The Welfare Effects of Unrestricted Labour Migration in a Two Nation World Economy Essay

The welfare effects of unrestricted labour migration in a two nation world economy. Labour migration can be defined as the movement of workers from one region, state or country to another with the intention of working at the foreign nation in exchange for wages for a considerable period of time. There are several reasons why international labour migration occurs.

Some of these reasons include; greater economic development, higher wage rate opportunities, lower living costs and greater quality of life, higher standard of living, better working conditions, higher level of education, low gender equality in home country, scarcity of natural resources in home country, etc. (Wildan, 2012). A major determinant of labour migration is the barriers that exist in nations to curb immigration or emigration. The fewer labour migration barriers that exist, the greater the mobility of labour in the international market (Kjeldsen-kragh, 2002).

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The aim of this essay is to discuss the welfare effects of international labour migration in a two nation world economy, when no barriers to migration exist. According to Dickens, (1992), poor nations have large underemployed labour force; the rate of supply cannot keep up with the demand for jobs. Thus these nations supply labour to rich foreign nations. Rich nations are said to experience economic growth as a result of labour immigration, an example is the United States. Approximately 70million people moved to the United States between 1820 and 2004.

These immigrants expanded the labour force when other factors of production such as land and capital where still budding. Thus, it is not improbable to conclude that immigration played a role in the United States emergence as the leading world economy in the 1900s. Countries have discovered the relationship between labour immigration and economic growth, thus governments have come up with policies inviting workers from foreign countries relocate to their countries for short periods of time so as to work in different industries.

Majority of the migration flow is from poor countries, to rich countries. The migration however, of rich country to poor country is relatively scarce. Also, Poor country to rich country migration usually involves skilled labour (Husted et al. , 2007). In a two nation economy, if there is unrestricted labour migration, a number of welfare effects are bound to affect the nations. The diagram bellow, by Salvatore, (1998), illustrates the welfare effects of unrestricted international labour migration in a nation’s economy.

In the diagram, the supply of labour is represented as 0A for Nation 1 and 0’A for nation 2. The value of the marginal product of labour in Nation1 and Nation 2 is represented respectively by the VMPL1 and VMPL2 curves. In Nation1, before the occurrence of migration, the wage rate was represented as 0C while the total product was represented as 0FGA. In Nation2, before the occurrence of migration, 0’JMA represented total produce, while 0’H represented wage rate. All barriers of labour mobility have been removed thus allowing unrestricted labour migration.

Nation2 has higher wage rate (0’H) than Nation1. Thus, labour (AB) will migrate from Nation1 to Nation2 in other to balance wages between the two nations. BE (=0N=0’T). The resulting effect is that wages will fall in Nation2 and rise in Nation1. This effect is one of the costs of labour migration on organised labour. Also, in Nation2 total product will rise from 0’JMA to 0’JEB while in Nation1, total product will fall from 0FGA to 0FEB, resulting In a net gain in the world output of EGM.

There is also a redistribution of national income towards non labour in Nation2 and towards labour in Nation1. Remittances may also be sent to families in Nation1 by migrant workers from Nation1. Finally, in Nation1, if AB of labour represents the unemployed, 0N would have represented wage rate and total product even if the migration had or had not occurred. The world output net increase with the occurrence of migration would be ABEM (Salvatore, 1998). The diagram above and its subsequent analysis assume labour is unskilled.

According to Salvatore, (1998) the welfare effects of skilled labour are significantly different from those produced by unskilled labour. The main problems that result from skilled migration all stem from a term called brain drain. Husted et al. , (2007) defines brain drain as a situation whereby skilled labours migrate from their home nations, to foreign nations is defined as brain drain. According to Husted, the issue with brain drain came to light in the 1960s as a result of Europe’s best and brightest skilled workers where leaving Europe and relocating to the united states.

Salvatore, (1998) divulges a good example. In the 1980s, 8. 7 million people relocated to the Unites states from the rest of the world. Out of those 8. 7, 1. 5 million had college degrees. Using the diagram illustrated above, the cost of brain drain to Nation1 stems from the costs incurred from educating and training the workers who end up benefiting Nation2. On the other hand, Nation2 encourages brain drain, it facilitates the migration of Nation1s skilled workers. In conclusion, labour migration occurs as a result of different reasons.

Some economic related and some non-economic related. Unrestricted labour migration between two nations will result in both costs and benefits for those countries. Some benefits for the poorer nation would include a decrease in unemployment and remittances while a cost would be brain drain and for the richer nation, the benefits would be expansion of labour market and economic growth. Bibliography Dominick Salvatore (1998), International Economics, New Jersey: prentice-Hall, Inc.

Soren kjeldsen-kragh (2002), International Economics: trade and investments Copenhagen business school press DK. Stephen Husted, Michael Melvin (2007), International Economics, Boston: Pearson Education Inc. Syafitri Wildan (2012), Determinants of Labour Migration Decisions: The case of East Java, Indonesia. Germany: Kassel University press gmbh Kassel. Peter Dicken (1992), Global Shift: The Internationalization of Economic Activity, London: Paul Chapman Publishing Ltd.

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