Migration effects on conditional convergence

Migration effects on conditional
convergence
Joseph Qian
Economics Research Essay
2015

DEPARTMENT OF ECONOMICS
RESEARCH ESSAY COVER SHEET
SUBJECT CODE
ECON40016
SUBJECT NAME
Economics Research Essay
STUDENT ID.
588355
STUDENT NAME
Joseph Qian
WORD COUNT
3145
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Signed JOSEPH QIAN Date 10/19/2015

Acknowledgements
I acknowledge the assistance of my advisor Shuyun (May) Li for her academic guidance and support
throughout the year. I also acknowledge my Honours in Economics Co-ordinator Neville Norman for
his support throughout the year.

Migration Effects on Conditional
Convergence
Abstract
This paper aims to look at the role that migration plays in a country's economic growth. We have
seen over the past century that countries such as Australia and Canada have benefitted greatly from
migration inflows. Whilst on the other side of the story, developing countries as of late have shown
signs of divergence and a persistent migration outflow. I aim to provide insight into this
phenomenon by developing a theoretical model mainly based upon the work of Reichlin and
Rustichini. I will then run numerical simulations using my model to support my theoretical results
and to derive any further results. My main finding is that migration can result in convergence of
wages which would otherwise not be achieved if labour was immobile. I also find that skilled labour
migration plays a significant role in determining whether convergence or divergence will occur in the
long run.

Contents
1. Introduction 2
2. Literature Review 3
3. Theoretical Model 4
3.1 Model Environment 4
3.2 Equilibrium 6
3.3 No Migration Case 6
3.4 Migration Case 7
4. Numerical Simulation 9
5. Results 10
6. Limitations and Extensions 12
7. Conclusion 13
8. References 14
9. Appendices 15

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Migration Effects on Conditional Convergence
1. Introduction
In the modern world, migration has become more and more prevalent as society becomes more
inclusive and accepting of diversity. However, it remains to be seen what the exact implications are
for countries that primarily have labour inflows or outflows. As many individuals rationally look to
migrate to a country where they can achieve a better life, does that affect the gap between rich and
poor countries?
My paper looks to answer this vital question and determine the whether migration patterns have
any explanatory power in predicting conditional convergence. This area of economics has become a
great concern in recent times, with many countries showing signs of divergence. By gaining a greater
understanding of this field, we can look for ways to close the income gap and achieve convergence.
I will do so by developing a theoretical model based upon the Diamond model and incorporate
migration. The migration element will be drawn from the model developed by Reichlin and
Rustichini (1997). I will then analyse the long run results in terms of wages based on varying initial
parameters.
In Section 2, I will provide an overview of the past literature that looks at areas such as convergence
theory, capital flows and migration. Next I will present my theoretical model in Section 3 and derive
analytical long run outcomes. In Section 4, I will conduct numerical simulations to validate my
theoretical results and explore more outcomes. I will then present the results of my simulation in
Section 5 and discuss the limitations and extensions of my model in Section 6. Finally I will
summarize my findings in Section 7.

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2. Literature Review
The general consensus on conditional convergence is that it is very plausible. The classic Solow-Swan
model (1956) captures this theory and tests it empirically. The underlying driving force for
convergence comes from capital mobility. Capital flows from rich countries to poor countries allow
the gap between income per capita to close. However, Lucas (1990) noticed that this is not always
the case and looks at reasons why this does not occur. One of the main reasons he contends is that
due to capital market imperfections, convergence is a less likely outcome. Given recent signs of
divergence between rich and poor countries, we are unable to conclude that the neoclassical theory
holds for all cases.
In the absence of perfect capital mobility, it is possible that migration also plays its role in
conditional convergence. Neoclassical models predict that as countries converge, migration should
die away. However, Borjas (1994) extensively studied migration patterns in USA, Canada and
Australia and found that migration inflows to these countries were not diminishing. In this sense,
these models are unable to explain persistent migration flows or the lack of cross country
convergence. The common determinant for migration as supported by the empirical literature is
wage differentials. A contentious result of the Solow-Swan model is that convergence leads to wage
equivalence across countries. Empirical studies have disproved this notion, which possibly explain
the persistence of migration.
Okun and Richardson (1961) and Bhagwati and Rodriguez (1975) share the view that human capital
flows in the form of migration is likely to provide a clearer picture of convergence theory. They argue
that there is a significant externality produced by migration on workers productivity. A study on the
effect of immigrant workers on domestic wages by Greenwood and McDowell (1986) looks at the
possible likelihood that skilled immigrants have a positive effect. Similarly, Lucas (1990) also argues
that differences in human capital and the external benefits of human capital explain the lack of
convergence. Mankiw, Romer and Weil (1990) addresses this common view by developing the
Human Capital Augmented Solow-Swan model. This model proved to perform better empirically

