6 - Trade and migration: a production-theory approach

Summary

Introduction

Do guest-workers threaten the jobs of native workers? Do foreigners, willing to work for low wages, drive down domestic wages? These and similar questions have long preoccupied workers, policy-makers and economists, in Switzerland and elsewhere, and they have become particularly pressing at a time when globalisation is likely to increase exposure of workers from industrialised countries to competition from low-wage nations.

One line of research that has proved useful to address this type of question is what has become known as the ‘production-theory’ approach to migration. This approach, introduced by Baldwin Grossman (1982), treats foreign labour services as an input to the technology. Moreover, due to differences in characteristics and attributes, foreign labour is treated as being conceptually different from domestic labour. This makes it possible to determine whether immigrants and natives are substitutes or complements in production. One can then also assess the job-displacement and income-redistribution effects of international labour mobility.

It is quite surprising, however, that none of the studies based on the production-theory framework has modelled international migration within an open-economy setting. That is, no allowance has been made for possible links between international factor movements and foreign trade. Many additional questions thus remain unanswered. Does immigration reduce or enhance a country's foreign trade? Who benefits most from international movements of labour in an open-economy context? How does a change in the terms of trade affect the distribution of income in the presence of international labour mobility?