Factor mobility and income distribution

In ‘Factor mobility and income distribution’, we find that capital owners will improve (deteriorate) their relative and absolute position in the North (South) in the aftermath of free labour migration. Moreover, the gains of capital owners in the North outweigh the losses of capital owners in the South. On the opposite side, owners of low and medium working qualification will deteriorate (improve) their absolute and relative position in the North (South). However, the losses for labour in the North fall short of the gains achieved by labour in the South. In the North, there is a clear indication of increasing inequality in the case of unskilled immigration and a strong rationale for the conjecture that skilled immigration reduces inequality. Globalization tends to equalize factor prices: on the one hand, domestic capital owners win more than foreign capital owners lose; on the other hand, domestic losses for labour are more pronounced than gains for labour in foreign countries. It seems that comparatively immobile factors of production, such as labour, lose during globalization, while more mobile factors of production, such as capital, win. In the case of rigid wages, the North will lose welfare, whereas the South still profits from the new division of labour in the world economy. Hence, rigid wages make autarky more profitable than free trade/free flow of capital goods in the North. Opposed to this, the South profits from rigid wages in the North and prefers globalization in comparison to autarky. We put forward a bargaining solution where firms compensate unions’ members for wage decreases (in conjunction with higher real interest rates) induced by the forces of globalization with better working conditions. There exists a political economy trade-off: while the free movement of factors of production serves to maximize income and the international competitiveness of the domestic economy, the lack of regulation for labour and capital flows puts into danger a socially acceptable labour’s share in national income. In contrast, the regulation of factors’ mobility (capital export controls, immigration laws) can help to better achieve the distributional goal, but have to be paid by losses in allocative efficiency and hence in output units.