Modelling Trade Policy Scenarios: Macroeconomic and Trade Effects of Restrictions in Cross Border Labour Mobility

Wednesday, February 23, 2022 at 11:00-12:30 Vienna time (CET) 

Hervé Joly, JVI Director

Donal Smith, Economist/Policy Analyst, Smart Data and Modelling Unit, Trade and Agriculture Directorate and the Macroeconomic Policy Division, Economics Department, OECD

Zuzana Zavarska, Economist, the Vienna Institute for International Economic Studies

The COVID-19 crisis has caused significant frictions in the global flow of goods, resulting in supply chain bottlenecks and shortages of intermediate inputs. While this issue has been subject to extensive public attention and debate, another critical factor in global trade flows cannot be overlooked. Namely, the pandemic has underscored the economic importance of cross-border labour mobility, raising the question of what impacts pandemic-induced long-term frictions in international mobility might have on economies.  

As highlighted in this lecture, with the onset of the pandemic, all OECD countries put up greater barriers to entry of foreign nationals. At the same time, the post-pandemic world puts up new obstacles to migration, as transportation costs rise, foregone earnings from unemployment become notable during a potentially longer transition between markets, and travel restrictions and social distancing measures make relocation psychologically more demanding. In this light, Donal Smith (OECD) presented the latest OECD study prepared with his co-authors (Przemyslaw Kowalski, Frank van Tongeren and Sophie Guilloux-Nefussi), in which they estimate the anticipated impacts of a long-term decrease in cross-border mobility on the labour supply and trade and production patterns. This is done based on a stylised general decrease in net migration flows by 20%. They use two models to quantify the scenario: a general equilibrium trade model (METRO), and a global macroeconomic model (NiGEM). The analysis is also carried out at the sectoral level, to account for possible differentiated impacts across sectors, and considers different skill categories.

The study finds that OECD economies would be most adversely impacted from reduced labour mobility in the post-pandemic world. At the same time, they find signs of redistribution of economic activity from OECD to non-OECD countries: Eastern Europe, for example, finds itself on the positive end of this spectrum (see Figure 1). In OECD economies which are characterised by particularly high shares of a foreign-born workforce in the labour market (such as Australia, Germany and Canada), the fall in potential output is estimated to range between 0.4% to 0.6%. There is some variation in the scale of the impact if labour and capital are considered simultaneously— the impact on the United Kingdom is much more pronounced when capital is also considered.

Figure 1: GDP impact of a reduction in labour mobility through labour and capital

Source: Smith et al. (2022)

A similar picture holds for trade patterns. The economies which lose out the most in immigration flows are the ones that see the steepest declines in imports. In terms of exports, however, the role of external demand is key. The difference in the scale of impact between Australia and Canada illustrates this: the growth in Australia’s main exporting partners softens the losses associated with lower labour mobility (see Figure 2). 

Figure 2: Response of exports and imports to a long-term reduction in labour mobility

Source: Smith et al. (2022)

The sectoral analysis further revealed that labour intensive manufacturing sectors in developed economies would see greatest declines in exports— of these, electronics (13% of the total reduction of exports in the long term), automobiles (12%) and pharmaceuticals (9%) would be among the most affected.

Following the presentation delivered by Donal Smith, the discussion also touched upon general issues related to CGE modelling, and pointed participants to useful sources for learning more about trade policy scenario modelling.

Zuzana Zavarská, Economist, Vienna Institute for International Economic Studies

Smith, D., P. Kowalski and F. van Tongeren (2022), "Modelling trade policy scenarios: Macroeconomic and trade effects of restrictions in cross border labour mobility", OECD Trade Policy Papers, No. 259, OECD Publishing, Paris:


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