Welfare Implications of Migration: A General Equilibrium Approach

While interconnection between factor movements and trade had been recognized long ago, it is rarely mentioned in current policy debates on effects of migration. I revisit the question of how migration affects welfare of native workers in a recipient country by setting a general equilibrium model with trade and allowing for exogenous reallocation of labor. In particular, I focus on the adverse terms of trade effect that may arise following immigration if new labor is employed in export-oriented industry or non-tradable sectors. By changing supply of imported and exported goods, migration may change the relative prices of foreign and domestic tradable goods making the natives in recipient country worse off. To show the importance of trade intensity for evaluating migration effects, I differentiate between cases when migrants come from trading partner and from a country unrelated through trade. The analysis suggests that the terms of trade effects and deterioration of welfare are stronger when source and recipient countries are linked by trade. To visualize the effects, I simulate the comparative statics analysis choosing the parameters so as to match the example of the US and Mexico - countries that are linked through both trade flows and migration flows.