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Economics of Migration

Economics of Migration. Jan Fidrmuc Brunel University . Introduction. Important, and very contentious, aspect of economic integration and globalization 175mn (2.9%) int’l migrants in 2000, 190mn today (WB Migration Database, 2007) Most (37%) from LDC to DC; 24% LDC LDC, 16% DCDC

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Economics of Migration

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  1. Economics of Migration Jan Fidrmuc Brunel University

  2. Introduction • Important, and very contentious, aspect of economic integration and globalization • 175mn (2.9%) int’l migrants in 2000, 190mn today (WB Migration Database, 2007) • Most (37%) from LDC to DC; 24% LDCLDC, 16% DCDC • Immigrants: 8-12% of population in US, Germany, France, UK; 18-21% Canada & Australia; 38% HK • Emigrants: 5-10% of Mexico, Afghanistan, Morocco, UK, Algeria, Italy, Germany, Bangladesh, Turkey; 0.5-0.9% China, US, India

  3. Introduction • EU Single Market: free movement of labor • Migrants (foreign born): 11.7% of EU15 population in 2005 (OECD) • Approximately 1/3 EU foreigners • EU enlargements in 2004 and 2007 • Forecasted East-West migration 3-4 mn • Temporary restrictions imposed by most EU15 countries for up to 7 years • Large E-W influx to Austria, Germany, Spain, UK and Ireland

  4. Outline • Introduction • Models of migration • Economic Impact of migration: Theory and evidence • Brain Drain; Remittances • Labor-market Performance of Migrants • Politics of Immigration • EU Enlargement and East-West Migration • Conclusions

  5. Economics of Migration • Most common type of migration: LDC to DC • Revealed preference: migrants move iff they expect to be better off at destination • Yet, migrants often suffer occupational downgrading, end up in poorly-paid informal jobs or remain unemployed • Ex-ante vs ex-post: Harris-Todaro Model • Michael P. Todaro, AER 1969; and John R. Harris and Michael P. Todaro, AER 1970.

  6. Harris-Todaro Model • Original focus: rural-urban migration in LDC • Rural residents move to urban regions despite already high unemployment there • Puzzle: migration continues although it makes (some) rural migrants worse off • HT model: migrants motivated by expected returns • Expected returns may be different from actually realized returns

  7. Harris-Todaro Model • Two regions: urban and rural • Rural wage: wR (farming) • Urban wage: wU>wR • Full employment in rural region • Involuntary urban unemployment • Fraction q of urban workers hold jobs • 1-q are unemployed and have zero earnings • Urban wages downward rigid • Minimum-wage rules, unionization, or b/c workers must acquire residence/work permits

  8. Harris-Todaro Model • Workers are risk neutral • Migration continues as long as: wU*q>wR • Migration is optimal despite unemployment • Migration from LDC to DC similar case

  9. Harris-Todaro Model: Implications • Urban job creation (government spending) raises q migration more attractive • Improving education in rural areas may increase migration if educated rural worker face higher q • Rising rural wages reduce incentive to migrate to urban region • However, if migration costly, rising rural incomes may relieve liquidity constraints on migration

  10. Other Models of Migration: Beyond Income Differentials • Stark (The Migration of Labor, 1991) • Households vulnerable to idiosyncratic shocks that are region or sector-specific • Migration  household members exposed to different regional shocks • Risk diversification through pooling of household members’ income  remittances • Migration optimal even without income differentials if individuals risk averse  consumption smoothing through risk sharing

  11. Other Models of Migration: Roy-Borjas Model • Roy (OEP 1951); Borjas (AER 1987) • Consider two countries, A and B • Identical mean earnings • Different income distributions: returns to human capital higher in A • Individual returns to migration depend on one’s skills • Skilled workers fare better in A

  12. Other Models of Migration: Roy-Borjas Model • Migration patterns: • Skilled migration to A • Unskilled migration to B • Returns to human capital important also when mean earnings not identical • DC – LDC migrants often highly skilled professionals and managers

  13. Economics of Migration: Impact • Trade theory: free trade, free capital mobility and free labor mobility should have similar effects on the economy • Yet, migration more controversial than either free trade or capital mobility • Popular view: immigrants displace native workers and/or drive down wages • Is this consistent with theory and evidence?

