Open Economies, Insider Power and International Migration

In this paper we incorporate the possibility of international migration of Labour (IML) into a model of open economy with a non-competitive labour market. Migration flows in our model are endogenously determined by labour market performance. Our approach to the specification of the labour market is based on a trade union model where employed workers can exercise insider power. The model we develop allows for a simultaneous determination of union membership and real wages under conditions of migration outflows. In this framework, we show that migration outflows, lead to a real consumer wage higher than what would have been in the absence of migration. We also show that an increase in the rest-of-the-world wage or a decrease in the average migration cost will lead to higher real consumer wages at home. On the other hand, an increase in the real exchange rate will increase the home real product wage, however, the sign of change in the home real consumer wage is ambiguous. Finally, an improvement in the firm’s product market will raise both the domestic real consumer wage and the employment level.