Movement of heterogeneous goods and people.

Abstract

Applied General Equilibrium models of trade failed to predict the sectoral changes in trade volumes following the Canada-US Free Trade Agreement. These models utilized a representative firm framework and used econometric estimates for the elasticities of substitution between home and foreign goods. I take a different approach on both fronts, modeling plants as heterogeneous and calibrating the elasticities to match estimated markups in each sector. I introduce these features by adapting a \citeasnoun{hop92} model of plant entry and exit and embed this in a multisector trade model. I calibrate the model using trade data between the United States and Canada before their Free Trade Agreement and evaluate the model's performance using later data. I find that calibrating the elasticities to markups improves the fit between model predictions an d data significantly, from weighted correlations which are negative to values of 0.36. Incorporating plant heterogeneity and industrial data improves the weighted correlation to 0.77. After tax wages differ considerably across countries, providing strong economic incentives for individuals to migrate. Increasing political integration and regional trade agreements facilitate international labor mobility, making these economic motives more important relative to the costs of migration. I undertake an empirical analysis using economic incentives to explain the migration of college-educated Canadian workers to the United States in the 1980 to 2000 period. Young workers migrated at a rate over 10 percent during this period. I develop an overlapping generations model of migration with heterogenous agents and calibrate the model to match the total flow of young, college-educated Canadian workers to the US from 1980 to 1990. I verify the calibration by comparing migration predicted by the model to the actual migration of groups not used in the calibration. I use the calibrated model to perform two policy experiments, income tax harmonization and wage equalization. I find that tax harmonization only reduces overall migration by 30 percent, with large reductions in the migration of workers in the middle of the income distribution. Due to the large US wage premium for highly skilled workers, the migration rate for the top quintile of workers declines only slightly. This indicates that the US premium for skilled workers contributes more to migration flows than the varying tax codes.