International Factor Mobility, Wages and Prices

• DOI: http://doi.org/10.1111/rode.12159
• Published date: 01 August 2015
• Date: 01 August 2015

International Factor Mobility, Wages and Prices

Elena Podrecca and Gianpaolo Rossini*

Abstract

This paper analyzes the joint influence of migration inflows and outward foreign direct investment (FDI)

on wage bargaining. Labor migration and offshoring supported by FDI affect wage deals by changing the

outside options of workers and firms. Unemployed workers may find alternative jobs either in the legal or

in the illegal labor markets. Wages in this latter case are highly affected by migrants crowding this segment

more than any other market. Firms may have the option of moving production partly or entirely to foreign

low-cost countries. A wage curve is designed theoretically, reflecting cross-border labor and capital mobil-

ity, and estimated on panel data for 13 European countries over the period 1995–2013. The theoretical pre-

dictions of a joint negative effect on wages of FDI outflows and labor migration inflows are confirmed with

some novel results.

1. Introduction

In an open economy wages depend on variables relating both to the domestic labor

market and to globalization of goods and factor markets. To the first group belong the

rate of unemployment, the dynamics of labor productivity, the institutional setting,

the diffusion and shape of the welfare state, the extent of flexibility of the labor

market, the effectiveness of central bank inflation targeting, the size of the illegal

labor market. The second group captures the intensity of international integration of

a nation in terms of competition in goods and services and cross-border mobility of

labor and capital. While on the former group of variables we enjoy an abundant crop

of theory and applied analyses, contributions on international factor mobility are

more recent and contain a bunch of controversial results. Moreover, the main thrust

of the research in this field is on the influence of international labor migration on

wage levels in host countries, while the investigation of the upshot of capital mobility

is often neglected.

It is this issue, i.e. the effect on wages of cross-border mobility of both factors of

production in an age of intensive labor migration and production offshoring, that is at

the center stage of our investigation.

During the last twenty years, a large chunk of literature1on international factor

mobility has concentrated on the degree of substitutability between migrant and

native labor neglecting capital mobility. Zhao and Kondoh (2007) find that in the

USA temporary and permanent migrants reduce the gap between union and non-

union workers in manufacturing. In a similar vein D’Amuri et al. (2010) explore the

German labor market over the 1990s, empirically adapting a general equilibrium

model and discover that new immigrants are not close substitutes for native workers,

but only for old migrants with similar education and skill. Still Ottaviano and Peri

* Rossini: University of Bologna, Dipartimento di Scienze Economiche, Strada Maggiore, 45, 40125

Bologna, Italy. Tel: +39-(0)51-2092607; Fax: +39-(0)51-2092664; E-mail: gianpaolo.rossini@unibo

.it.Podrecca: University of Trieste DEAMS, Piazzale Europa, 1, Trieste, Italy. The authors wish to thank

Paolo Zanghieri and Gaetano Carmeci for their help. They also appreciate the comments of Alessia Lo

Turco and Tony Thirlwall. The usual disclaimer applies.

Review of Development Economics, 19(3), 683–694, 2015

DOI:10.1111/rode.12159

© 2015 John Wiley & Sons Ltd