Essays in International Economics and Labor Economics

Abstract

The three chapters of this dissertation investigate major puzzles in international economics and labor economics. The first chapter investigates the macroeconomic effects of primary commodities trade flows across countries with different export composition. The second chapter studies labor flows of workers with similar skill-level and across countries with similar income. Lastly, the third chapter evaluates the macroeconomic effects of a health policy in the United States. Chapter 1 analyzes how the production and price volatility of primary commodities account for the co-movement between real GDP and terms of trade. Primary commodity exporter countries face large terms of trade fluctuations, largely driven by primary commodity price shocks and amplified by the relative importance of primary commodities in the countries’ exports. In this chapter, I document that an increase in the price of a primary commodity is usually followed by a decrease in terms of trade, defined as the relative price of imports over exports, and an increase in real GDP in these countries. Meanwhile, countries that do not export primary commodities enjoy more stable terms of trade, and their real GDP is positively correlated with terms of trade. Although the literature on primary commodity exporters has focused on developing countries, I show that this relation is independent of a country’s income level. Since standard models are unable to generate real aggregate fluctuations from price shocks if real GDP is correctly measured, this paper identifies a puzzle. I propose a class of mechanisms that is capable of explaining the heterogeneous impact of terms of trade fluctuations across countries. I show that a possible resolution is to incorporate the presence of idle resources and a production cost externality in the primary commodity producing sector in order to connect terms of trade fluctuations to real GDP fluctuations. When subjected to a primary commodity price shock, the model successfully accounts for the behavior of terms of trade and its relation to real GDP for different export compositions. Chapter 2, joint work with Maria Jose Rodriguez Garcia and Rocio Madera, revisits empirical evidence on migration within the European Union-15, disaggregated by occupation. We find that workers move to countries where their type is relatively more abundant among natives. This is at odds with traditional models of migration. We develop a model with external economies of scale that generates an agglomeration force in high-educated labor. Our main result is that a country that is relatively abundant in highly educated labor force will attract foreign labor of the same type. We argue this type of model is more suitable to analyze migration flows between countries of similar income level. Finally, Chapter 3, joint with Juan Carlos Conesa, Parisa Kamali, Timothy Kehoe, Vegard Nygard, Gajendran Raveendranathan, and Akshar Saxena, develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We find that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we find lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we find that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.