Fiscal Policy, Human Capital, and Canada-US Labor Market Integration

This paper analyzes some of the implications of North American labor market integration for fiscal policy. The economies of Canada and the US are both characterized by highly integrated internal markets for goods and services as well as for labor and capital, and subnational governments in both economies play an important role in the financing and provision of public goods and services, including higher education. Despite theoretical insights from traditional trade theory that suggest that “trade and migration are substitutes”, labor markets in both the US and Canada exhibit substantial and persistent interregional migration, with gross migration rates that greatly exceed net migration rates, especially for highly-educated workers. High gross migration rates are consistent with the hypothesis that education contributes to skill-specialization and worker heterogeneity, and that mobility provides a form of insurance for investment in risky human capital. Mobility also constrains the ability of competitive governments to engage in redistributive financing of human capital investment, and recent trends in both the US and Canada reveal a diminishing level of financial support for public-sector institutions by subnational governments. The implications of labor market integration for the efficiency of resource allocation, for income determination, and for fiscal competition are important for evaluations of tax and education policies both at the subnational and at the international levels.