Migration and Wage Flexibility

Abstract

The relationship between migration decision and migration equilibrium among two rather similar regions and the existence of differences in the workings of the two regional labour markets is the main focus of the paper. The reason for this choice is twofold: first, it enables us to readdress some of central questions of the literature on migration by isolating the interesting role played by institutional differences between the labour markets; second, it allows some light to be shed on the consequences of a monetary union in the presence of important differences in the workings of labour markets. Some interesting results not stressed by the existing literature on labour migration are obtained. First, it is shown that the presence of a difference in the rules that determine wages is an independent reason for migration and determines a positive migration equilibrium even when regions are identical in every respect and capital is perfectly mobile. Second, it is found that migration is not neutral as far as aggregate output and aggregate employment are concerned when the two semi-elasticities of wages with respect to unemployment rates are different among regions. Third, in this framework capital and labour tend to move together from the region with a lower semi-elasticity toward the region with a higher one. However, while the labour movement increases aggregate output and employment, the capital flow by contrast reduces aggregate output. Therefore capital mobility may be undesirable when labour markets work in different ways.

JEL Classification: J16, R23