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than the baseline model, however various assumptions had to be made in establishing what
constituted human capital.
Reichlin and Rustichini (1997) developed a model based on the Arrow model which provides many
conclusions that oppose standard neoclassical model predictions. They define migration flows in
terms of a size and composition effect. They conclude that reduction in the labour force due to
migration outflows are ultimately bad for a country. However, migration that consists mainly of
unskilled workers is beneficial to the labour exporting country as it improves that country’s
composition of labour and hence improves the efficiency of that country’s work force. As these two
effects can operate in the same or opposite directions, it can provide explanations for both
persistent and temporary migration.
Dowrick and Rogers (2002) also point out the unlikelihood of convergence is due to steady state
levels changing over time. They argue that the importance of technological progress allows the
richer country to grow whilst poorer countries are unable to effectively utilize the existing
technology. They emphasize that the lack of skilled workers in poorer countries results in an inability
to take advantage of technological advances that would otherwise be transferable to their country.
3. Theoretical Model
My theoretical model will be based off the model produced by Reichlin in Rustichini (1997). My
model differs to theirs in the specification of productivity function. Given the arguments made by
Dowrick and Rogers (2002), I will make productivity a function of skilled labour, which would
therefore mean that technology may not be perfectly transferable across countries.
3.1 Model Environment
I construct a two country model in discrete time, indexing each country with a superscript i and j. I
follow an overlapping generations model framework, whereby each country consists of young and
old individuals at any given time. A young individual has the option to earn a wage in their own

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country, or migrate to the other country and earn a wage there. For simplicity, I take the case where
individuals only consume when they are old. Therefore young individuals invest all of their income
and can earn capital income from either country. In the next period, they become an old individual
and consume their initial income plus the accumulated interest. Assuming that there is no disutility
from work, an individual aims to maximise their utility by maximising their consumption when old.
𝑀𝑎𝑥 𝑈(𝑐𝑜𝑡+1) 𝑠. 𝑡 𝑐𝑜𝑡+1 = 𝑤𝑡(1 + 𝑟𝑡+1) (3.1.1)
Each country will follow an identical Cobb-Douglas production function as given by
𝑌𝑡 = (𝐾𝑡) 𝛼(𝐴 𝑡 𝐿𝑡)1−𝛼
, 𝑤ℎ𝑒𝑟𝑒 0 < 𝛼 < 1 (3.1.2)
I assume that each country’s capital and labour markets are perfectly competitive, such that interest
rates and wages are paid according to their marginal products.
𝑟𝑡 = 𝛼(𝑘 𝑡) 𝛼−1
, 𝑤ℎ𝑒𝑟𝑒 𝑘 𝑡 =
𝐾𝑡
𝐴 𝑡 𝐿 𝑡
(3.1.3)
Furthermore, I decompose labour into skilled and unskilled labour to establish two different wage
rates.
𝐿 𝑡 = 𝐿𝑢 𝑡 + 𝐿𝑠𝑡 (3.1.4)
I differentiate between the two by allowing total factor productivity to be independent of unskilled
labour and positively related to skilled labour. I do this by assuming that total factor productivity can
be expressed as a function of skilled labour. For simplicity I express this function as
𝐴 𝑡 = (𝐿𝑠𝑡) 𝜂
, 𝑤ℎ𝑒𝑟𝑒 0 < 𝜂 < 1 (3.1.5)
Hence wages for unskilled and skilled labour will be given by
𝑤𝑢 𝑡 =
𝛿𝑌𝑡
𝛿𝐿𝑢 𝑡
= (1 − 𝛼)(𝑘 𝑡) 𝛼(𝐿𝑠𝑡) 𝜂
(3.1.6)
𝑤𝑠𝑡 =
𝛿𝑌𝑡
𝛿𝐿𝑠 𝑡
= (1 − 𝛼)(𝑘 𝑡) 𝛼
(𝜂(𝐿𝑠𝑡) 𝜂−1
𝐿𝑢 𝑡 + (𝜂 + 1)(𝐿𝑠𝑡) 𝜂
) (3.1.7)
where skilled workers have a strictly larger wage than unskilled workers.

