Immigration and Unemployment of Skilled and Unskilled Labor. Shigemi Yabuuchi* Nagoya City University

Transcription

1 Ag. 7, 6 Immigration and Unemployment of Skilled and Unskilled Labor Shigemi Yabchi* Nagoya City University Abstract This paper discsses the problem of nemployment in developed contries that faces international labor movement. There are two types of nemployment. The first traditional type of nemployment exists simply becase the common wage rate is fixed and higher than the eqilibrim level. The second one may exist when the wage rate in one sector is high and fixed, while that in the other is flexible. On the other hand, an extensive movement of labor among contries has been observed. Ths, this paper investigates the effects of immigration and other policies on the two types of nemployment. * The athor greatly acknowledges the financial spport received from the Japan Society for the Promotion of Science (Grant-in-Aid for Scientific Research, no. c--6556). Corresponding address: Department of Economics Nagoya City University Yamanohata, Mizho Nagoya Japan yabchi@econ.nagoya-c.ac.jp

2 . Introdction Unemployment of both elderly skilled labor and yonger nskilled labor is fond in certain developed contries. Unemployment of elderly skilled labor is characterized as being traditional becase it occrs as a reslt of the high and nonflexible wage rate. This type of nemployment can be observed particlarly among middle-aged and elderly workers. On the other hand, a remarkable increase has been observed in the nemployment of yonger nskilled workers. This type of nemployment is characterized as being volntary becase these workers have excessive expectations from their jobs and rely on others for a living. In other words, if they wish, it is possible for yonger workers to be employed in certain sitable indstries. However, they prefer volntary nemployment in the hope of secring their ideal job someday. Recently, a tendency has been observed among yonger workers wherein they insist on finding jobs only in the indstry that they prefer. This sitation is highly similar to that witnessed in developing contries. In these contries, rral workers are attracted to the bright lights of the city and migrate to rban areas at the risk of nemployment, even thogh they can be flly employed in rral areas at the prevailing rral wage rate. Harris and Todaro (97) developed this labor allocation mechanism between the rral and rban areas in developing contries. Ths, the problem of nemployment of the yonger generation in the economy with international factor movements can be analyzed by employing Harris and Todaro s approach. Varios aspects of the Harris-Todaro (HT hereafter) model have been discssed by several trade theorists sch as Bhagwati and Srinivasan (974), Corden and Findlay (975), Khan (98), Batra and Naqvi (987), Beladi and Naqvi (988), Hazari and Sgro (99), Marjit (99), Neary (99), Gpta (99), Yabchi (99), Chao and Y (996), Bas (), Chadhri (), and Marjit and Beladi (). Or analysis is an extension of the mobile capital HT model that was developed by Corden and Findlay (975) and followed by Batra and Naqvi (987) and Yabchi (998, 5), among others. Yabchi (5) introdced the difference between skilled and nskilled labor into the standard mobile capital HT model and analyzed the relationship between nemployment and the international movement of labor and capital. His analysis deals with nemployment problem of developing contries, and then concentrates on the nemployment of only nskilled labor in the traditional two-sector framework. In this paper, however, we introdce a third sector that is characterized as the absorption sector of

3 nskilled daydreamers, and examine the problem of nemployment of both elderly skilled labor as well as yonger nskilled labor in the model with three sectors and three factors. We will focs particlarly on the interaction between domestic and international labor movements by paying special attention to the coexistence of disgised nemployment in the form of part-time worker and two types of nemployment. Both these types of nemployment have characteristic featres. The nemployment of elderly workers cases personal hardships, social costs reslting from an inefficient allocation of labor, social instability, and so on. This type of nemployment is mostly involntary becase it is cased de to instittional and strctral reasons. Ths, the primary concern of policy makers shold be to alleviate nemployment involving both the nemployed workers themselves and the economy as a whole. The nemployment of yonger nskilled workers involves an aspect of volntary nemployment in the sense that these workers can be employed in another sector where the wage rate is low and the job is ninteresting. Therefore, at first sight, it appears that for the workers themselves, nemployment is not a serios problem; it is merely a matter of preference with regard to whether or not they wold like to be employed in a sitable job of their choice. However, if this nemployment contines for a long period of time, it might reslt in social instability or loss of opportnity to accmlate technical knowledge in the most appropriate period. This type of nemployment is sometimes known as NEET (Not in Employment, Edcation, or Training). Ths, yonger workers tend to remain nemployed and nskilled. Therefore, in this respect, the problem of nemployment is an extremely important concern for the contry at large as well as for the nemployed workers themselves. Sbseqently, we consider the effective policies that aim to redce both this type of nemployment as well as the nemployment of elderly skilled labor. The remainder of this paper is organized as follows. Section presents the model and basic assmptions. Sections, 4, and 5 examine the effects of the international labor movement, prodction sbsidies, and the wage policy on nemployment, respectively. Conclding remarks are provided in section 6.. The model and assmptions Let s consider a small open economy that has three sectors. Each sector prodces good j, X j (j =,,). We assme that the nskilled workers find sector to be attractive in terms of employment bt they do not regard sector in the same light. For simplicity, we

