Employment Effects of International Factor Mobility : A Theoretical Approach with Heterogenous Labor

In many countries the difference in labor market performance for skilled and unskilled workers has increased over the past decades. While an extended literature exists on the employment effects of trade, less is known about the effects of factor mobility. Based on the “labor market flow approach”, we develop a model of persistent structural unemployment for skilled and unskilled workers. Within this model the effects of capital mobility and migration are analyzed. Given that real and human capital are complements we find that skilled and unskilled worker will both gain from capital inflows. Within each labor market segment, the effects of labor inflows is always negative. The cross effects of labor infows, however, are non-symmetrical: On the one hand, an inflow of unskilled labor negatively affects the unskilled segment, but will not affect the unemployment rate of skilled workers. On the other hand, an inflow of skilled labor will always negatively affect the unemployment rate in both segments of the labor market. If policy makers would like to avoid these effect, the number of unskilled must simultaneously be decreased, the rate of internal real capital accumulation must be increased or real and human capital must be imported as a bundle.