6 | P a g e
3.2 Equilibrium
The total combined capital accumulation between the two countries is given by
𝐾𝑡+1
𝑖
+ 𝐾𝑡+1
𝑗
= 𝐿𝑢 𝑡
𝑖
𝑤𝑢 𝑡
𝑖
+ 𝐿𝑠𝑡
𝑖
𝑤𝑠𝑡
𝑖
+ 𝐿𝑢 𝑡
𝑗
𝑤𝑢 𝑡
𝑗
+ 𝐿𝑠𝑡
𝑗
𝑤𝑠𝑡
𝑗
(3.2.1)
Firstly, if interest rates are the same between the two countries, there is no incentive for individuals
to invest their income in a different country and therefore each countries capital is accumulated
domestically. However, if the interest rate is different between the two countries, young individuals
will prefer to invest in the higher interest rate country. This persists until interest rates are equalized
between the two countries at which point we revert back to the previous result. Therefore, each
countries capital stock will be determined jointly by the above equation, as well as
𝑘 𝑡
𝑖
= 𝑘 𝑡
𝑗
(3.2.2)
Note that this result relies upon the assumption of perfect capital mobility, which we assume
throughout.
A country’s labour force grows at a rate of n, and can differ between countries. I assume that both
skilled labour and unskilled labour grow at the same rate, such that the composition of labour
remains constant when labour is immobile. The equilibrium will therefore be defined such that
equations (3.2.1) and (3.2.2) hold and capital per effective worker is constant. Since interest rates
are always are equal, the long run wages will determine which country’s inhabitants can achieve a
higher utility.
3.3 No Migration Case
I will firstly look at the case when labour is immobile, and determine the long run equilibrium. When
there is no labour migration, and labour grows at the same rate irrespective of quality, we can
express unskilled labour as a function of skilled labour. By defining
𝐿𝑠𝑡 = 𝛾𝐿 𝑡 (3.3.1)
𝐿𝑢 𝑡 =
1−𝛾
𝛾
𝐿𝑠𝑡 (3.3.2)

7 | P a g e
we can see that the wage for a skilled worker is
𝑤𝑠𝑡 = (1 − 𝛼)(𝑘 𝑡) 𝛼
(𝜂
(1−𝛾)
𝛾
+ 𝜂 + 1)(𝐿𝑠𝑡) 𝜂
(3.3.3)
With the assumption of perfect capital mobility and identical production functions, we see that the
long run outcomes depend upon the composition and the population growth rates. If we take the
case where both countries have the same labour composition, then we can see that individuals from
the country with the higher skilled labour force will have a higher wage. Therefore the country with
a higher population growth will be better off regardless of their initial population in the long run.
If we then take the case where both countries have the same population growth, then the country
with the higher initial labour force will be better off as they will have a higher wage in every period.
3.4 Migration Case
I will now extend the analysis to allow for labour migration. As mentioned previously, young
individuals are able to migrate to another country and earn a wage that country. I assume that the
incentive to migrate is purely driven by wage differentials, however, unlike capital, labour is not
perfectly mobile.
The migration parameters are characterised by the following function, theta.
𝜃𝑢 𝑡
𝑖𝑗
= {
𝜃𝑢 𝑖𝑗
, 𝑖𝑓 𝑤𝑢 𝑡
𝑖
< 𝑤𝑢 𝑡
𝑗
0, 𝑖𝑓 𝑤𝑢 𝑡
𝑖
≥ 𝑤𝑢 𝑡
𝑗
(3.4.1)
𝜃𝑢 𝑡
𝑗𝑖
= {
𝜃𝑢 𝑗𝑖
, 𝑖𝑓 𝑤𝑢 𝑡
𝑗
< 𝑤𝑢 𝑡
𝑖
0 , 𝑖𝑓 𝑤𝑢 𝑡
𝑗
≥ 𝑤𝑢 𝑡
𝑖
(3.4.2)
𝜃𝑠𝑡
𝑖𝑗
= {
𝜃𝑠 𝑖𝑗
, 𝑖𝑓 𝑤𝑠𝑡
𝑖
< 𝑤𝑠𝑡
𝑗
0, 𝑖𝑓 𝑤𝑠𝑡
𝑖
≥ 𝑤𝑠𝑡
𝑗
(3.4.3)
𝜃𝑠𝑡
𝑗𝑖
= {
𝜃𝑠 𝑗𝑖
, 𝑖𝑓 𝑤𝑠𝑡
𝑗
< 𝑤𝑠𝑡
𝑖
0, 𝑖𝑓 𝑤𝑠𝑡
𝑗
≥ 𝑤𝑠𝑡
𝑖
(3.4.4)

