DP2040 Crossing the Rio Grande: Migrations, Business Cycles and the Welfare State

Author(s): Fabio Canova , Morten O. Ravn

Publication Date: December 1998

Keyword(s): Business Cycles , heterogeneous agents , Migration , Welfare State

JEL(s): E32 , E62 , F20 , H23

Programme Areas: International Macroeconomics , Labour Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP2040.asp

This paper studies the macroeconomic effects of an inflow of low-skilled workers into an economy where there is capital accumulation, endogenous labour supply and heterogeneous workers. We find substantial dynamic effects, with adjustments that resemble those triggered by a sudden disruption of the capital stock and significant long-run changes. We examine the interactions between migration and three different redistribution systems and find that these schemes change the dynamics and lead to prolonged periods of adjustments. The aggregate welfare implications of migration are sensitive to the redistribution system. Without redistribution there are gains and when the state engages in redistribution gains disappear and different types of agents bear the costs.