Labor Market and Fiscal Impacts of International Migration:

Lectures 3 & 4

Gordon H. HansonUCSD and NBER

2

Introduction

Last three lectures What explains small scale, positive selection, and positive sorting

in international migration

Illegal migration

Today What impact does international migration have on the labor

markets of sending and receiving countries? Do changes in national labor supply affect wages?

What are implications of global labor flows on fiscal accounts in sending countries for migrants? Does outflow of labor increase net tax burden on those that remain?

3

Rise in foreign born as share of OECD population

4

  1995 2000 2005 Δ1995-2005

Australia 23.0 23.0 23.8 0.8

Austria 10.5 13.5

Belgium 9.7 10.3 12.1 2.4

Canada 16.6 17.4 19.1 2.5

Czech Republic 4.2 5.1 0.9

Denmark 4.8 5.8 6.5 1.7

Finland 2.0 2.6 3.4 1.4

Germany 11.5 12.5

Greece 10.3

Hungary 2.8 2.9 3.3 0.5

Ireland 6.9 8.7 11.0 4.1

Netherlands 9.1 10.1 10.6 1.5

New Zealand 16.2 17.2 19.4 3.2

Norway 5.5 6.8 8.2 2.7

Portugal 5.4 5.1 6.3 0.9

Slovak Republic 2.5 3.9

Spain 5.3

Sweden 10.5 11.3 12.4 1.9

Switzerland 21.4 21.9 23.8 2.4

United Kingdom 6.9 7.9 9.7 2.8

United States 9.3 11.0 12.9 3.6

5

Rising share of immigrants from low-income countries in the OECD

Low Income Sending Region 1990 2000 Change

Mexico, Central America, Caribbean 0.149 0.202 0.053

Southeast Asia 0.086 0.102 0.016

Eastern Europe 0.057 0.099 0.042

Middle East 0.062 0.063 0.001

South Asia 0.041 0.052 0.011

North Africa 0.050 0.044 -0.006

South America 0.031 0.041 0.010

Central, Southern Africa 0.029 0.036 0.007

Former Soviet Union 0.031 0.029 -0.002

Total 0.540 0.672 0.132

High Income Sending Region

Western Europe 0.355 0.244 -0.111

Asia, Oceania 0.065 0.055 -0.010

North America 0.040 0.029 -0.011

Total 0.460 0.328 -0.132

6

Educational composition of immigration

Share in adult immigrant pop. Share in adult resident pop.