8 | P a g e
Where 𝜃𝑢 𝑖𝑗
, 𝜃𝑢 𝑗𝑖
, 𝜃𝑠 𝑖𝑗
𝑎𝑛𝑑 𝜃𝑠 𝑗𝑖
∈ (0,1)
For now, I will assume for simplicity that thetas are the same irrespective of skill and direction. This
allows me to express the labour dynamics of each country as follows
𝐿𝑢 𝑡+1
𝑖
= (1 + 𝑛 𝑖
)[(1 − 𝜃)𝐿𝑢 𝑡
𝑖
+ 𝜃𝐿𝑢 𝑡
𝑗
] (3.4.5)
𝐿𝑢 𝑡+1
𝑗
= (1 + 𝑛 𝑗
)[(1 − 𝜃)𝐿𝑢 𝑡
𝑗
+ 𝜃𝐿𝑢 𝑡
𝑖
] (3.4.6)
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛 𝑖
)[(1 − 𝜃)𝐿𝑠𝑡
𝑖
+ 𝜃𝐿𝑠𝑡
𝑗
] (3.4.7)
𝐿𝑠𝑡+1
𝑗
= (1 + 𝑛 𝑗
)[(1 − 𝜃)𝐿𝑠𝑡
𝑗
+ 𝜃𝐿𝑠𝑡
𝑖
] (3.4.8)
First I will consider the case when both countries have the same labour composition. If both
countries start with the same initial population, the long run outcome will again depend on the
population growth. If one country’s population grows at faster rate, we know that in 2nd
period, they
will have a larger skilled labour force, which will create a wage gap that attracts workers to that
country. This trend will continue in the long run, thus making individuals in that country better off in
every period.
However, if they do not have the same initial population, then the long run equilibrium will depend
on the population growth rates of each country and the migration parameters.
The proof for this statement is structured as follows.
Without loss of generality, assume that Country i has a larger initial labour force such that migration
will flow from Country j to Country i. We can than express the labour dynamics of each country as
follows
𝐿𝑢 𝑡+1
𝑖
= (1 + 𝑛 𝑖
)[𝐿𝑢 𝑡
𝑖
+ 𝜃𝐿𝑢 𝑡
𝑗
] (3.4.9)
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛 𝑖
)[𝐿𝑠𝑡
𝑖
+ 𝜃𝐿𝑠𝑡
𝑗
] (3.4.10)
𝐿𝑢 𝑡+1
𝑗
= (1 + 𝑛 𝑗
)(1 − 𝜃)𝐿𝑢 𝑡
𝑗
(3.4.11)

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𝐿𝑠𝑡+1
𝑗
= (1 + 𝑛 𝑗
)(1 − 𝜃)𝐿𝑠𝑡
𝑗
(3.4.12)
Migration will continue to persist if Country i’s wage is always higher than Country j’s wage, which is
equivalent to always having a larger skilled labour force. Therefore it is sufficient to look at the
difference in skilled labour between the two countries and determine whether there is convergence.
I find that if the following equation holds, then Country j’s wage will converge to Country i’s wage.
(1 + 𝑛 𝑖
)(1 + 𝜃) ≤ (1 + 𝑛 𝑗
)(1 − 𝜃) (3.4.13)
The right hand side of this equation describes the growth rate of skilled labour in Country j, whilst
the left hand side is the long run growth rate of skilled labour in Country i. If the equation holds with
equality, there is an equilibrium where wages will converge in the long run. If the right hand side is
strictly larger than the left hand side, then convergence is achieved after a finite period of time.
From then on, the migration flows in the other direction and wages diverge. If the left hand side is
strictly larger than the right hand side, then wages will not converge, and migration will persist in the
long run.
4. Numerical Simulation
I run several numerical simulations as a robustness check for my theoretical findings, as well as
analyse situations where analytical methods were not used. I conduct these simulations using
different initial values and parameters. For simplicity, I will fix population growth in Country i to be
zero throughout. Furthermore, to ensure consistency, both countries will be endowed with the same
amount of initial capital and Country i will have the same initial labour, both in terms of size and
composition. I then analyse the wages for skilled and unskilled workers and determine the long run
outcomes that are reached.

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5. Results
First I will look at the case where there is no migration and Country j has a lower initial population
and higher population growth rate. As we can see from figure 1, the result is consistent with the
theoretical results and wages diverge. Although young individuals in Country i born in the first two
periods have a relatively higher wage and therefore utility, in all subsequent periods they are
relatively worse off. I then replicate this analysis to include migration and setting Country j’s
population growth rate to satisfy equation (3.4.13). By including migration into the model I find that
wages converge in the long run as shown in figure 2. Therefore in this scenario, migration is
beneficial to Country i and detrimental to Country j.
Next I will relax the assumption that both countries have the same labour composition. First I will let
Country j have a lower skilled labour composition than Country i. Similar to the previous case, we
can see from figure 3 that wages will converge in the long run. Notably, the labour composition also
Figure 1
Figure 2

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converges, with Country j’s composition improving with migration whilst Country i’s composition
worsens. The overall long run composition of labour in the economy is lower than in the previous
case. As such, skilled workers a slightly worse off in this scenario, whilst unskilled workers are
marginally better off. I then repeat this process with a higher initial skilled labour composition for
Country j in figure 4 and find that this results in divergence. Although there is an initial migration
flow from Country j to Country i, this flow is reversed after two periods. Subsequently, each
individual in Country j is better off as the wage gap persistently increases.
Figure 3
Figure 4

