This study provides a theoretical exploration on the optimality of migration in a two-country world. It provides what determines the optimal stationary state of migration in a two-country dynamic stochastic general equilibrium framework, with endogenous and costly migration. With productive capital also included in the framework, this work provides insights into the substitutability between labour mobility and endogenous capital adjustment.
In general, we study migration under three possible political regimes, which are: 1) a single global planner; 2) two countries with their own central planners; and 3) two free-market economies under perfect and imperfect competition. A single benevolent planner delivers the global optimum welfare and the optimal size of migration. With two planners, we compare the outcomes of Nash and cooperation games, and suggest that a cooperation game is not necessarily superior to a Nash game in determining migration. Comparing planned to free-market economies, we find that a central planner and the perfectly competitive free-market economy are equivalent in terms of welfare maximization with migration. In imperfectly competitive free-market economies, this study shows how efficient wage-employment contracts of all labour groups (home, foreign and migrant labour) interact with each other, with migration jointly determined by all groups’ productivity, costs of migration and labour market bargaining in both economies.
A comparison of the derived welfare outcomes shows that migration can improve social welfare for both home and foreign economies, and that the global welfare optimum can be reached by a single global planner, two central planners and perfectly competitive free-market economies. The imperfectly competitive free-market economies cannot achieve the same welfare state due to the presence of bargaining frictions and natural level of unemployment.
Our simulation of the imperfectly competitive free-market model presents the general equilibrium responses to productivity, cost of migration and leisure shocks. A positive productivity shock can increase its origin’s output and households’ utility, while its effects on the other economy rely on the relative bargaining powers of labour market participants and on the degree of capital adjustment in both countries. Leisure shocks can reduce the utility of their own households, while a foreign leisure shock benefits the home households because it can stimulate migration. A cost of migration shock is at the cost of both home and foreign welfare via migration and capital adjustment. We show that there is a degree of substitutability between the labour mobility of migration and endogenous capital movements in adjusting to the full general equilibrium.