Migrant labor supply in a booming non-renewable resource economy: cure and transmission mechanism for de-industrialization?

Abstract

This paper challenges the determinism that booming resource economies suffer from de-industrialization, the “Dutch Disease”. For several decades, economists have attempted to explain how a sudden surge in mineral and energy extraction affects an economy’s output and employment from an aggregate and sectoral perspective. Economic theory shows that a “boom” in mineral and energy production is welfare enhancing to the economy experiencing it. However, the phenomenon also induces inter-sectoral adjustments among non-renewable resource (NRR), traditional traded, and non-traded industries that tend to crowd out traditional export sectors such as agriculture and manufacturing. In turn, this paper asks two fundamental questions: 1) Can the inter-sectoral adjustments wrought by a boom in NRR production be mitigated in the resource-abundant economy experiencing it; 2) Can the inter-sectoral adjustments be exported to a neighboring non-resource economy by movements in migrant labor supply? The theoretical model and empirical estimation approach presented in this paper introduces an endogenous migrant labor supply response to booms in NRR output to test the extent traditional tradable sectors shrink in the NRR-abundant economy during the boom and if such effects are exported to a neighboring jurisdiction. Using data at the U.S. county level, the empirical results show that booming economies experience positive and statistically significant rates of real income and traded sector job growth during the boom, attributable to the influx of migrant labor. By contrast, little evidence is found that non-booming counties adjacent to the booming counties experience declines in income or job growth because of labor supply outflows. Instead, the results suggest the larger the number of potential “donor” counties that can supply labor to the booming economies, the more likely the transmission of booming economy effects, namely evidence of de-industrialization, is diffused across all of the donor counties that actually yielded migrant labor. Overall, the results indicate that a shrinking traditional traded sector during a NRR boom is by no means inevitable in an NRR-abundant economy, contrary to the stylized facts. Additionally, when investigating the total and inter-sectoral effects of a resource boom, economists must extend their investigation to the labor migration channel and the effects of the boom on both neighboring non-resource producing economies and economies even further afield.