   primary

educationsecondry education

tertiary education

 primary

educationsecondry education

tertiary education

1990 EU 8 0.616 0.210 0.174 0.332 0.485 0.183

Canada, US 0.388 0.180 0.433 0.118 0.486 0.397

Australia, N. Zealand 0.303 0.322 0.375 0.311 0.391 0.298

2000 EU 8 0.510 0.240 0.250 0.233 0.541 0.226

Canada, US 0.367 0.181 0.453 0.060 0.427 0.513

  Australia, N. Zealand 0.285 0.267 0.448   0.248 0.425 0.327

7

National emigration rates vary and are persistent

Afghanistan

Albania

AlgeriaAngola

ArgentinaAustralia

Austria

Bahamas, The

BahrainBangladesh

Barbados

Belgium

BeninBhutanBolivia

BotswanaBrazil

Brunei

Bulgaria

Burkina FasoBurundi

Cambodia

Cameroon

Canada

Cape Verde

Central African RepublicChadChile

China

ColombiaComoros

Congo, Dem. Rep.Congo, Rep.Costa Rica

Cote d'Ivoire

Cuba

Cyprus

Czech RepublicDenmark

Djibouti

Dominican Republic

Ecuador

Egypt

El Salvador

Equatorial Guinea

Ethiopia

Fiji

Finland

FranceGabon

Gambia, TheGermanyGhana

GreeceGuatemala

GuineaGuinea-Bissau

Guyana

Haiti

HondurasHong Kong

Hungary

Iceland

IndiaIndonesiaIranIraq

Ireland

IsraelItaly

Jamaica

JapanJordan

KenyaKorea

Kuwait

Lao PDR

Lebanon

Lesotho

Liberia

Libya

Luxembourg

Macao, China

MadagascarMalawiMalaysiaMali

Malta

Mauritania

MauritiusMexico

Mongolia

Morocco

MozambiqueMyanmarNamibiaNepal

Netherlands

New Zealand

Nicaragua

NigerNigeria

Norway

OmanPakistan

Panama

Papua New GuineaParaguayPeru

PhilippinesPoland

Portugal

Qatar

Romania

RussiaRwandaSaudi Arabia

SenegalSierra LeoneSingapore

Solomon IslandsSomalia

South AfricaSpainSri Lanka

Sudan

Suriname

Swaziland

SwedenSwitzerland

Syrian Arab RepublicTaiwan

TanzaniaThailandTogo

Trinidad and Tobago

TunisiaTurkeyUK

USUgandaUnited Arab EmiratesUruguay

Venezuela, RBVietnamWest Bank and Gaza

ZambiaZimbabwe

0.1

.2.3

.4.5

Em

igra

tio

n r

ate

, 2

00

0

0 .1 .2 .3 .4 .5Emigration rate, 1990

8

Theory

Consider migration from a low wage country (eg, Mexico) to a high wage country (eg, the US)

How would migration effect wages and national income in the two countries?

Assumptions One good Two factors of production, labor and capital Only labor is mobile between countries All factors are fully employed (can relax this) Wage equals marginal revenue product

9

Solving for General Equilibrium

Putting the elements of the model together

Conditions for equilibrium in the labor market

Wage equals marginal revenue product of labor in US WUS = PUS*MPLUS

Wage equals marginal revenue product of labor in Mexico WMX = PMX*MPLMX

World labor supply LUS + LMX = L

10

Solving for General Equilibrium

Conditions for equilibrium in markets for capital

Rental price of capital = revenue MP of capital: US: RUS=PUS*MPKUS

MX: RMX = PMX*MPKMX

We assume capital is immobile between countries (or whatever capital will move already has)

As a result, equilibrium in K markets holds by assumption and remains in the background of the model

All action comes from competing national demands for labor

11

Demand for Labor in the US

W

LUS

PUS*MPLUS

12

Demand for Labor in Mexico

W

LMX

PMX*MPLMX

13

Global Supply of Labor

W

← LMX LUS →

L

14

Labor Market Equilibrium with Labor Mobility

W

← LMX LUS →

PUS*MPLUSPMX*MPLMX

1W1

L1US L1

MX

15

Labor Market Equilibrium without Labor Mobility

W

← LMX LUS →

PUS*MPLUSPMX*MPLMX

WUS

L0US

L0MX

WMX

16

Labor Market Equilibrium with Labor Mobility

W

← LMX LUS →

PUS*MPLUSPMX*MPLMX

WUS

L0US

L0MX

WMX

W1

Immigrants

17

Labor Market Equilibrium with Labor Mobility

W

← LMX LUS →

PUS*MPLUSPMX*MPLMX

WUS

L0US

L0MX

WMX

W1

Immigrants

A B

C

E

D F

18

Wage and Income Effects of Migration

US natives Loss in labor income = A Gain in capital income = B Gain in GNP = B Gain in GDP = B+C+D+E

Mexico natives Gain in labor income (migrants) = C+D Gain in labor income (non-migrants) = F Loss in capital income = D+F Gain in GNP = C Loss in GDP = D+E

Gain in global GNP = B+C

19

Trends in migrant share of population, N. America

20

Impact of Emigration on Wages

Does the exodus of labor due to emigration drive up wages in sending countries?