  14. Economic Impact of Migration: Theory • Dustmann et al., EJ 2005; Dustmann et al., OxRevEcPol 2008) • Two countries: Home and Foreign • One output good, price set at world market • Two types of labor: skilled and unskilled • Labor supplied inelastically • Supply of capital perfectly elastic • Interest rate set at world markets

  15. Economic Impact of Migration: Theory • If skill composition of immigration the same as that of natives • No labor-market effect of migration • This is because capital supply is elastic • Economy adjusts to immigration by importing capital  no change in relative endowments • Migrants in DC predominantly unskilled  compete with native unskilled workers only • Consider case with only unskilled immigrants

  16. Economic Impact of Migration: Theory • L and L* unskilled workers in Home and Foreign • Demand for labor given by MPL  initial wage w0 and w*0; w0>w*0 • Migration equalizes wages: w1=w*1 • Unskilled workers in Home worse off • Migrants and unskilled workers in Foreign better off

  17. Economic Impact of Migration: Theory MPL MPL* w0 w1 w*0 o L L* M L+M o*

  18. Economic Impact of Migration: Theory • What about overall impact on Home? • Capital supplied elastically  no impact for owners of capital • Skilled labor in Home becomes scarcer relative to unskilled labor • Skilled-wage premium goes up • Overall effect: average earnings go up • Immigration surplus: unskilled workers paid less than their marginal product • Net gain accrues to skilled workers

  19. Economic Impact of Migration: Theory MPL MPL* Immigration surplus w0 w1 w*0 o L L* M L+M o*

  20. Economic Impact of Migration: Theory • Immigration has important distributional implications • This can have important political implications • Note: if labor supply flexible, migration leads to unemployment in addition to (or instead of) lower unskilled wages • Note: reverse holds for Foreign: skilled labor becomes less abundant and skilled workers lose out

  21. Economic Impact of Migration: Heckscher-Ohlin Model • Multiple heterogenous output goods • Free and competitive trade  goods prices set at world markets • All countries have access to the same technology • Skilled and unskilled labor, supplied inelasticly • Capital supply elastic • All immigrants unskilled

  22. Economic Impact of Migration: Heckscher-Ohlin Model • Output mix determined by relative factor endowments • Immigration  pressure on unskilled wages to fall  output of goods produced by unskilled labor goes up • Wages of skilled and unskilled labor unchanged as long as goods prices constant • Immigration absorbed through changes in output mix (Rybczinski Theorem) • No labor-market impact at all

  23. Economic Impact of Migration: Evidence • Most studies: no or mildly negative impact of migration on natives’ wages or employment • Card (EJ 2005)US data, Dustmann et al. (EJ 2005; OxRevEP 2008)UK data • Borjas (QJE 2003, NBER WP 2005): labor-market impact of migration is mitigated by out-migration of natives (US data) • Card (EJ 2005): little evidence of natives’ migration being driven by immigration

  24. Economic Impact of Migration: Evidence • Dustmann et al. (OxRevEP 2008)UK data • Immigrants predominantly low skilled  impact on wages different alongside natives’ wage distribution • Elasticity of natives’ wages with respect to immigration rate • Low-wage earners: -0.5 at 10th percentile • Positive for most: 0.6 at median, 0.35 on average • Insignificant for high-wage earners (from 95th percentile)

  25. Economic Impact of Migration: Evidence (Dustmann et al., 2008)

  26. Economic Impact of Migration: Evidence • Impact on employment (Dustmann et al., EJ 2005) UK data: zero effect overall • Positive effect for high-educated natives (high-school diploma and higher) • Negative effect for intermediate-educated, negative but insignificant for unqualified • Effects for high and intermediate educated approximately cancel each other in aggregate