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Finally, I will look at the case where only skilled labour can migrate. Using a significantly low
population growth rate for Country j, figure 5 shows that Country j’s wages will eventually diverge
away from Country i’s wage, despite being initially lower. This analysis emphasises the ‘brain drain’
effect, as we can see the significance of skilled labour migration on wage differentials. Compared to
when we allowed for unskilled labour migration, convergence could only be achieved for a
significantly high population growth for Country j. However, when we restrict migration to only be
possible for skilled labour, the same qualitative outcome can be achieved with a lower population
growth rate.
6. Limitations/Extensions
My theoretical models main limitation is its ability to be tested empirically. In particular, it would be
difficult to get values that can capture total factor productivity and the migration parameters. The
model’s framework and the numerical simulation were also significantly simplified by assigning the
same values to each country for many parameters. Additionally, by assuming that the migration
parameters are constant through time and did not vary in direction likely made the model’s results
less realistic.
In this sense the model can be improved by specifying a more precise function for migration
movements. One possible extension could be to lower the migration parameter when the wage gaps
are closer. Currently, my model is specified such that even small wage differences induce the same
Figure 5

13 | P a g e
magnitude of migration. Another way to improve the model is to allow migration to differ across
countries. As there are various other factors which influence migration patterns, it is possible that
these can be added to the model to allow migration to occur even with wage equivalence. Although
the model can be made more accurate by allowing migration to vary between countries and time,
this makes it significantly more complex.
7. Conclusion
The main results are that migration can result in many different outcomes depending on the
population growth rate and the incentives to migrate. From the theoretical model, we can see that
when migration is included in the model, convergence can be achieved even if both countries have
different population growth rates. Therefore, the country with low population growth can be better
off through migration inflows.
However, as discussed in the theoretical findings as well as the numerical simulations, migration may
also be temporary. When migration flows change their direction, the result is that the wage gap will
persistently increase, leaving the poorer country behind. This was shown to be the case when one
country has a significantly higher skilled labour composition. Furthermore, when migration is only
possible for skilled workers, the long run result is the same even for relatively small differences in
population growth.
Therefore, migration can be beneficial in some situations, allowing countries with low population
growth rate to achieve a wage rate similar to a high population growth country. However, migration
can also lead to divergence, especially when the ‘brain drain’ effect causes skilled workers to come
together in a single country, leaving the other country behind.

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8. References
Bhagwati, J., & Rodriguez, C. (1975). Welfare-theoretical analyses of the brain drain. Journal of
development Economics, 2(3), 195-221.
Borjas, G. J. (1994). The economics of immigration. Journal of economic literature, 1667-1717.
Diamond, P. A. (1965). National debt in a neoclassical growth model. The American Economic
Review, 1126-1150.
Dowrick, S., & Rogers, M. (2002). Classical and technological convergence: beyond the Solow-Swan
growth model. Oxford Economic Papers, 369-385.
Greenwood, M. J., & McDowell, J. M. (1986). The factor market consequences of US immigration.
Journal of Economic Literature, 1738-1772.
Lucas, R. E. (1990). Why doesn't capital flow from rich to poor countries?. The American Economic
Review, 92-96.
Mankiw, N. G., Romer, D., & Weil, D. N. (1990). A contribution to the empirics of economic growth
(No. w3541). National Bureau of Economic Research.
Moody, C. (2006). Migration and economic growth: a 21 st century perspective. Migration, 6, 02.
Okun, B., & Richardson, R. W. (1961). Regional income inequality and internal population migration.
Economic Development and Cultural Change, 9(2), 128-143.
Reichlin, P., & Rustichini, A. (1998). Diverging patterns with endogenous labor migration. Journal of
Economic Dynamics and Control, 22(5), 703-728.
Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of
economics, 65-94.
Swan, T. (1956). Economic growth and capital accumulation.

15 | P a g e
9. Appendices
Proof of equation (3.4.13)
Given
𝐿𝑠𝑡+1
𝑗
= (1 + 𝑛 𝑗
)(1 − 𝜃)𝐿𝑠𝑡
We can write
𝐿𝑠𝑡
𝑗
= (1 + 𝑛 𝑗
)
𝑡
(1 − 𝜃) 𝑡
𝐿𝑠0
𝑗
Given
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛 𝑖
)[𝐿𝑠𝑡
𝑖
+ 𝜃𝐿𝑠𝑡
𝑗
]
We can write
𝐿𝑠𝑡
𝑖
= (1 + 𝑛𝑖
)
𝑡
(𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
) + 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡−1
𝑘=1
𝐿𝑠𝑡
𝑖
= (1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡
𝑘=1
Proof by Induction
For any t,
𝐿𝑠𝑡
𝑖
= (1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡
𝑘=1
For t=1
𝐿𝑠1
𝑖
= (1 + 𝑛𝑖
)
1
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
1
𝑘=1
𝐿𝑢1
𝑖
= (1 + 𝑛𝑖
)(𝐿𝑢0
𝑖
+ 𝜃𝐿𝑢0
𝑗
)
Assume for any t,
𝐿𝑠𝑡
𝑖
= (1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡
𝑘=1
For t+1,
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛 𝑖
)[𝐿𝑠𝑡
𝑖
+ 𝜃𝐿𝑠𝑡
𝑗
]
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛𝑖
) [(1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡
𝑘=1
+ 𝜃(1 + 𝑛 𝑗
)
𝑡
(1 − 𝜃) 𝑡
𝐿𝑠0
𝑗
]
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛𝑖
)
𝑡+1
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
(∑(1 + 𝑛𝑖
)
𝑘+1
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡
𝑘=1
+ (1
+ 𝑛𝑖
)(1 + 𝑛 𝑗
)
𝑡
(1 − 𝜃) 𝑡
)
𝐿𝑠𝑡+1
𝑖
= (1 + 𝑛𝑖
)
𝑡+1
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡+1
𝑘=1

