Foreign Workers, Product Quality, and Trade: Evidence from a Natural Experiment

Abstract

This paper shows that international labor mobility attenuates information frictions, and leads to higher-quality products, more trade, and more effective global value chains. Exploiting the variation in the time and intensity at which Swiss postal codes were hit by the increasing availability of foreign workers due to the implementation of the Swiss-EU Agreement on the Free Movement of Persons, I find that the inflow of high-skilled European workers led to an upgrade in the quality of inputs imported from their origin countries. Better intermediates improved the quality of output, making Swiss products more appealing for international markets and boosting exports. Therefore, the efficacy of Swiss global value chains improved: upstream thanks to higher-quality intermediate inputs brought by the intensification of the existing buyer-seller relations; and downstream because higher-quality products eased increasing exports to existing buyers and helped finding new customers, especially in distant destinations.