The Costs of Babylon – Linguistic Distance in Applied Economics # 337

Linguistic distance, i.e. the dissimilarity between languages, is an important factor infl uencing international economic transactions such as migration or international trade fl ows by imposing hurdles for second language acquisition and increasing transaction costs. To measure these costs, we suggest to use a new measure of linguistic distance. The Levenshtein distance is an easily computed and transparent approach of including linguistic distance into econometric applications. We show its merits in two diff erent applications. First, the eff ect of linguistic distance in the language acquisition of immigrants is analyzed using data from the 2000 U.S. Census, the German Socio-Economic Panel, and the National Immigrant Survey of Spain. Across countries, linguistic distance is negatively correlated with reported language skills of immigrants. Second, applying a gravity model to data on international trade fl ows covering 178 countries and 52 years, it is shown that linguistic distance has a strong negative infl uence on bilateral trade volumes. JEL Classifi cation: J24, J61, F22, F16