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June 11, 2007

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Michael Sullivan

It doesn't strike me as surprising that if you assume a negative externality to a certain set of worker's movements, then those movements may prove to be a bad thing. It seems that the analysis hinges on that aspect of the model.

I still don't understand the mechanism for that externality after a quick read through of the paper.

It's clear that immigrants entering with lower than average human capital lower than average level of human capital.

But two things are not clear at all: The first is how much of a given person's human capital is individual versus social. Clearly the human capital of an unskilled laborer in the US is much higher than in India or Haiti, so a worker's human capital is not independent of that worker's location.

The second bit I don't understand is their model's assumption that per unit productivity in the whole economy is a function of human capital per capita. At face-value, this seems to assume a profound non-independence of microeconomic transactions in the labor market that is at odds both with my instincts about current economic reality and with the neo-classical model. I'd like to see a real explanation of the mechanism for this, or perhaps a paper I've missed (not being an expert in the field) that establishes such a relationship.

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"From an output-maximizing perspective, it would then be optimal to geographically segregate low-skill labor completely"

From an output-maximizing perspective yes. But from a welfare perspective, even with the negative externality (which sort of makes it into an assortative-matching model) we have this:

""Freedberg and Hunt’s (1995) numbers tell us that we are, effectively, in
the x = 0 region [of closed borders]. But, since z [ratio of human capital of poor to rich countries] must be rather small — say 1/10 — the action x = 0
is optimal only if θ [weight on rich country resident's utility] is at least 0.8. In other words, this outcome we now have is
incompatible with even approximately equal weights in the social welfare function.""

So x=0 (relatively closed borders) is not compatible with treating everyone the same, even with the presence of negative externalities.

More generally, I don't think it would take much to "kill" this result or at least convexify it - as is usually the case with corner solution outcomes. Say by differentiating skilled from unskilled labor explicitly (so having an L and an H rather than just different, perfectly substitutable H's)

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