The political economy of trade and international labour mobility

Abstract

AbstractWe explore the political economy of trade and migration policies in several models of international trade. We show that in a Ricardian world, free trade and no international labour mobility is a Nash equilibrium outcome, but free trade and free international labour mobility is not. The result holds under different assumptions about the set of goods, preferences and the number of countries. An analogous result also holds in multifactor economies such as a version of the standard two‐sector Heckscher–Ohlin model, the Ricardo–Vinner specific factors model and a three‐sector model with a non‐tradeable sector. We also study several extensions of our model in which free trade and at least partial labour mobility is a Nash equilibrium outcome. One extension introduces increasing returns to scale. Another an extractive elite. Finally, we allow the recipient country to charge an immigration fee in the form of an income tax and distribute the proceeds among domestic workers, which induces a Pareto improvement for the global economy.