4 4 label sectors and as the traditional and advanced manfactring sectors, respectively. Sector is a labor-absorbing sector that comprises indstries sch as light manfactring, retailing, and food service, all of which employ nmeros part-time workers. This third sector is similar to the informal sectors fond in developing contries. The prodction of goods and reqire nskilled labor ( L ), skilled labor ( H ), and capital ( K ), while the prodction j of good reqires nskilled labor ( ) and capital ( K ). Sector does not employ skilled L labor. This is a natral occrrence in light of the natre of this sector. Capital is also assmed to be specific to each sector. Ths, the prodction fnctions are as follows: j j and j X j = F ( L j, H j, K j ), j =, () X = F L, ). () ( K It is assmed that F j has positive and diminishing marginal prodcts and is homogeneos of degree one. We also assme that nskilled and skilled labor mainly comprise yonger and older generations, respectively. Under perfect competition, we have w w w ( L, H, ), () = pfl K L ( K = p F L, H, ), (4) = ( L, pfl T s = p ), (5) ( L, H, K) pfh ( L, H, ), (6) FH = K j where F is the marginal prodct of the kth factor in the jth sector (k = L,H; j =,,), w is k the wage rate of nskilled labor in the jth sector, s is the wage rate of skilled labor, and the price of the jth good (j =,,). We assme that all goods are tradable and their prices are given exogenosly. If sector is a service indstry, it is likely that it is a non-traded indstry. In this case, the price mst be determined endogenosly. In this paper, althogh we assme that the price of good is constant, this assmption constittes an important extension that reqires frther examination. The nemployment of elderly skilled labor has been observed in certain developed contries. This type of nemployment is characterized as being traditional becase it occrs 4 j p j is

5 5 as a reslt of the high and nonflexible wage rate. This can be observed particlarly among middle-aged and elderly workers. Ths, the wage rate of skilled labor is assmed to be constant. This is partly becase firms have specific wage standards depending on the ages and indstries to which the workers belong. In the standard HT model, it is assmed that the wage rate in (manfactring) sector ( ) is set at a relatively high level, and it is rigid de to some political and/or instittional w factors. However, the wage rate in (agricltral) sector ( ) is flexible. In this sitation, rral workers have two alternatives they can either stay in rral areas and acqire jobs at low wage rates or migrate to rban areas at the risk of nemployment in search of a high wage income. Ths, the labor allocation mechanism between the sectors is shown as follows: w w = w L /( L + L ) or w ( + λ ) = w, where L and L represent employed and nemployed labor in the rban area, respectively, and λ = L / L. In the labor market eqilibrim, therefore, the wage rate in sector ( w ) eqals the expected wage income in sector, which in trn eqals the manfactring wage rate ( w ( L /( L + L )). ) mltiplied by the probability of finding a job in the rban manfactring sector We apply this labor allocation mechanism to the job search behavior of nskilled labor in developed contries. Ths, nskilled labor can obtain secre (bt ninteresting) jobs in the nattractive sector (for example, the traditional manfactring sector) at low wage rates; alternatively, they can seek high wages and/or attractive jobs at the risk of nemployment or disgised nemployment (as a part-time worker) in, for example, a laborsing service indstry. Unskilled labor prefer to be nemployed or employed as temporary workers ntil they acqire their ideal job by being in the vicinity of the attractive sector. This appears to be reflective of the behavior of several yonger nskilled job-seekers in developed contries. We refer to the area that incldes the attractive sector, the labor-absorbing sector, and the nemployment pool as the advanced area. This area is a conceptal one. However, this does not necessarily imply that the labor-absorbing sector and the nemployment pool are geographically located near the attractive sector. The area consisting of the nattractive sector is termed as the traditional area. 5

