Lecture 8: Migration and

Convergence
Danny Shoag

Overview

We are looking for a framework for how regional economies work

We attack this by attacking the first order fact big income gaps &

convergence

We saw that capital was pretty mobile within countries: unlikely that

capital accumulation is prevents convergence today

Looked at the evidence for two kinds of immobile inputs:

agglomeration (knowledge, labor pooling) and market access

We looked at the spatial equilibrium model both within and across cities
We saw that labor migration was responsive to unemployment, though it

hasnt closed income gaps

We saw that housing prices can capitalize differences in amenities,

productivity, etc.

Today we close the loop: why did convergence stop?

Back to Diminishing Marginal Product

What was it?

Does it apply to labor?

Y
Output

= K * L1-
Capital

Labor

Mariel Boatlift

The Peruvian embassy

granted asylum to over
ten thousand Cubans
seeking to leave.
Castro ultimately
opened the port of
Mariel.
About 100K people
left in 1980, 50% of
whom stayed in Miami

Card (1990)

Borjas 2003
Suppose education-experience worker types are imperfect

substitutes. How much has increased supply of each type

from immigration changed relative wages:

Recap:
The spatial equilibrium implies that area studies dont find

the full effect

Its very hard to estimate national general equilibrium effects

My take: Most studies do show downward sloping labor

demand

o Where have we seen it before in this semester?

What does this have to do with

convergence?
Preview of my paper:

Recent US history has two periods

Strong convergence + migration to rich places
Weak convergence + no directed migration

Even though estimating the effect of migration directly is hard, I

will show that our models suggest it matters

We will argue that migration stopped due to increased

capitalization / more inelastic housing supply

Pause
We talked about capital convergence in Barro- Sala-i-Martin
Why didnt we think that mobility drove convergence there?

Y = K L1
1

Y K L
=
L
L
Y
K
=
L
L

A bit more math

The percentage change (or the convergence coefficient) is

With the observed movements in labor and the standard value

of , migration can only generate about 25% of observed

convergence

Whats going on?

Since labor is such a big share of production, diminishing

marginal returns sets in too slowly.

Back to the original Barro problem?

Whats going on?

We introduce two new channels:

Elastic Labor Supply:

Before every person supplies 1 unit of labor even though wages fall. If

fall in wages reduces supply, then there will be more convergence

We have estimates of this effect in the literature

Human Capital Migration:

Migration can redistribute human capital

Migration did redistribute human

capital

With these channels migration can explain the change in convergence!

Why did Convergence Stop? Model

Two places: Productiveville and Reservationville
People have different skill types, supply labor, require a home,

and consume goods.

Model of Skills : 1 hr of work by guy with skill
produces units of labor

Model
Two places: Productiveville and Reservationville
People have different skill types, supply labor, require a home,

and consume goods.

Housing Prices Are More Important for Low Skilled Workers

Model
Two places: Productiveville and Reservationville
People have different skill types, supply labor, require a home,

and consume goods.

Housing Prices Are More Important for Low Skilled Workers
Local labor demand curves are downward sloping
People choose whether or not to move, face a moving cost.

Model
Two places: Productiveville and Reservationville
People have different skill types, supply labor, require a home,

and consume goods.

Local labor demand curves are downward sloping

People choose whether or not to move, face a moving cost.

Move if:

Wages in Productiveville* Land Price >

Wages in Reservationville* + Moving Cost*

Predictions
1.

When housing prices do not capitalize income differences,

there should be migration by all types to productive places

2.

When housing supply elasticity falls, net migration to

productive places falls and migration becomes skill biased

3.

Convergence should continue in places without

constrained supply

Why did
convergence
stop?
There was a change in capitalization

Returns to living in productive places

Recap:
In a spatial equilibrium model, we would expect people to

move in response to income differentials if they werent

capture in the price:
Utility = Wages Rent + Amenities Transportation Costs
Is this a good explanation for convergence?
What are the source of the underlying income differences here?

Broader Recap
Persistent income gaps is a big question but dont lose the forest for the trees.

This was the frame to flesh out these regional economic forces:

Persistent Income Gaps

Convergence, Capital & Labor mobility,

Agglomeration, Market Access,
Capitalization & Housing Supply Elasticity
Natural Advantages, Institutions, etc.

Hopefully you now have some feel for the forces that shape regional economies

Framework
Determinants of Output
Mobile
Capital
Labor
Immobile
Population Driven
-Knowledge Spillover, Matching

Other:
-Market Access, Institutions, Natural Advantages

Framework
Determinants of Output
Mobile
Capital
Labor
Immobile
Population Driven
-Knowledge Spillover, Matching

Other:
-Market Access, Institutions, Natural Advantages

Mobile Factors Movement

Mobile
Capital Market Integration
Spatial Equilibrium
Housing and Capitalization

Framework
Determinants of Output
Mobile
Capital
Labor

Mobile Factors Movement

Mobile
Capital Market Integration
Spatial Equilibrium
Housing and Capitalization

Immobile
Population Driven
-Knowledge Spillover, Matching

Other:
-Market Access, Institutions, Natural Advantages

Large Income Gap

Convergence