Estimated elasticity of wages with respect to emigration for Mexico:

Using nat’l data, 0.4-0.6 (Mishra, Aydemir & Borjas)

Using regional data, 0.7 (Hanson)

Problems in estimating the wage elasticity of emigration (all of which would appear to bias estimate toward zero):

Estimate is reduced form, net of effect of capital adjustment

Emigration may be negatively correlated with local wage shocks

21

Impact of Emigration on Wages

Estimation framework

Demand for labor (L):

Demand for leisure (H):

Labor supply constraint:

Solving for wages (W) as a function of emigration (M):

t tln W ln L , 0

t tln W ln H , 0

t t tN L H M

tt 0 t t

0

Mln W ln W m , m , 0 1

L

22

Impact of Emigration on Wages

Estimation framework

Specification:

The wage for a given education (E) and experience (X) cell at time t is a function of the emigration shock and other shocks

E, X, T dummies control for time-invariant shocks specific to each education/experience group and year-specific shocks for each education group and each experience group

Identification is based on variation in the emigration shock within education-experience groups over time

ext ext extln W m E X T E X E T X T

23

Emigrants as a share of male population by education group, Mexico 1960-2000

24

Labor impacts in receiving countries

There is an enormous literature on the impact of foreign labor inflows on the US labor market

Studies using national-level data find that immigration reduces wages for US native workers, with strongest effects being felt by low-skilled workers

Studies using city or state-level data find that immigration’s wage impacts are small

What are flaws in two approaches to studying labor market impacts of immigration? What is “true” impact of foreign labor inflows on labor markets?

25

Immigrant share of US workforce, by education

0

0.1

0.2

0.3

0.4

1960 1970 1980 1990 2000

Year

Fraction

High school dropouts

High school graduates

Somecollege

College graduates

26

US Immigrant supply shocks, by skill group

0.1

.2.3

.4.5

0.1

.2.3

.4.5

0 10 20 30 40 0 10 20 30 40

High school dropouts High school graduates

Some college College graduates

1960 1970 1980 1990 2000

Fra

ctio

n

Labor market experience

27

Immigrant share of Canadian workforce, by education

28

National-level regression (Borjas, 2003)

Let yijt be the mean value of a particular labor market outcome for native with education s, experience x, in year t. Stack the data across skill groups and calendar years and estimate:

yext = pext + E + X + T + (E × T) + (X × T) + (E × X) + ext,

E are fixed effects indicating educational attainment; X are fixed effects indicating work experience; T are fixed effects indicating calendar year; p is the immigrant share in the skill group.

Regressions weighted by sample size of education-experience-year cell. Standard errors clustered by education-experience.

Problems with this approach: Are there other shocks that could be correlated with immigration

inflows (eg, skill biased technological change)? What is counterfactual? Could immigration cause changes in

technology (which would have changed fixed effects)?

29

National-level results for US

Log weekly earnings

Employment rate (log odds)

Incarceration rate (log odds)

A. Least squares

Blacks -0.561 -0.489 0.100

(0.167) (0.092) (0.040)

Whites -0.669 -0.206 0.010

(0.250) (0.079) (0.015)

B. IV

Blacks -0.519 -0.488 0.105

(0.172) (0.098) (0.038)

Whites -0.640 -0.180 0.003

(0.255) (0.088) (0.016)

Multiply these coefficients by 0.73 to get a numerically sensible elasticity: dy/d(% change in supply)

30

US Simulation results, log weekly wage

1. Actual change

2. Predicted impact

3. % due to immigration

Blacks

High school dropouts -0.140 -0.083 59.5

High school graduates -0.085 -0.032 37.4

Some college 0.008 -0.033 --

College graduates 0.127 -0.044 --

All persons -0.060 -0.036 60.0

Whites

High school dropouts -0.206 -0.086 41.7

High school graduates -0.146 -0.033 22.8

Some college 0.050 -0.035 --

College graduates 0.102 -0.046 --

All persons -0.060 -0.037 61.7

31

Has immigration really changed the US wage structure?

32

Correlation in native wages & immigrant inflows for US cities (Card, 2005)

33

Assessing the literature

National level data find negative correlation between native wages and immigrant inflows by skill group

Are all relevant shocks controlled for?

Could immigration affect technology?

Area studies find a zero correlation between wages for low-skilled natives and immigration inflows

Isn’t the size of the local immigrant population endogenous (with more immigrants in locations with higher wages)?

