Education, Institutions, Migration, Trade, and the Development of Talent

This paper proposes a theory of free movement of goods and labor between two large economies with imperfect labor contracts. Each country is incompletely specialized in producing two final goods that differ in their complexity of production. The most complex good is produced by workers and managers who pair up with each other according to an efficient matching process, where the most talented manager matches with the most talented worker. The least complex good is produced by firms that consist of one individual. The heart of my analysis lies in the determinants of talent development in each country. Under free trade, the best institutions and the best early educational system can serve as complementary sources of comparative advantage in the most complex industries. Consequently, the host country of immigrants will export the most complex goods produced by the most talented individuals. It is shown that individuals’ decisions to emigrate are related to the difference of the institutional quality between the two countries and on the fixed costs of migration, such as language barriers. The economic progress of the origin country of immigrants is shown to be related to its ability to improve its quality of institutions and its early educational system. Finally, emigration affects the income of both countries via an indirect effect on individuals’ incentives to invest in their job training and a direct effect on prices of goods.