consumption point is Q, the point of tangency between the new transformation curve and a community indifference curve. As a result of the ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 Economic Welfare and International Factor Mobility 31 shift of the transformation curve, the relative price of the non-tradeable goods falls from tangent a to tangent ¡5. This fall in p follows from equations (1) to (7). For a simultaneous increase in A and K, with dK= ok dA, it follows that (where dA* stands for the overall change in factors): 1 — {g jz{Tk - ok) - - NCE [n g JI (Tk - ok) - f JZ (Nk - ok), (10) dn dA* with: 1 71 = Tk - ajk NCV change in consumption expenditure on NCE = : the non-tradeable goods as a result of Eu a change in total expenditure. D = -Np + nCp< 0. The relative price of the non-tradeable goods will fall, with t assumed constant, if there is an excess supply of these goods in the domestic market. Change in supply: When there is a change in the supply of non-tradeable goods with relative prices constant, it follows that: (11) dN dA* dp = 0 = g JI (Tk - ok) > 0 for JZ > 0 and o < 1. This is the first expression in the curved brackets in equation (12). From the assumption made here that the production of the non-tradeable good is relatively labor-intensive, it follows that JZ > 0. In this case, however, the capital-intensity of the tradeable goods is greater than the overall capitalintensity (Tk > k). If it is further assumed that overall capital-intensity falls as a result of the factor increase ( o < 1) there is an unambiguous increase in the output of the non-tradeable goods, because Tkok > 0. Change in Demand: The increase in the production of the non-tradeable goods, and the consequent increase in income, also lead, proportionately to n NCE, to an increase in demand for these goods. Because n NCE is less than one,5 the increase in demand is smaller than the increase in supply and the market for the non-tradeable goods still has an excess supply. This is shown 5 It holds that nNCE +tTCE = 1 and thus, as long as the tradeable goods are not absolutely inferior, that nNCE < 1 • ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 32 Gerhard Rùbel by the second expression in the curved brackets. The change in income, which results from the production effect in the trade sector, also affects demand. With p constant, the following change in output of the tradeable goods results from the factor increase: An increase in the supply of labor, with K constant (a = 0) and jt > 0, results in an unambiguous fall in output of the tradeable goods (Rybczynski case). Proportionately to NCE, such a fall in income leads to a reduction in demand for the non-tradeable goods and the relative price unambiguously falls. Where 0 < o < 1, the change in output is indeterminate as Nk < k. In the borderline case a= Nk/k, output of the tradeable goods is unchanged. In what follows it will be assumed that the increase in the stock of capital is so small that the demand effect in the market for the non-tradeable goods, which results if there is an increase in output of the tradeable goods, does not dominate the relative price change. Thus, as a result of the inflow of factors, excess supply appears in the market for the non-tradeable goods and the relative price of this type of good falls (dn/dA* < 0). The size of the price effect is also influenced by D, that is, by both the price sensitivity of production of the non-tradeable goods (Np > 0) as well as of the demand for these goods (NCP < 0). To show the difference between the situation of the old residents before and after immigration, we can imagine the economy being divided into two sectors, one with the old residents and one with the immigrants (RiveraBatiz 1982, Bhagwati/Brecher 1980). Trade takes place between these two sectors. It follows from the fact that immigration is associated with a fall in overall capital-intensity that the sector consisting of old residents is capital abundant and therefore specializes in the production of the relatively capital-intensive good. This is shown in figure 1 where the new price line with slope tg ¡3 is tangent to the country's pre-immigration transformation curve of the old residents (the country's original transformation curve) at production point R. After trade (with the immigrants), the relatively capital abundant sector specializes in the production of the relatively capital-intensive good (production moves from P to R) and thus the relative price of the 'imported' goods falls from tg a to tg ¡3. Total output of the tradeable (nontradeable) goods is 0TG (QNG), and the old residents' share of this is 0TA (ONA).6 However, the old residents no longer must themselves produce 6 It is also assumed in figure 1 that the output of the tradeable good increases, i.e., o> Nk/k. Here and in what follows it is assumed, that the transformation curve for the old residents in the existence of foreign factors - which is clearly a hypothetical construct - will not change with a change of the relative price. (12) dT dA* dp = 0 - f jt{Nk - ok). ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 Economic Welfare and International Factor Mobility 39 b) relatively capital-intensive production of non-tradeable goods combined with very small remittances. With both these constellations, there are advantages for the old residents which appear in the model presented here. In the sixties, when remittances were large, the old residents benefitted because the non-tradeable goods were relatively labor-intensive. Today, when the capital-intensity of production of these goods is stronger, the old residents are able to benefit because remittances are a very much smaller proportion of the immigrants' earnings. The present paper considers the case where the immigration of labor is accompanied by an inflow of capital. In the paper itself it is assumed that aggregate capital-intensity falls, but the opposite situation is also covered. The parameter o would then be larger than one and the above results would be appropriately modified. Summary This paper examines the welfare situation of existing residents of a country when factor immigration occurs. There is always an increase in welfare when there are nontradeable goods and a fall in overall capital intensity. If the non-tradeable good is relatively labor-intensive, the increase in the existing residents' welfare is larger, the larger the proportion of their income the immigrant workers send back to their country of origin. However, if the non-tradeable good is relatively capital intensive, the improvement in welfare is smaller, the larger the remittances. Zusammenfassung Unter Berücksichtigung handelund nicht-handelbarer Güter wird gezeigt, daß die Zuwanderung von Arbeitskräften für die Altbürger des Landes eine Nutzenverbesserung impliziert. Wird das nicht-handelbare Gut relativ arbeitsintensiv produziert, so ist der Nutzenzuwachs für die Altbürger um so größer, je größer der Teil des Einkommens der Zuwanderer ist, den diese in ihr Heimatland zurücküberweisen. Wenn das nicht-handelbare Gut dagegen relativ kapitalintensiv produziert wird, gilt der umgekehrte Zusammenhang zwischen der Größe des Nutzenzuwachses und dem Ausmaß der Rücküberweisungen. References Batra, R. N. (1973), Studies in the Pure Theory of International Trade. London. Bhagwati, J. N./Brecher, R. A. (1980), National Welfare in an Open Economy in the Presence of Foreign-Owned Factors of Production. Journal of International Economics 10, 103 - 115. Blitz, R. C. (1977), A Benefit-Cost Analysis of Foreign Workers in West Germany. Kyklos 30, 479 - 502. ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49 40 Gerhard Rübel Djajic, S. (1986), International Migration, Remittances and Welfare in a Dependent Economy. Journal of Development Economics 21, 229 - 234. Ethier, W. (1985), International Trade and Labor Migration. American Economic Review 75, 691 - 707. Hiermenz, U./ Schatz, K.-W. (1977), Internationale Arbeitsteilung als Alternative zur Ausländerbeschäftigung - Der Fall der Bundesrepublik Deutschland. Die Weltwirtschaft 105, 35 - 58. IWD-Wochendienst (1988), 14, 50. Krauss, M. B. (1976), The Economics of the "Guest Worker" Problem: A Neo Heckscher-Ohlin Approach. Scandinavian Journal of Economics 78, 470 - 476. — (1979), A Geometric Approach to International Trade. Oxford. Mehrländer, U. (1976), Zur politischen Konzeption der Ausländerbeschäftigung, in: Heidermann, H. (Hrsg.), Wirtschaftsstruktur und Beschäftigung. Bonn-Bad Godesberg, 77 - 102. Quibria, M. G. (1988), A Note on International Migration, Non-Traded Goods and Economic Weif are in the Source Country. Journal of Development Economics 28, 321 - 324. Rivera-Batiz, F. L. (1982), International Migration, Non-Traded Goods and Economic Welfare in the Source Country. Journal of Development Economics 11, 81 - 90. — (1984), International Migration, Non-Traded Goods and Economic Welfare in a Two-Class Economy - A Reply. Journal of Development Economics 16, 325 - 330. Ruffin, R. J. (1984), International Factor Movements, in: Jones, R. W./Kenen, P. B. (Ed.), Handbook of International Economics I, 237 - 288. Srinivasan, T. N. (1983), International Factor Movements, Commodity Trade and Commercial Policy in a Specific Factor Model. Journal of International Economics 14, 289 - 312. Thompson, H. (1984), International Migration, Non-Traded Goods and Economic Welfare in the Source Country A Comment. Journal of Development Economics 16, 321 - 324. ZWS 114 (1994) 1 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.114.1.25 | Generated on 2023-04-04 12:18:49