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  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; % China, US, India

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

Outline 1. Introduction 2. Models of migration 3. Economic Impact of migration: Theory and evidence 4. Brain Drain; Remittances 5. Labor-market Performance of Migrants 6. Politics of Immigration 7. EU Enlargement and East-West Migration 8. Conclusions

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.

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

Harris-Todaro Model Two regions: urban and rural  Rural wage: w R (farming)  Urban wage: w U >w R 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

Harris-Todaro Model Workers are risk neutral Migration continues as long as: w U *q>w R Migration is optimal despite unemployment Migration from LDC to DC similar case

Harris-Todaro Model: Implications 1. Urban job creation (government spending) raises q  migration more attractive 2. Improving education in rural areas may increase migration if educated rural worker face higher q 3. Rising rural wages reduce incentive to migrate to urban region However, if migration costly, rising rural incomes may relieve liquidity constraints on migration

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

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

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

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?

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

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

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

Economic Impact of Migration: Theory oo* MPL MPL* w0w0 w* 0 w1w1 LL*L+MM

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

Economic Impact of Migration: Theory oo* MPL MPL* w0w0 w* 0 w1w1 LL*L+MM Immigration surplus

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

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

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

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

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 10 th percentile  Positive for most: 0.6 at median, 0.35 on average  Insignificant for high-wage earners (from 95 th percentile)

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

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

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

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

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

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

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

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

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)

Immigration and Crime Bianchi, Buonanno & Pinotti (2009 BI wp)  Immigration & crime in IT provinces, 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

Brain Drain Migration of skilled workers from LDC to DC Docquier et al. (IZA DP 2005): brain drain estimates,  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

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

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

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)

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

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: with respect to emigration rate and with respect to remittances-to-GDP ratio

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

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

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

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

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

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

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

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: Share of students studying abroad increases democracy in home country But only if students study in democratic countries

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

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

Migrant’s Labor-market Performance Migrants typically subject to substantial occupational downgrading Human capital poorly portable  Eastern European Jews in Israel: low return on imported education and experience (Friedberg JLE 2000; Eckstein and Weiss, 2003 IZA DP710)  Destination-country education raises return also to home-country education (Friedberg 2000) Immigrants catch up slowly and imperfectly

Occupational Downgrading: UK (Dustmann et al., 2008)

Migrant’s Labor-market Performance US/UK: immigrants from Latin American and Eastern Europe suffer more downgrading than immigrants from industrialized countries  UK: Drinkwater et al. (2006 IZA DP2410)  US: Mattoo et al. (JDE 2008) Language skills important  Immigrants who speak destination-country language earn up to 20% more (Chiswick and Miller, 2002 JPopE; 2007 IZA DP 2664)

EU Enlargement and East-West Migration EU enlargements in May 2004 and Jan 2007 Pre-enlargement debate in academia, policy- making and popular press: fear of mass migration, welfare shopping and displacement effects in labor market Result: transitional restrictions on free movement of workers (2+3+2 formula)  Exceptions in 2004: UK, Ireland and Sweden  More countries removed restrictions later

EU Enlargement and East-West Migration (Zaiceva & Zimmerman, OxRevEP 2008) Fear of mass migration: high unemployment:

EU Enlargement and East-West Migration (Zaiceva & Zimmerman, OxRevEP 2008) Fear of mass migration: low wages:

East-West Migration: Predictions (Zaiceva & Zimmerman, OxRevEP 2008) Since early 1990s – more than 30 studies forecasting East-West migration 1. Predictions based on intentions to move to the West using surveys 2. Econometric models using historical data for countries other than CEECs (“double out-of- sample extrapolations”)  Migration experience after the Southern EU enlargement or other countries (e.g. immigration to Germany from a broad sample of countries)

East-West Migration: Predictions Boeri and Bruecker (2000)  Estimate model of immigration to Germany over  Use it to predict East-West migration to the EU Total net immigration 335 ths to the EU15 Most predicted to go to Germany and Austria: 218 ths and 40.5 ths, respectively; UK to receive some 15 ths.

EU Enlargement and East-West Migration (Zaiceva & Zimmerman, OxRevEP 2008)

East-West Migration: Predictions Surveys of willingness to migrate (WTM) Drinkwater (2003): WTM to the EU highest among the young and those with high skills and foreign-language skills Expected impact:  mainly positive impact for destination countries  potentially adverse impact on source countries (brain drain)

EU Enlargement and East-West Migration (Zaiceva & Zimmerman, OxRevEP 2008) Actual migration flows difficult to estimate  UK and Ireland: no restrictions, large influx (Gilpin et al., 2006, Blanchflower et al., 2007, UK Home Office Accession Monitoring Reports; Doyle et al., 2006)  Sweden: no restrictions, little immigration  Austria, Germany: restrictions, large influx Why? Push and pull factors: Economic factors, geographic proximity, language, networks, demand-driven (IE), re-directed from other countries…

EU Enlargement and East-West Migration (Zaiceva & Zimmerman, OxRevEP 2008)

