Faculty of Economics and Business Administration Publications Database

The Welfare State, an Impediment to Integration?

Wellisch, Dietmar
Volume: 56
Number: 2
Pages: 218 - 240
ISSN-Print: 0015-2218
Link External Source: Online Version
Year: 1999
Keywords: Free trade area; International migration; International Economic Theory; Factor proportions; Income redistribution; Welfare state; Welfare effect; NAFTA countries
Abstract: We investigate the consequences of redistribution policy on migration and trade in a standard two-good Heckscher-Ohlin framework. With free trade and factor prices equalization, abolishing migration barriers is redundant. With the introduction of government activity, matters change drastically. Redistributive policies create an incentive to migrate in the country providing higher transfers. We show that in such a world, free migration increases the burden of the welfare program in the rich country and causes suboptimal national redistribution policies in both countries. It is definitively in the interest of the rich country to stop short of a relaxation of migration barriers. Rather, a pure free trade regime without migration proves to be preferable.