The Aggregate Effects of Trade and Migration: Evidence from OECD Countries

Abstract

Two large but separate bodies of literature analyze the economic effects of international trade and immigration. Given that several factors affect both trade and migration flows, the previous studies potentially suffer from omitted-variables bias. This paper provides estimates of the effects of trade and immigration on income in a unified framework. We also provide a useful decomposition of the channels at work. We assemble panel data on immigration flows, output, employment and capital stocks for 30 OECD countries over the period 1980–2007. In order to identify the causal effects of trade and immigration we extend the gravity-based approach in Frankel and Romer (Am Econ Rev 89(3):379–399, 1999). Our predictors for trade and immigration flows are based on geography and the demographic trends of each country’s trade and migration partners. Our estimates suggest that immigration and trade do not have a significant effect on income per capita in the short run. However, this masks offsetting effects. Trade openness appears to reduce capital intensity but increase TFP. This is consistent with an increase in the degree of specialization in knowledge-intensive industries for OECD countries. In the case of immigration we find that it leads to an increase in the employment rate of the receiving economy but, at the same time, it appears to reduce TFP.