Immigration policy in a small trade distorted economy : insurance and e ¢ ciency

Interregional labor mobility improves the allocation of labor and provides a means of insurance against income risks (Wildasin, 1995). This paper studies labor mobility in a simple version of the speci...c factors model where domestic factors are geographically immobile. I take the perspective of a region which faces an uncertain and less than in...nitely elastic export demand schedule but is a price taker on all other markets. Moreover, migrants are hired on a spot market whereas natives enjoy long-lasting contractual arrangements with ...rms. With missing insurance markets, risk neutral ...rms insure workers against income variations. In this setting, I study how ...rms insulate natives from terms of trade variability. The paper derives two main results: First, depending on the relation between the elasticity of export demand and the elasticity of substitution between natives and migrants, ...rms either vary migrant employment excessively or expand exports by selling below unit costs, keeping employment in the export sector high. Therefore, to achieve insurance against terms of trade variability, natives need not themselves be geographically mobile but can bene...t from the mobility of migrant labor. Second, whether immigration restrictions are desirable also depends on the mentioned elasticities. To the extent that regions (sectors) di¤er with respect to these key parameters, will the optimal immigration policy be di¤erent. This might provide a tentative rationale for recent changes in immigration legislation in European countries. JEL codes: F16, F22, O15