16 | P a g e
𝐿𝑠𝑡
𝑖
− 𝐿𝑠𝑡
𝑗
= [(1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑(1 + 𝑛𝑖
)
𝑘
(1 + 𝑛 𝑗
)
𝑡−𝑘
(1 − 𝜃) 𝑡−𝑘
𝑡
𝑘=1
] − (1 + 𝑛 𝑗
)
𝑡
(1 − 𝜃) 𝑡
𝐿𝑠0
𝑗
= (1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
∑ (
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘
((1 + 𝑛 𝑗
)(1 − 𝜃))
𝑡
𝑡
𝑘=1
− (1 + 𝑛 𝑗
)
𝑡
(1 − 𝜃) 𝑡
𝐿𝑠0
𝑗
= (1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝜃𝐿𝑠0
𝑗
((1 + 𝑛 𝑗
)(1 − 𝜃))
𝑡
∑ (
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘𝑡
𝑘=1
− (1 + 𝑛 𝑗
)
𝑡
(1 − 𝜃) 𝑡
𝐿𝑠0
𝑗
= (1 + 𝑛𝑖
)
𝑡
𝐿𝑠0
𝑖
+ 𝐿𝑠0
𝑗
((1 + 𝑛 𝑗
)(1 − 𝜃))
𝑡
(𝜃 ∑ (
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘
− 1)
𝑡
𝑘=1
For the above distance to converge to zero,
𝜃 ∑ (
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘
− 1
𝑡
𝑘=1
< 0
𝜃 ∑ (
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘𝑡
𝑘=1
< 1
𝑀𝑎𝑥 ∑ (
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘𝑡
𝑘=1
𝑤ℎ𝑒𝑛 𝑡 → ∞
∑ (
1 + 𝑛𝑖
(1 + 𝑛 𝑗)(1 − 𝜃)
)
𝑘𝑡
𝑘=1
→
1
1 − (
1 + 𝑛𝑖
(1 + 𝑛 𝑗)(1 − 𝜃)
)
− 1
→
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃) − (1 + 𝑛𝑖)
𝜃
(1 + 𝑛𝑖
)
(1 + 𝑛 𝑗)(1 − 𝜃) − (1 + 𝑛𝑖)
< 1
1 + 𝜃
1 − 𝜃
≤
1 + 𝑛 𝑗
1 + 𝑛𝑖
If this equation holds, wages will converge