How does one instrument for local immigrant stock?

34

Resolving difference in results at national & local level Possible explanations

Local technology is endogenous to labor supply (Acemoglu, 1998; Lewis, 2005) Possible but insufficient data to evaluate to date

Internal native migration hides wage effects at local level (Card, 2001; Borjas, 2006) Conflicting results in the literature

Explanations rejected by the data Immigrant and natives are imperfect substitutes (Ottaviano &

Peri, 2005) Plausible but data are inconsistent with this hypothesis in the US

Sectoral output mix adjusts to absorb immigrants without wage effects as in HO model (Lewis, 2005; Hanson & Slaughter, 2001) Data reject this hypothesis

35

Emigration and Remittances

Workers' Remittances as % of GDP

Region 1992 2000 2005

East Asia & Pacific 0.6 1.0 1.5

Europe & Central Asia 1.4 1.4

Latin America & Caribbean 0.7 1.0 2.0

Middle East & North Africa 8.3 3.1 4.1

South Asia 1.8 2.9 3.5

Sub-Saharan Africa 0.8 1.5 1.6

36

Emigration and Remittances

Emigrants share income gains with family members through remittances

Fulfillment of migration contract (Lucas & Stark) and/or consumption smoothing across borders (Rosenzweig & Stark)

Positive income shock in emigrant’s country is associated with larger remittances to sending country (Yang)

Remittances support both consumption and investment spending (Yang) and may deepen financial markets (Woodruff et al.)

But there is no reason to believe primary motivation of remittances is investment in the sending country

Impediments to remittances Service fees on money transfers average 11% and elasticity of

remittances w.r.t. services fees is -0.15 (Freund & Spatafora)

37

Effects of emigration on public finances

The outflow of labor means that sending countries lose access to future tax payments of emigrants

But they also shed the obligation to provide departing workers with income transfers

What is net effect of tax loss and spending savings?

Presumption is that the net effect is negative

Most emigrants are relatively highly educated

Emigrants receive many of their lifetime transfers prior to their departure in the form of public education and child healthcare

38

Fiscal impacts of emigration in India (Desai et al.) In 2000, individuals with tertiary education made up 60.5% of Indian

emigrants but just 4.5% of India’s total population

Between 1990 and 2000, emigration rate for tertiary educated rose from 2.8% to 4.3% (but only 0.3% to 0.4% for total population

US has 64.6% of India’s skilled emigrants (48.9% of all Indian emigrants)

Estimation procedure Produce counterfactual incomes: income emigrants would have earned

in India based on observed characteristics and returns to these characteristics in India (using Mincer wage regression)

Calculate income tax losses by running counterfactual income through Indian income tax schedule (and calculate indirect tax losses)

Calculate expenditure savings by identifying categories for which savings would exist – eg, not interest payments and national defense

Emigration to US cost India net tax contributions of 0.24% of GDP in 2000, partially offset by the tax take on remittances of 0.1% of GDP

39

Other Impacts of Emigration

Does emigration affect international trade? Bilateral migration is positively correlated with bilateral trade, though

causality is unclear (Gould, Head & Reis) Countries with larger bilateral Chinese populations do trade more,

especially in differentiated products (Rauch & Trindade)

Does emigration affect international knowledge flows? Chinese and Indian engineers in Silicon Valley have contributed to

FDI and business formation in their home countries (Saxenian) Countries that send students to democratic countries for university

have stronger democratic leanings later on (Spilimbergo)

40

What We Don’t Know

The impact of emigration on wages and net tax revenues Do results for Mexico and India generalize?

The impact of skilled emigration on the stock of human capital What is the primary cause of skilled emigration? Does skilled emigration cause a brain drain or a brain gain?

The relative contribution of labor productivity, returns to skill, and migration costs to migration flows Are migration costs large enough to explain small migration flows? Is there a skill bias in receiving country immigration policies? How do sending-country policies affect emigration?

How does migration interact with trade and capital flows? Are trade and migration substitutes or complements? Do remittances help deepen financial markets?