Main sending countries:  UK: Poland, Slovakia, Lithuania,  Ireland: Poland, Lithuania, Latvia  Sweden: Poland, Lithuania, Estonia Sectoral distribution of immigrants:  UK: hotels/catering, manufacturing, agriculture/construction  Ireland: construction, manufacturing, hotels/catering  Sweden: health care, trade, manufacturing

EU Enlargement and East-West Migration (Zaiceva & Zimmerman, OxRevEP 2008)

East-West Migration: Impact (Zaiceva & Zimmerman, OxRevEP 2008) No negative impact on receiving countries’ economies Occupational downgrading common No evidence of an impact on unemployment If displacement of natives (Ireland)  no rise in aggregate unemployment but “upgrade” jobs for nationals No wage pressure, not even in manufacturing sector  highest share of new immigrants

East-West Migration: Impact (Zaiceva & Zimmerman, OxRevEP 2008) Reduced or falling wage growth rates mainly follow pre-enlargement trends UK: immigration has increased supply by more than it has increased demand  Lower inflationary pressures and lower natural rate of unemployment.

East-West Migration: Public Perceptions (Zaiceva & Zimmerman, OxRevEP 2008)

East-West Migration: Public Perceptions (Blanchflower, EJ 2009) Unemployment expectations over the next 12 months: EU15 (3 month average - advanced 12 months - LHS) Unemployment rate (RHS) average Balance Per cent

East-West Migration: Public Perceptions Unemployment expectations over the next 12 months: Germany (3 month average - advanced 12 months - LHS) Unemployment rate (RHS) average Balance Per cent

East-West Migration: Public Perceptions Unemployment expectations over the next 12 months: UK (3 month average - advanced 12 months - LHS) Unemployment rate (RHS) average BalancePer cent

East-West Migration: Public Perceptions Unemployment expectations over the next 12 months: Ireland (3 month average - advanced 12 months - LHS) Unemployment rate (RHS) average BalancePer cent

East-West Migration: UK Experience Annual gross inflow of A8 nationals over 200 ths The stock of A8 migrants estimated to be around 500 ths by the end of 2006 (Blanchflower, Saleheen and Shadforth, 2007) 65-70% of A8 immigrants are Polish Most work in low-skilled occupations and earn low wages 80% are below 35; 60% are males

East-West Migration: UK Experience Unlike migrants from other countries, relatively low share come to London (around 10%)  Main destinations: Anglia, Midlands, London Anecdotal evidence: some immigrants highly skilled No welfare tourists: by 2007, less than 1,000 A8 nationals per quarter approved to receive income support and job-seekers allowance

East-West Migration: UK Experience WRS registrations as a % of home population WRS Registrations (000s) U Rate (2004) Emp Rate (2004) GDP per head (2005)* Czech Rep ,200 € Estonia ,000 € Hungary ,000 € Latvia ,100 € Lithuania ,500 € Poland ,200 € Slovakia ,200 € Slovenia ,400 € Correlation

East-West Migration: UK Experience Life Satisfaction Bulgaria Czech Rep Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia UK

East-West Migration: UK Experience Intended length of stay 12 months ending March 2007 Per cent Less than 3 months 126,10055% 3 to 5 months 3,840 2% 6 to 11 months 7,605 3% 1 to 2 years 10,520 5% More than 2 years 21,225 9% Do not know 58,480 26% Total 227, % WRS Applications

East-West Migration: UK Experience 1-2% (at least) of Polish, Slovak, Latvian and Lithuanian populations lived and worked in the UK at some time between 2004 and 2007 (WRS statistics only) East-West migration helped lower unemployment in A8 countries  Some caused labor shortages, especially in agriculture and construction Gilpin et al. (2006, DWP WP 29): relationship between change in share of A8 migrants and change in regional unemployment

East-West Migration: UK Experience Drinkwater, Eade and Garapich (2006 IZA DP2410): A8 migrants highly skilled but have low returns to skills and experience Wages increase with years since migration A8 migrants earn 30% less than migrants from other European countries (those from English-speaking countries earn 30% more) when not controlling for occupation No evidence as to whether the extent of occupational downgrading is falling over time

East-West Migration: UK Experience If occupational downgrading persists:  Destination countries do not realize the migrants’ full contribution to their GDPs  Migrants fail to receive wages corresponding to their human capital Occupational downgrading may become permanent and persist even upon return to the home country (scarring) Source countries suffer brain drain Overall, everyone loses Time will show if this will be the case.

Summary Factors underlying patterns of migration flows:  Differentials in (expected) earnings  Returns to human capital  Risk sharing at household level Economic impact of migration  Host country: little or none aggregate labor-market impact but important distributional implications  Home country: may be harmful because of brain drain and/or Dutch disease

Summary Political impact  Host country: distributional implications  winners and losers  political backlash against labor mobility and integration  Home country: spread of liberal norms and values EU enlargement  Large and unprecedented migration flows within Europe  Little or no negative labor-market impact on host countries (so far)