International Migration, Segmented Labour Markets and Competitiveness: Amalgamating the Lewis and Balassa-Samuleson Models

We integrate three hitherto unconnected strands of economic theory; Lewis’ dual economy model, the Balassa-Samuelson model and, segmented labour market theory. With our hybrid model we investigate the implications of migration with labour market segmentation for an economy’s internal competitiveness, where migrants are concentrated in the secondary labour market and this segment supplies unskilled labour to the non-traded goods and services sectors. Our model reveals a number of original and counterintuitive insights that conventional models are unable to address. We show how international migration allows an economy to prevent appreciation of its real exchange rate, forestalling the loss of competitiveness predicted by Balassa-Samuelson to accompany economic growth. The essential transmission mechanism is through the relative prices of traded to non-traded goods, rather than unit wage costs in the traded goods sectors.