Diverging Patterns in a Two Country Model with Endogenous Labor Migration

Models with endogenous growth due to production externalities imply that per capita output is positively affected by the size of the labor force (which we interpret as the stock of human capital). In this framework we investigate the effects of labor migration between two countries in the presence of free trade and perfect capital mobility. We show that any wage differential between countries sets up a continuous flow of migration of the workforce from the "low wage" country to the "high wage" country. This flow does not dampen over time and wage differentials become larger and larger. As a consequence, the former country will be permanently underdeveloped with respect to the latter. In a second part of the paper we modi fy the model to incorporate heterogeneous labor inputs (skilled and unskilled). Then, we study all the possible stable and unstable patterns of migration between countries and sectors and show that divergence as well as flow reversals are possible (the sending country may subsequentially become a receiving country).