17 | P a g e
Figure 1
𝑛𝑖 𝑛𝑗 𝛼 𝜃 𝜂
0 0.5 0.3 0 0.5
Country i
𝑡 𝐾 𝐿𝑢 𝐿𝑠 𝐴 𝑌 𝑘 𝑤𝑢 𝑤𝑠 𝛾
0 5.00 7 3.00 1.73 11.93 0.29 0.84 2.23 0.3
1 11.26 7 3.00 1.73 15.22 0.65 1.07 2.84 0.3
2 12.02 7 3.00 1.73 15.52 0.69 1.09 2.90 0.3
3 11.20 7 3.00 1.73 15.20 0.65 1.06 2.84 0.3
4 10.13 7 3.00 1.73 14.75 0.58 1.03 2.75 0.3
5 9.27 7 3.00 1.73 14.36 0.54 1.01 2.68 0.3
6 8.68 7 3.00 1.73 14.08 0.50 0.99 2.63 0.3
7 8.30 7 3.00 1.73 13.89 0.48 0.97 2.59 0.3
8 8.08 7 3.00 1.73 13.78 0.47 0.96 2.57 0.3
9 7.95 7 3.00 1.73 13.71 0.46 0.96 2.56 0.3
10 7.88 7 3.00 1.73 13.68 0.45 0.96 2.55 0.3
Country j
0 5.00 3.50 1.50 1.22 5.76 0.82 0.81 2.15 0.3
1 7.32 5.25 2.25 1.50 9.89 0.65 0.92 2.46 0.3
2 14.34 7.88 3.38 1.84 18.52 0.69 1.15 3.07 0.3
3 24.55 11.81 5.06 2.25 33.31 0.65 1.38 3.68 0.3
4 40.80 17.72 7.59 2.76 59.39 0.58 1.64 4.38 0.3
5 68.57 26.58 11.39 3.38 106.23 0.54 1.96 5.22 0.3
6 117.94 39.87 17.09 4.13 191.33 0.50 2.35 6.27 0.3
7 207.37 59.80 25.63 5.06 346.90 0.48 2.84 7.58 0.3
8 370.75 89.70 38.44 6.20 632.12 0.47 3.45 9.21 0.3
9 670.25 134.55 57.67 7.59 1155.70 0.46 4.21 11.22 0.3
10 1220.00 201.83 86.50 9.30 2117.27 0.45 5.14 13.71 0.3
Figure 2
0 0.5 0.3 0.2 0.5
Country i
0 5.00 7.00 3.00 1.73 11.93 0.29 0.84 2.23 0.3
1 13.24 7.70 3.30 1.82 17.66 0.66 1.12 3.00 0.3
2 17.90 8.54 3.66 1.91 21.55 0.77 1.24 3.30 0.3
3 21.87 9.55 4.09 2.02 25.73 0.79 1.32 3.52 0.3
4 26.15 10.76 4.61 2.15 30.77 0.79 1.40 3.74 0.3
5 31.34 12.21 5.23 2.29 37.11 0.79 1.49 3.97 0.3
6 37.88 13.95 5.98 2.45 45.18 0.78 1.59 4.23 0.3
7 46.24 16.04 6.87 2.62 55.54 0.77 1.70 4.52 0.3
8 56.99 18.55 7.95 2.82 68.89 0.76 1.82 4.85 0.3
9 70.86 21.56 9.24 3.04 86.11 0.76 1.96 5.22 0.3
10 88.80 25.17 10.79 3.28 108.42 0.75 2.11 5.63 0.3
Country j

18 | P a g e
0 5.00 3.50 1.50 1.22 5.76 0.82 0.81 2.15 0.3
1 5.33 4.20 1.80 1.34 7.12 0.66 0.83 2.21 0.3
2 8.12 5.04 2.16 1.47 9.77 0.77 0.95 2.53 0.3
3 11.02 6.05 2.59 1.61 12.97 0.79 1.05 2.80 0.3
4 14.49 7.26 3.11 1.76 17.05 0.79 1.15 3.07 0.3
5 18.88 8.71 3.73 1.93 22.36 0.79 1.26 3.35 0.3
6 24.56 10.45 4.48 2.12 29.30 0.78 1.37 3.66 0.3
7 31.97 12.54 5.37 2.32 38.40 0.77 1.50 4.00 0.3
8 41.65 15.05 6.45 2.54 50.34 0.76 1.64 4.37 0.3
9 54.33 18.06 7.74 2.78 66.02 0.76 1.79 4.78 0.3
10 70.94 21.67 9.29 3.05 86.61 0.75 1.96 5.22 0.3
Figure 3
0 0.5 0.3 0.2 0.5
Country i
0 5.00 10.00 7.00 3.00 1.73 11.93 0.29 0.84 0.30
1 10.62 10.30 7.90 2.40 1.55 14.12 0.67 0.96 0.23
2 14.39 11.71 8.98 2.73 1.65 17.70 0.74 1.06 0.23
3 18.08 13.40 10.28 3.13 1.77 21.85 0.76 1.14 0.23
4 22.38 15.43 11.83 3.60 1.90 27.01 0.76 1.23 0.23
5 27.74 17.87 13.70 4.17 2.04 33.61 0.76 1.32 0.23
6 34.60 20.79 15.94 4.86 2.20 42.12 0.76 1.42 0.23
7 43.46 24.30 18.62 5.68 2.38 53.12 0.75 1.53 0.23
8 54.94 28.51 21.85 6.66 2.58 67.41 0.75 1.66 0.23
9 69.86 33.56 25.72 7.84 2.80 86.00 0.74 1.79 0.23
10 89.28 39.63 30.36 9.26 3.04 110.20 0.74 1.95 0.23
Country j
0 5.00 4.50 0.50 0.71 3.92 1.41 0.55 3.30 0.10
1 6.03 5.40 1.65 1.28 8.01 0.67 0.80 2.50 0.23
2 8.85 6.48 1.98 1.41 10.89 0.74 0.90 2.83 0.23
3 11.94 7.78 2.38 1.54 14.43 0.76 0.99 3.12 0.23
4 15.72 9.33 2.85 1.69 18.98 0.76 1.09 3.42 0.23
5 20.55 11.20 3.42 1.85 24.90 0.76 1.19 3.74 0.23
6 26.84 13.44 4.11 2.03 32.67 0.76 1.30 4.09 0.23
7 35.07 16.12 4.93 2.22 42.87 0.75 1.43 4.47 0.23
8 45.86 19.35 5.91 2.43 56.27 0.75 1.56 4.89 0.23
9 60.00 23.22 7.09 2.66 73.86 0.74 1.71 5.35 0.23
10 78.57 27.86 8.51 2.92 96.98 0.74 1.87 5.85 0.23
Figure 4
0 0.5 0.3 0.2 0.5
Country i
0 5.00 7.00 3.00 1.73 11.93 0.29 0.84 2.23 0.30
1 10.40 5.60 3.60 1.90 14.95 0.60 1.14 2.59 0.39
2 13.84 5.60 4.32 2.08 18.29 0.67 1.29 2.77 0.44