6 6 Based on the HT model, we assme that the advanced-sector wage rate is fixed at a higher level than the traditional-sector wage rate. This is becase firms in the advanced sector have well-organized trade nions and/or certain agreements or laws pertaining to the level of the minimm wage rate. Alternatively, it might be arged that the high and constant wage rate in the sector captres the varios types of benefits offered to workers; these benefits inclde pecniary rewards, stability, and job interest. We also assme that the wage rate in sector is a fraction of that in the advanced sector, i.e., w = α. (7) w This is partly jstified by the fact that the wage rate of part-time workers is fixed according to the standard of the economy in qestion. For example, the wage rate of part-time workers is approximately 8 yen per hor in Japan. Ths, the labor allocation of nskilled labor is expressed as or w = ( wl + α wl ) /( L + L + L w ( + αµ L, (8) L L + L ) = w ( + ) ) where µ = L / L. (9) The exogenosly given endowments impose the following resorce constraints: L + L + L + L = L + *, () L H + H + H = H + *, () H where L, H, and K are the domestic endowments of nskilled labor, skilled labor, and capital, respectively, while L* and H* are the foreign inflows of nskilled labor and skilled labor, respectively. This completes the specification of or model with the fixed endowment of factors and the internationally determined prices. We have eight nknown variables w, 6

7 7 L, H, and, which are solved by eight eqations () (8), (), and () for L, L, L, H, H the given parameters, s,, α, p, p, p, K, K K w,,l, H, L*, and H*.. International factor movement and nemployment (-) Immigration of nskilled labor In the present set-p of the model, with respect to the positive aspects of this analysis, the positive effects of the changes in factor endowment on the variables do not depend on whether the changes are atonomos increases or foreign inflows. The normative effects differ according to the reason for the changes. If the change is cased by the inflow of foreign factors, it additionally affects welfare throgh the change in the remittance. Therefore, the following reslts of nemployment apply to the case of an atonomos increase in the domestic endowment of nskilled labor. First, we examine the effect of an inflow of nskilled foreign labor on the nemployment of nskilled and skilled labor. Comparative statics yield the following (see the Appendix): ( dl / dl*) = ( p ) pf CΦΦ / LL, () where C L + L +, Φ = ( p ) { F F ( F ) }, Φ = ( p ) { F F ( F ) }, = L LL HH LH LL HH LH and is the vale of the determinant of the coefficient matrix of the system, which can be shown to be negative (see the Appendix). We obtain the effect of the inflow of foreign nskilled labor on the nemployment of skilled labor as follows: ( dh HL LL / dl*) = w p p F F Φ /. () Ths, we have the following proposition. 7

8 8 Proposition. The increase in foreign nskilled labor increases the nemployment of nskilled labor, and it decreases the nemployment of skilled labor provided skilled and nskilled labor are technically complements each other in sector (i.e., ). F HL The reslt is fairly straightforward and consistent with or economic intition The inflow of foreign nskilled workers increases the employment of nskilled labor in sector, while the employment in sectors and remains constant. A slight increase in employment is possible de to the decrease in the wage rate in sector. However, the increase in employment in sector is less than the inflow of foreign nskilled labor. As a reslt, the nemployment of nskilled labor eventally increases. On the other hand, the indced increase in the employment of nskilled labor increases the marginal vale prodct of skilled labor in sector. In trn, this increases the employment of skilled labor in sector provided that skilled and nskilled labor are technically complements each other in the sector (i.e., ), and then it decreases nemployment of skilled labor. Conversely, the employment of skilled labor decreases if skilled and nskilled labor are technically sbstittes each other (i.e., < ). This depends on the natre of the prodction techniqe employed in the indstry. In the presence of three factors in the indstry, both cases are possible. However, it may be more realistic to assme that skilled and nskilled labor are technically complements each other. F LH F LH (-) Immigration of skilled labor Now consider the effect of the inflow of skilled labor on nemployment. Solving the system for dl and dh with respect to dh *, we have dl / dh* = () and dh / dh* =. (4) 8

