Immigration policies, labor complementarities, population size and cultural frictions: Theory and evidence

• Author: Thomas Osang,Shlomo Weber
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/ijet.12119
• Published date: 01 March 2017

doi: 10.1111/ijet.12119

Immigration policies, labor complementarities, population

size and cultural frictions: Theory and evidence

Thomas Osang∗and Shlomo Weber†

In this paper we consider a model of international migration due to Fujita and Weber, with

two heterogeneous countries, and show that in equilibrium the larger country attracts more

immigrants, while choosing a lower quota. Moreover,a higher degree of labor complementarity

and lower degree of cultural friction between natives and immigrants yield a higher immigration

quota. We test the empirical validity of the model by using time-series country-level data.

Even in the absence of direct evidence of strategic and non-cooperative choice of countries’

immigration quotas, both cross-section and panel data approaches indicate that cross-country

immigration patterns are consistent with the majority of our theoretical findings.

Key wor ds immigration quota, Nash equilibrium, labor complementarity, cultural friction,

panel data, fixed effect.

JEL classification C72, F22, O3, R1

Accepted 14 June2016

1 Introduction

In describing an array of industries that require high-skilled labor, one immediately comes to the

conclusion that different production technologies in different countries impose distinct require-

ments on the level and distribution of labor skills and the workers’ interaction with each other. For

example, over the years Japan has achieveda very hig h level of performancein manufactur ing indus-

tries (cars, sophisticated consumer goods) that require a high level of precision and consistentquality

control. These industries are characterized by a large number of production stages where techno-

logical progress is usually achieved through the series of small but incessant improvements, called

kaizen (see Imai 1989). This type of production requires not only highly educated and able workers,

but also a consistent and extensive level of interaction among them. These demands result in the

emergence of a labor force that is relatively homogeneous in its educational, cultural, and linguistic

background. On the other hand, the United Statesspecializes in “knowledge,” and especially software

industries that rely on the talents and abilities of individuals from a wide range of educational and

∗Department of Economics, SMU, Dallas, USA.

†Department of Economics, SMU, Dallas, USA, and Center for the Study of Diversity and Social Interactions, New

Economic School, Moscow,Russia, and Lomonosov Moscow State University,Moscow, Russia. Email: sweber@smu.edu

The authors wish to thank an anonymous referee for helpful comments and suggestions. They would also like to thank

Juan Wang and Mariam Kharaishvili for their excellent research assistance. Shlomo Weberthanks the Russian Science

Foundation for financial support for research project no.15-18-00098. The paper represents an empirical and theoretical

extension of Fujita and Weber (2010). Shlomo Weber wishes to express his gratitude to Masa Fujita, whose friendship

and guidance were the most important outcome of their collaboration.

International Journal of Economic Theory 13 (2017) 95–111 © IAET 95

International Journal of Economic Theory

Immigration and cultural frictions Thomas Osang and Shlomo Weber

cultural environments. The success of Silicon Valley in the late 1990s is often attributed to the diverse

backgrounds of the scientists, engineers and entrepreneurs who arrived from all corners of the world.

However, the diversity did not prevent, and, in fact, even reinforced the commonality of workers’

purpose and goals. Saxenian (1996) describes how workers in Silicon Valley enjoyed frequent and

intensive exchange of information through a variety of formal and informal contacts. The exchange

was facilitated by frequent moves of workers fromone fir m toanother (the average time spent by an

individual in one firm was about 2 years), and a flexible industry structure (it has often been claimed

that in Silicon Valley“a firm is simply a vehicle allowing an individual to work.”)

The nature of knowledge production indicates the importance of interaction between different

workers and, especially,the complementarity of their talents and skills, that is quite different from the

multi-stage technological process in high-precision manufacturing (see Milgrom and Roberts 1990;

Kremer 1993). In general, the labor complementarity is based on two sources, internal heterogeneity,

which describes the diversity of talents within the existing group of workers engaged in a given

industry, and external heterogeneity, which captures the diversity between the existing group of

workers and “newcomers” to the industry. The first type of heterogeneity has been the focus of the

Grossman and Maggi (2000) two-country analysis, which introduced a model with a diverse talent

pool within each country and examined, among other issues, an assignment of different individuals

to complementary tasks, and its impact on trade patterns between two countries. Our goal is to

examine an external labor complementarity between “native” population and immigrant workersin

a given industry.

Following Fujita and Weber (2010), we consider two countries, Aand B, and the world of immi-

grants, denoted by I. Each of the three groups, A,B, and I, is homogeneous and consists of identical

individuals. The countries’ heterogeneity comes from three sources: (i) a different degree of labor

complementarity between countries’ native population and immigrants; (ii) a variation in popula-

tion size between countries; (iii) the magnitude of cultural friction between natives and immigrants.

The cultural friction may manifest itself in language barriers caused by the difficulty of learning a

local language, natives’ bias toward to immigrants, and distinct cultural, religious and behavioral

attitudes exhibited by natives and immigrants. Different attitudes toward immigrants across various

countries can be explained by the web of historical, cultural, linguistic, ethnic, religious, geographic

and economic reasons that are not examinedhere and we simply accept the fact that various countries

exhibit different degrees of cultural friction between natives and immigrant population.

Fujita and Weber (2010) have shown the existence and uniqueness of Nash equilibrium in the

non-cooperative quota game between two countries, where the spillovereffect is introduced through

the world immigrant wages. The goal of our paper is twofold. In the theoretical part we characterize

the Fujita–Weber equilibrium and compare the equilibrium quotas in two countries. We show

that the country with the higher labor complementarity and lower cultural friction admits a larger

number of immigrants than its counterpart. It turns out that while the more populous country

would attract a larger number of immigrants, its relative immigration quota would nevertheless be

lower than in the smaller country. Second, we provideestimates for an empirical model that mimics

the main features of the theoretical model. In addition to the explanatory variables identified by

the theory, we include a number of control variables that are likely to matter for a country’s share

of immigrants. We estimate the empirical model within a cross-section, time-series framework

that allows us to include country-specific dummies to control for unobserved, time-invariant

country-specific variables. We also provide estimates from a basic cross-country regression as a

robustness check. Weshow that, even in absence of direct evidence of strategic and non-cooperative

choice of countries’ immigration quotas, the observed cross-country patterns of immigration shares

are consistent with the majority of our theoretical findings. In particular, we find strong support

96 International Journal of Economic Theory 13 (2017) 95–111 © IAET