  27. Economic Impact of Migration: Evidence from Natural Experiments • Friedberg and Hunt (JEP 1995): Large-scale immigration episodes  little long-term impact on labor markets • French and Portuguese decolonization • Cuban immigration to the US during the Mariel boatlift • Russian-Jewish immigration to Israel in 1990s

  28. Economic Impact of Migration: Israel • 1990s: more than 1 million ethnic Jews immigrated to Israel from the FSU • Israeli population in 1989: 4.6 million • Migration driven by economic hardship and political unrest • Approximately two-thirds of these immigrants highly skilled

  29. Economic Impact of Migration: Israel • FSU immigration  no long-term effect on wages or employment of natives • Friedberg (2001 QJE), Gandal, Hanson and Slaughter (2004 EER), and Cohen and Paserman (2004 CEPR DP 4640): • Cohen and Paserman (2004): negative short-term effect (elasticity -0.1 to -0.3) on wages (but not on employment) • Effect disappears in 4-7 years

  30. Economic Impact of Migration: Israel • Gandal et al.: global technology changes increased demand for skilled labor • This helped Israeli economy absorb immigrant influx • Cohen and Hsieh (2000 mimeo): immigration followed by large influx of capital (borrowing) • Consistent with standard neoclassical growth model

  31. Economic Impact of Migration: Israel • Eckstein and Weiss (2003 IZA DP 710): substantial initial occupational downgrading of FSU immigrants but wages increase rapidly • No return on their imported skills in short run • Lower return to education, same return to experience and higher return to unobserved skills, than native Israelis, in long run • Because of lower return to imported skills, immigrants’ wages never catch up with natives’ wages

  32. Economic Impact of Migration: Germany • Re-unification of Germany  large migration flow from East to West • Frank (2007 mimeo): no overall effect on wages or unemployment in West Germany • But: important distributional effects • Employment of less educated workers, blue-collar workers and foreign nationals declined • Wages of workers in non-traded-goods and service sectors increased

  33. Immigration and Crime • Immigrants often associated with high crime rates • Theory: ambiguous relationship • Immigrants fare poorly in labor market, but: • face higher detection probability (prejudice) • and stricter punishment (sentence & deportation)

  34. Immigration and Crime • Bianchi, Buonanno & Pinotti (2009 BI wp) • Immigration & crime in IT provinces, 1990-2003 • OLS: elasticity of crime to immigration: 0.1 • Especially for property crime (theft and robbery) • Result may be driven by endogeneity • Eg immigrants more to high-crime areas because of low cost of housing • IV: no significant effect on total crime or property crime, significant effect on robberies • Robberies 1.5% of total crime only

  35. Brain Drain • Migration of skilled workers from LDC to DC • Docquier et al. (IZA DP 2005): brain drain estimates, 1990-2000 • World weighted-average skilled migration rate 5.3% vs unskilled rate 1.1% • LDC: 7% vs 0.3% • Latin America 11%, Africa 10.4%, Asia 5.5% • Traditional view: brain drain reduces stock of human capital  lower potential for growth

  36. Brain Drain • Skilled immigrants often subject to occupational downgrading • But face better employment prospects than unskilled immigrants • Liquidity constraints • Migration is costly • Skilled migrants better able to afford the cost

  37. Brain Drain: Reassessment • Mountford (1997 JDE), Fan and Stark • Individuals under-invest in education because they ignore social returns • Education raises probability of emigration • Higher expected private return to education • Greater incentive to invest in education • Emigration uncertain  some skilled workers remain in LDC • Brain drain may raise LDC stock of human capital  better prospects for growth

