Economic Growth and Migration

The literature on growth theory lacks a precise sense of why there are interactions and dependencies between countries. Correspondingly, the spatial econometrics literature on growth empirics accounts for endogenous cross-country interactions, but lacks crucial insights from economic theory as to how such linkages should be precisely modeled. We address this weakness, by proposing a new economic model as a combination of an endogenous Romer-style growth model and a New Economic Geography model. The model admits two distinct sources of interactions between countries: mobility of high skilled workers and inter-country trade. Both of these sources develop from the New Economic Geography models, while the engine of the growth process is adapted from the endogenous growth literature. Motivated by higher wages, highly skilled workers migrate to the richer country, and there they work in the R&D sector. This in turn contributes towards economic growth in the richer country, and leads to divergence between the two countries. Trade in the manufactured good reduces the difference between the two countries but does not negate divergence. In its focus on both migration of highly skilled labour and
its conclusion of divergence, the model captures the phenomenon of the Great Divergence in the 19th century. It is also consistent with evidence of club convergence in the 20th century. The implications of the model are verified by simulation.