International Factor Mobility, Skills Formation and Welfare

Abstract

The paper examines the welfare consequences of an inflow of foreign capital and an emigration of skilled labour in a small open economy in terms of a four sector general equilibrium model in the presence of endogenous skill formation and imperfection in the market for unskilled labour. It finds that both foreign capital and emigration of skilled labour may be welfare-improving although the outcomes of these policies depend on the relative capital intensities of different sectors and the magnitude of imperfection in the market for unskilled labour. Measures like labour market reform and capital subsidy (or tax) to the appropriate sector may be resorted to improve national welfare and ensure higher skills formation.