  38. Remittances • Large inflows, esp. for developing countries: • Remittances one third of exports and greater than FDI (Barajas et al., 2009, IMF WP09/153) • Top recipients in 2008: Mexico, China and India: $25-27bn • Mexico: remittances  1/3 of formal wage income in 2006 (Vargas-Silva, RDE 2009) • US: 18mn people of Mexican origin • Poland: 2mn Poles abroad  $6bn in 2007 (NBP report)

  39. Remittances • China: remittances of rural migrants large • 15% of agricultural income of selected provinces in 1992 (Wu & Zhou 2005) • 1995 survey in Jinan and Shandong (Liu & Reilley, Apllied Economics 2004) • Rural migrants remit RMB 2110 p.a.  36% of earnings • 85% of rural migrants transfer remittances

  40. Remittances: Impact • Remittances increase household disposable income • Rozelle, Taylor and deBrauw (AER P&P 1999): remittances increase agricultural productivity in rural China (Hebei and Liaoning) • Adams and Page (WB WPS3179): remittances reduce poverty in LDC • Elasticity: -0.19 with respect to emigration rate and -0.16 with respect to remittances-to-GDP ratio

  41. Remittances: Impact • Barajas et al. (2009, IMF WP09/153): • Remittances to 84 countries over 1970-2004 • Effect on growth is insignificant or even negative • Interpretation: remittances alleviate poverty and increase consumption but not investment

  42. Remittances and the Dutch Disease • DD typically associated with revenue from export of natural resources (origin: North-Sea natural gas exports in the Netherlands) • Large receipts of foreign currency  XR appreciates  loss of competitiveness  manufacturing exports fall while imports rise • Vargas-Silva (RDE 2009): remittances cause appreciation of real exchange rate in Mexico

  43. Politics of Immigration • Migration (and trade)  winners and losers among natives • If immigrants predominantly unskilled, unskilled natives lose out and skilled workers gain • Losers may need to be compensated (redistribution of gains from winners) • Otherwise, economic integration may not be politically feasible

  44. Politics of Immigration • Wages reflect relative abundance of each factor of production • Consider again skilled vs unskilled labor • DC: skilled labor relatively abundant • Immigrants predominantly unskilled • Skilled workers likely to emigrate • LDC: unskilled labor relatively abundant • Immigrants predominantly skilled • Unskilled labor likely to emigrate

  45. Politics of Immigration • Attitudes depend on relative factor endowments and redistributional impact of immigration • DC: immigrants predominantly unskilled • Skilled wage goes up • Unskilled wage falls • Skilled workers should favor immigration • Unskilled workers should oppose immigration

  46. Politics of Immigration • LDC: immigrants predominantly skilled • Skilled workers should oppose immigration • Unskilled workers should be in favor • Attitudes on free trade determined similarly

  47. Politics of Immigration • O’Rourke and Sinnott (2005 EJPE), Mayda and Rodrik (2005 EER) and Mayda (2005) use large multi-country individual-level survey dataset to investigate individual attitudes on trade and migration • Skilled individuals more in favor of immigration (free trade) • More so in rich countries

  48. Politics of Emigration: Home Country • Emigration experience may affect one’s political opinion and attitudes • Spilimbergo (CEPR DP 5934): • UNESCO database on international student flows: 1950-2003 • Share of students studying abroad increases democracy in home country • But only if students study in democratic countries

  49. Politics of Emigration: Home Country • Fidrmuc and Doyle (CEPR DP 4619):Voting behavior of Czech and Polish emigrants in home-country elections • Emigrant votes differ from home country votes and also across host countries • Votes for pro-reform and left-wing parties depend on host-country characteristics • Migrants adapt to institutional environment • Level and tradition of democracy • Extent of economic freedom

  50. Political Impact of Immigration • Living in economically liberal and democratic countries should have a favourable impact on migrants from less developed countries • Migrants espouse liberal attitudes while living abroad • Autocratic regimes often restrict their citizens’ freedom to travel • North Korea, Turkmenistan, Zimbabwe • Autocracies that tolerate free travel often more liberal  former Yugoslavia

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