19 | P a g e
3 10.12 5.60 3.46 1.86 14.45 0.60 1.12 2.58 0.38
4 6.14 4.48 2.76 1.66 9.84 0.51 0.95 2.20 0.38
5 4.01 3.58 2.21 1.49 6.85 0.47 0.83 1.91 0.38
6 2.77 2.87 1.77 1.33 4.85 0.45 0.73 1.69 0.38
7 1.97 2.29 1.42 1.19 3.46 0.45 0.65 1.51 0.38
8 1.41 1.84 1.13 1.06 2.48 0.45 0.58 1.35 0.38
9 1.01 1.47 0.91 0.95 1.77 0.45 0.52 1.21 0.38
10 0.72 1.17 0.72 0.85 1.27 0.45 0.47 1.08 0.38
Country j
0 5.00 5.00 2.00 3.00 1.73 7.34 0.58 1.03 0.60
1 9.84 8.70 5.10 3.60 1.90 14.13 0.60 1.14 0.41
2 16.70 11.97 7.65 4.32 2.08 22.07 0.67 1.29 0.36
3 32.27 19.25 11.48 7.78 2.79 46.08 0.60 1.68 0.40
4 57.41 31.59 18.89 12.70 3.56 91.99 0.51 2.04 0.40
5 102.91 49.56 29.68 19.88 4.46 175.71 0.47 2.48 0.40
6 188.92 76.08 45.60 30.48 5.52 330.54 0.45 3.04 0.40
7 350.19 115.52 69.26 46.26 6.80 616.53 0.45 3.74 0.40
8 649.59 174.39 104.58 69.81 8.36 1143.47 0.45 4.59 0.40
9 1202.24 262.47 157.42 105.06 10.25 2112.78 0.45 5.63 0.40
10 2219.55 394.42 236.56 157.86 12.56 3894.42 0.45 6.91 0.40
Figure 5
𝑛𝑖 𝑛𝑗 𝛼 𝜃𝑠 𝜂
0 0.5 0.3 0.2 0.5
Country i
0 5.00 7.00 3.00 1.73 11.93 0.29 0.84 2.23 0.30
1 14.10 7.00 3.30 1.82 17.19 0.75 1.17 2.99 0.32
2 18.41 7.00 3.56 1.89 19.47 0.92 1.29 3.20 0.34
3 20.74 7.00 3.80 1.95 20.95 0.99 1.36 3.29 0.35
4 22.23 7.00 4.00 2.00 22.07 1.01 1.40 3.34 0.36
5 23.35 7.00 4.18 2.04 23.01 1.02 1.44 3.37 0.37
6 24.28 7.00 4.34 2.08 23.82 1.03 1.47 3.39 0.38
7 19.76 7.00 3.47 1.86 19.58 1.01 1.31 3.28 0.33
8 21.22 7.00 3.82 1.95 21.15 1.00 1.37 3.31 0.35
9 17.20 7.00 3.05 1.75 17.45 0.98 1.22 3.22 0.30
10 14.05 7.00 2.44 1.56 14.54 0.95 1.08 3.16 0.26
Country j
0 5.00 3.50 1.50 1.22 5.76 0.82 0.81 2.15 0.30
1 4.48 3.85 1.32 1.15 5.46 0.75 0.74 2.19 0.26
2 5.37 4.24 1.16 1.08 5.68 0.92 0.74 2.45 0.22
3 5.66 4.66 1.02 1.01 5.72 0.99 0.70 2.66 0.18
4 5.77 5.12 0.90 0.95 5.73 1.01 0.67 2.90 0.15
5 5.84 5.64 0.79 0.89 5.76 1.02 0.63 3.17 0.12
6 5.92 6.20 0.70 0.83 5.80 1.03 0.59 3.51 0.10
7 11.35 6.82 1.72 1.31 11.25 1.01 0.92 3.21 0.20
8 11.15 7.50 1.51 1.23 11.11 1.00 0.86 3.43 0.17
9 16.68 8.25 2.51 1.58 16.92 0.98 1.10 3.47 0.23

20 | P a g e
10 22.04 9.08 3.43 1.85 22.81 0.95 1.28 3.61 0.27

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