Giovanni Peri (University of California, Davis)

“The Effect of International Trade and Migration on Income”

abstract

This paper explores the relationship between economic openness and income per person using crosscountry data. To address endogeneity concerns we extend the instrumental-variables strategy first usedby Frankel and Romer (1999). First, we show that geographic characteristics, relative to the location of acountry are successful in generating enough identifying variation to predict openness to immigration and totrade. Equipped with these instruments we then establish a robust, positive effect of openness to immigrationon long-run income per capita using econometric specifications that include a comprehensive set of variablesthat control for geography, climate, disease environment, and colonial past. In contrast the positive effectof trade openness on income vanishes once the control variables are included in the specification. Our mainfinding is robust to explicitly including institutional quality as an (endogenous) regressor, to controlling for measures of early economic development, and to measuring the share of immigrants in terms of efficiencyunits of labor. We also show that the main effect of migration operates through total factor productivity, as predicted by our simple theoretical model, which postulates that immigration increases the variety of skills available for production. We also provide some more direct evidence of this channel by building an indexof the degree of diversity in immigration flows by country of origin. We do not find evidence of increased income inequality due to openness to immigration or trade. However, we find that immigration significantly increases ethnic and linguistic fractionalization. Our results indicate that fractionalization has a negative effect on income per capita, however the gains from greater skill diversity appear to outweigh the costsarising from fractionalization.