9 9 Or reslt can be smmarized in the following proposition: Proposition. The increase in (foreign) skilled labor increases the nemployment of skilled labor by exactly the same amont bt does not affect the nemployment of nskilled labor. Under the constant wage rate of skilled labor, the inflow of skilled labor is directly absorbed into the nemployment pool. Frther, this inflow does not affect the market of nskilled labor. Ths, this policy cannot be employed to redce both the types of nemployment. 4. Prodction sbsidies and nemployment (4-) Sbsidy to the traditional sector and nemployment We will now investigate the other policy tools that can be sed to alleviate the problem of nemployment. Here, we consider the prodction sbsidies provided to the sectors. This section examines the effect of the sbsidy to the traditional sector. The effect of prodction sbsidies can be captred by the increase in the prices nder the assmption that the good prices are constant and the sbsidies are initially zero. We obtain the effect of the sbsidy to sector as (see the Appendix) and / LL dl dp = Cp F Π Φ / (5) dh / dp = pfll( wf H + CΛ) Φ /, (6) where Π = p ( F F F F ) and = p ( F F F F ). Note that and positive if H LH L HH F LH = F HL Λ L HL H LL Π. This leads to the following proposition. Λ are Proposition. A prodction sbsidy provided to sector decreases the nemployment of nskilled labor and the nemployment of skilled labor provided that skilled and nskilled labor are technically complements each other in sector (i.e., ). F HL 9

10 The prodction sbsidy to the traditional sector increases the vale marginal prodct of nskilled labor of the sector. This directly increases the employment of nskilled labor in sector. We can see that the sbsidy does not change the employment of other two sectors. Ths, the sbsidy decreases nemployment of nskilled labor. On the other hand, the expansion of sector indces the increase the employment of skilled labor if skilled and nskilled labor are technically complements each other in sector (i.e., sbsidy will be sed for training, edcation and job-search activities of nskilled labor. F HL ). The (4-) Sbsidy to the advanced sector and nemployment Now let s examine the effect of the sbsidy to the advanced sector on nemployment. Comparative statics reveals that dl / dp = p pfllπ ( AFHH + pcφ ) / < (7) and dh / dp LL HH HL = p p F { Λ ( p CΦ w F ) w F Π }/, (8) where ( ) A = w w, Π = p ( F F F F ), and Λ = p ( F F F F ). < Ths, we obtain following proposition. H LH L HH L HL H LL Proposition 4. A prodction sbsidy provided to the advanced sector decreases the nemployment of nskilled labor, and it decreases the nemployment of skilled labor provided that { Λ( CΦ ) + w Π} w FHH FHL <. The prodction sbsidy provided to the advanced sector expands the otpt, and then increases the employment of nskilled labor. Ths, this decreases nemployment of nskilled labor. Part of the increased employment in sector comes from sector. This, in trn, decreases the employment of skilled labor in sector, while the expansion of sector increases it if skilled and nskilled labor are technically complements each other in sector

11 (i.e., F HL ). Therefore, the total effect on skilled labor depends on the relative magnitde of these two offsetting effects. Proposition provides the necessary and sfficient condition. The condition is a bit complicated. However, if the degree of technical complementality between skilled and nskilled labor in sector is large and that in sector is small, the indced increase in the employment of skilled labor in sector will be relatively large compared with the decrease in the employment of skilled labor in sector. This leads to the decrease in nemployment of skilled labor. (4-) Sbsidy to sector and nemployment Now, we will examine the prodction sbsidy provided to sector. This policy incldes varios sbsidies provided for the spport of small indstries sch as laborabsorbing, retailing, and food service indstries. We can show that dl / dp = F ( w pf CΦ) Φ / L HH < (9) and dh / dp L HL = αw p F F Φ /. () Ths, we arrive at the following proposition. Proposition 5. A prodction sbsidy provided to sector decreases the nemployment of nskilled labor, and it increases the nemployment of skilled labor provided that skilled and nskilled labor are technically complements each other in sector (i.e., F HL ). The prodction sbsidy provided to sector increases the marginal vale prodct of nskilled labor in the sector. In trn, this increases employment in sector nder the constant wage rate in the sector. The sbsidy has no direct effect on two other sectors. Ths, the

12 increase in the employment of sector leads to the decrease in the nemployment of nskilled labor. However, the increase in the employment of nskilled labor in sector exerts an pward pressre on the expected wage income in the advanced area. This indces a labor movement from the traditional area to the advanced area, ths decreasing the employment of nskilled labor in the traditional sector. Therefore, the contraction of the traditional sector indces the decrease in the employment of skilled labor skilled and nskilled labor are technically complements each other in sector (i.e., ). This reslts in the increase in the nemployment of skilled labor since the sbsidy does not affect the advanced sector. Ths, this policy can redce open nemployment of nskilled labor by increasing employment (or, in other words, disgised nemployment) in sector. However, it may decrease the employment of both skilled and nskilled labor in sector. F HL 5. Wage rate and nemployment In this section, we investigate the exogenos change in the wage rate in sector. This change takes place, for example, when the part-time wage rate decreases de to recession, the byers market of nskilled labor, and so on. This can be captred by the change inα. Ths, we have dl / dα = {( w L pfll + B) pfhh + wcφ} Φ / () and dh / LL HL dα = w ( L p F + αw ) p F Φ /, () where B = ( α w w ). Note that < + αw ) = w ( ξ ( L pfll ),

