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The Costs of Babylon—Linguistic Distance in Applied Economics


  • We wish to thank Thomas K. Bauer, John P. Haisken-DeNew, Julia Bredtmann, Jan Kleibrink, Maren Michaelsen, two anonymous referees, the participants of the 5th RGS Doctoral Conference and of the 2012 annual meetings of RES, SOLE and ESPE, for helpful comments and suggestions. We are also thankful to Andrew K. Rose and Johannes Lohmann for providing data and the German-Israeli Foundation for Scientific Research and Development (GIF) for financial support.


Linguistic distance, i.e. the dissimilarity between languages, is an important factor influencing international economic transactions such as migration or international trade flows by imposing hurdles for second language acquisition and increasing transaction costs. To measure these costs, we suggest using a new measure of linguistic distance. The Levenshtein distance is an easily computed and transparent approach of including linguistic distance into econometric applications. We show its merits in two different applications. First, the effect of linguistic distance in the language acquisition of immigrants is analyzed using data from the 2000 US Census, the German Socio-Economic Panel, and the National Immigrant Survey of Spain. Across countries, linguistic distance is negatively correlated with reported language skills of immigrants. Second, applying a gravity model to data on international trade flows covering 178 countries and 52 years, it is shown that linguistic distance has a strong negative influence on bilateral trade volumes.