Labor Market Integration and Social Capital Disintegration

Abstract

Labor market integration is typically assumed to raise welfare in the absence of distortions because it allows labor to move to where returns are highest. This result is examined in a parsimonious general equilibrium model in the presence of social capital. Based on evidence that social capital raises productivity and falls with labor mobility, the main findings are: i) labor market integration imposes a negative externality and need not raise welfare; ii) integration is more beneficial or less harmful, the greater the difference in endowments between the integrating regions; iii) whether positive or negative, the welfare impact is larger the lower the private migration costs; iv) trade liberalization is superior to labor market integration; and v) the creation of new institutions in response to labor market integration need not raise welfare.