Labor Market Integration and Social Capital Disintegration

Abstract:     
Labor market integration is typically assumed to raise welfare in the absence of distortions because it allows labor to move to where returns are highest. This result is examined in a parsimonious general equilibrium model in the presence of social capital. Based on evidence that social capital raises productivity and falls with labor mobility, the main findings are: i) labor market integration imposes a negative externality and need not raise welfare; ii) integration is more beneficial or less harmful, the greater the difference in endowments between the integrating regions; iii) whether positive or negative, the welfare impact is larger the lower the private migration costs; iv) trade liberalization is superior to labor market integration; and v) the creation of new institutions in response to labor market integration need not raise welfare.

Number of Pages in PDF File: 32

JEL Classification: J30, J50

working papers series