13 where ξ = L pfll / w, that is, the elasticity of the wage rate in sector with respect to its employment of nskilled labor. In this way, we obtain the following proposition. Proposition 5. The decrease in the wage rate in sector decreases the nemployment of nskilled labor, and it decreases nemployment of skilled labor provided that skilled and nskilled labor are technically complements each other in sector (i.e., ) and ξ <. F HL The decrease in w (orα ) directly increases the employment of nskilled labor in the sector. This, of corse, contribtes to redce nemployment of nskilled labor. On the other hand, this increase in the employment in sector may increase the expected wage income in the advanced area, w L + α w L ) /( L + L + L ), and then indce nskilled ( labor into the area from the traditional area. This decreases the employment of nskilled labor in sector. However, or reslt shows that the increase in the employment in sector is larger than the possible decrease in the employment in sector. Ths, the decrease in (or α ) redces nemployment of nskilled labor even if it decreases the employment in sector. As to the effect on skilled labor, however, the change in the nskilled employment in sector is of critical importance. Considering that wdα = pflldl from (5) and (7), we have α w + L pfll = αw{ + ( L / α)( dα / dl )}. Note that { + ( L / α )( dα / dl )} is eqivalent to that d ( + αµ ) dα <. In this case, therefore, the expected wage income in the advanced area decreases de to the decrease in w w (or α ). Ths, some of the nskilled daydreamer give p to stay in the advanced area and moves to the traditional area in order to secre the job. Then, if the direct increase in de to the decrease in w (orα ) is not very L large, in the sense that + ( L / α )( dα / dl )}, the nskilled employment in sector { increases. This in trn increases the skilled employment in the sector, and then redces

14 4 nemployment of skilled labor nder the assmption that skilled and nskilled labor are technically complements each other in sector and ξ <. 6. Conclding remarks In this paper, we have focsed on an economy that has two types of nemployment. The first type is the traditional nemployment that is cased by a relatively high and rigid common wage rate. This type of nemployment is often observed in elderly workers who obtain a relatively high wage rate as compared with their prodctivity. However, excessive expectations from a job may reslt in the nemployment of workers. This type of nemployment is observed among the yonger generations. Both these types of nemployment reslt in social loss as well as individal hardships. In this set-p, we have investigated the effects of international migration and other policies on the nemployment of both skilled and nskilled labor. The reslts are smmarized in the following table. It can be seen that prodction sbsidies and the decrease in the wage Table. The effects on nemployment Unemployment Unskilled labor Skilled labor Inflow of nskilled labor (L*) ( ) Inflow of skilled labor (H*) Constant Sbsidy to sector ( p ) ( ) ( ) Sbsidy to sector ( p ) ( ) Sbsidy to sector ( p ) ( ) Decrease in the wage rate ( ) in sector (α ) *The symbols within parentheses imply that the reslts are conditional. 4

15 5 rate in sector are effective in redcing the nemployment of nskilled labor. On the other hand, the inflow of foreign nskilled labor, prodction sbsidies to sectors and, and the decrease in the wage rate in sector are effective in redcing the nemployment of skilled labor nder certain conditions. The reslts obtained in this paper have important implications for alleviating the problem of nemployment. Ths, or reslts are sefl to policy makers in order to consider the effective policies that are necessary to solve the problem of nemployment. 5

16 6 Appendix Here we will show how to derive the mathematical expressions in the main text. Differentiating () (8), (), and (), and arranging the terms, we obtain C p F p F LL HL p p F A LL p F B LL w p F p F LH dw F L dp dl FL dp dl wdα FL dp dl wldα =, dl dl * dh dh * dh dh F dp HH FHL pfhh H p F LH (A) where A = ( w w ) <, B = ( α w ) w < and C = L + L + L. Solving (A) for d L with respect to dl *, we obtain () in the main text as follows. ( dl / dl*) = p FLLCΦΦ /, () wher e Φ = ( p ) { F F ( F ) }, Φ = ( p ) { F F ( F ) }, and LL HH LH LL HH LH = p F CΦ w p F ) Φ. LL( HH < Other reslts on comparative statics are obtained in a similar manner. 6

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