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We analyze the dynamics of labor migration and the insurance role of remittances in a two-country, real business cycle framework. Emigration increases with the expected stream of future wage gains but is dampened by the sunk cost reflecting border enforcement. During booms in the destination economy, the scarcity of established immigrants lessens capital accumulation, labor productivity, and the native wage. The welfare gain from the inflow of unskilled labor increases with the complementarity between skilled and unskilled labor and the share of the skilled among native labor. The model matches the cyclical dynamics of the unskilled immigration from Mexico.
JEL classification: F22, F41
Key words: labor migration, sunk emigration cost, skill heterogeneity, international real business cycles
The authors thank Gustavo Canavire for superb research assistance. They also thank James Anderson, Susanto Basu, Bora Durdu, Fabio Ghironi, Fabià Gumbau-Brisa, Peter Ireland, Myriam Quispe-Agnoli, Pedro Silos, Paul Willen, and seminar participants at the Federal Reserve Banks of Atlanta and Boston, the Green Line Macro Meeting at Boston College/Boston University, and the System Committee on International Economic Analysis conference at the Federal Reserve Board for helpful comments. They are also grateful to Gita Gopinath and Pedro Silos, who kindly provided part of the data. Part of this project was developed while Andrei Zlate was visiting the Federal Reserve Banks of Atlanta and Boston, whose hospitality he gratefully acknowledges. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Federico Mandelman, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8785, federico.mandelman@atl.frb.org, or Andrei Zlate, Department of Economics, Boston College, 21 Campanella Way, Chestnut Hill, MA 02467, 617-953-2185, zlate@bc.edu.
For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.
