Trade, capital adjustment and the migration of talent

Abstract

To determine the total effect of trade on migration in the existence of capital accumulation asymmetries between trading partners, this paper develops, calibrates, and solves a two-country general equilibrium model of trade and migration. The model introduces an interaction between capital adjustment costs and trade costs in different sectors of production, and then pins down the direction and the size of the effect those interactions have on the gap between the returns to labor in the skilled-labor-abundant (North) and unskilled-labor-abundant (South) countries. The results indicate that at low capital adjustment costs, higher trade volumes lead to a decrease in the rate of skilled migration, though the decrease is smaller than it would be if there were zero capital adjustment costs. At high levels of capital adjustment costs, higher trade volumes lead to an increase in the rate of skilled migration.