1. A land of milk and honey with streets paved with gold: Do emigrants have over-optimistic expectations about incomes abroad? David McKenzie, World Bank John Gibson, University of Waikato Steven Stillman, Motu Economic and Public Policy Research

2. Motivation Large and growing pressure to migrate out of many developing countries If migrants are over-optimistic about incomes earned abroad, some of this migration may be excessive. => This paper uses unique survey data combined with a natural experiment to assess how accurate income expectations of potential migrants are.

3. Pacific Access Category Allows an annual quota of 250 Tongans to emigrate to New Zealand without going through usual family reunification or skilled migrant categories. Conditions –Be aged 18-45 –Meet minimal English, health and character requirements  Almost 10 times as many apply as quota allows, so a lottery used to decide among applicants

4. Pacific Island-New Zealand Migration Survey We designed a special survey to use the random selection feature of the Pacific Access Category to investigate different impacts of migration. We surveyed winners of this ballot (migrants in New Zealand), winners still in Tonga, losers (who remain in Tonga), and non-applicants. In this paper, compare expectations of losers to actual experiences of winners.

5. Measuring Expectations Follow the approach of Dominitz and Manski (1997) used in U.S. Expectations about employment in New Zealand measured by asking: “I would like you to think about what you would be doing right now if you were living in New Zealand. What do you think is the percent chance that you would be working for pay?”

6. Income Expectations First ask what they think is highest and lowest amount they could earn if working in New Zealand Use this to define four threshold levels, Y1, Y2, Y3 and Y4. For each ask “Thinking about the income that you would be earning if you were working in New Zealand right now, what is the percent chance that your own weekly income from work would be less than Y1 New Zealand dollars?” - Interpret as points on CDF, fit log-normal.

7. Do these expectations predict actual behavior? Classic theories of migration (Sjaastad, Harris- Todaro) predict that expectations should matter. Compare expectations of ballot losers to those of Tongan individuals who don’t apply for the PAC. (Table 5) –Find median expected income does help predict decision to try and migrate, even conditional on pre- application income and employment status –Expecting $100 more income after migrating is associated with a 10 percentage point increase in likelihood of applying to migrate.

8. Low non-response 132/133 answered the expectations question on employment. Only 2 gave answer of 0%, none gave 100%. 130/130 answered expectations questions on income No degenerate distributions: i.e. no one who answers only 0% and 100% for income.

9. Main Results Potential migrants UNDER-ESTIMATE both the likelihood of employment, and the incomes earned if employed. Employment Migrants: 75% employed Potential Migrants expectations of employment: –Mean: 57% –Median: 55% –76% say percent chance of working is less than 75%.

11. Would-be emigrants underestimate earnings in New Zealand

12. Unconditional earnings Combine expectations of employment and expectations of income conditional on being employed Actual mean earnings is $423/week Mean mean: $196 per week (46% of actual) Mean median: $178 (40% of actual median) => Very large underestimation of earnings

13. Potential explanations for the underestimation of income 1)Tongans are bad at forming expectations in response to these questions 2)Comparison to the wrong reference group – use GPS in paper 3)Psychological effects 4)Role of the extended family 5)Male-female differences

14. Expectations of migrants about work back in Tonga Mean of the mean expected earnings is 158 pa’anga per month –Compare to mean prior income of 154 pa’anga per month –And 189 pa’anga per month of ballot losers => Quite accurate, may not incorporate inflation and wage growth in absence.

15. Comparison to the wrong reference group 1)If all the emigrants within 6km didn’t take up initial job offer, have 20% lower expected employment rate. Explains a lot, but not all, of poor expected employment. 2)Earlier cohorts: Pacific male unemployment rate was 15.2% in 1996, 6.8% in 2005; Income in 1997-99 mean was $487 vs $565 in 2001- 03=> perhaps basing expectations on earlier period => Still doesn’t explain all of underestimation, and raises question as to why don’t have more recent information.

16. Psychological effects We asked expectations questions at a time when people already knew if they had won or lost in the ballot lottery Perhaps ballot losers understate expectations about income in New Zealand in order to make themselves feel better about losing. We also interviewed ballot winners, who were waiting for their applications to be processed – these effects should be much less severe. => But we see they underestimate by similar amounts

17. Are incorrect expectations due to extended family trying to moderate remittance demands? Remittance demands from extended family seen as burden to many migrants  Migrants might claim they are earning less than they actually are, especially to extended family -We find having an uncle, aunt or cousin in NZ is significantly associated with lower expected earnings and greater underestimation of expected earnings Effect is large – expect earnings to be $100 per week lower if have extended family migrants.

18. Male-Female Differences Also see males underestimate income compared to females. Males and Females of the same age and education have similar expectations about incomes in NZ. There is no male wage premium in Tonga, but a large one in NZ (males work in construction, heavy work, females in retail sales, cleaning) Male PAC applicants earn $163 per week more per week in NZ than females on average => Males face quite a different wage distribution in NZ, but don’t seem to expect this.

19. Comparing Explanations Low expectations of employment seem to be driven by potential migrants overweighting the experiences of migrants who were unable to take up their initial job offer; perhaps also too much weight given to earlier cohorts migrating during period of higher unemployment. Underestimation of income seems in large part due to presence of extended family in information network – they offset pressure to remit by downplaying earnings in NZ. –Also tendency of males to underestimate income, perhaps due to lack of knowledge of gender gap in earnings in NZ.

20. Conclusions Have found that potential emigrants dramatically UNDERESTIMATE how much they could earn in New Zealand Contrast to anecdotal stories which raise fears of over-optimistic expectations.  Tonga has migrant stock in NZ equal to 17% of home population, so the fact that they are wrong on expectations suggests other migrants are likely to be too.  More generally, shows feasibility of asking probabilistic expectations questions in developing countries, even when event is not one individual has experienced.