Labor Market and Fiscal Impacts of International Migration: Lectures 3 & 4 Gordon H. Hanson UCSD 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

Δ Australia Austria Belgium Canada Czech Republic Denmark Finland Germany Greece10.3 Hungary Ireland Netherlands New Zealand Norway Portugal Slovak Republic Spain5.3 Sweden Switzerland United Kingdom United States

5 Rising share of immigrants from low-income countries in the OECD Low Income Sending Region Change Mexico, Central America, Caribbean Southeast Asia Eastern Europe Middle East South Asia North Africa South America Central, Southern Africa Former Soviet Union Total High Income Sending Region Western Europe Asia, Oceania North America Total

6 Educational composition of immigration Share in adult immigrant pop.Share in adult resident pop. primary education secondry education tertiary education primary education secondry education tertiary education 1990EU Canada, US Australia, N. Zealand EU Canada, US Australia, N. Zealand

7 National emigration rates vary and are persistent

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  W US = P US *MPL US Wage equals marginal revenue product of labor in Mexico  W MX = P MX *MPL MX World labor supply  L US + L MX = L

10 Solving for General Equilibrium Conditions for equilibrium in markets for capital Rental price of capital = revenue MP of capital:  US:R US =P US *MPK US  MX:R MX = P MX *MPK MX 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 L US P US *MPL US

12 Demand for Labor in Mexico W L MX P MX *MPL MX

13 Global Supply of Labor W ← L MX L US → L

14 Labor Market Equilibrium with Labor Mobility W ← L MX L US → P US *MPL US P MX *MPL MX 1 W1W1 L 1 US L 1 MX

15 Labor Market Equilibrium without Labor Mobility W ← L MX L US → P US *MPL US P MX *MPL MX W US L 0 US L 0 MX W MX

16 Labor Market Equilibrium with Labor Mobility W ← L MX L US → P US *MPL US P MX *MPL MX W US L 0 US L 0 MX W MX W1W1 Immigrants

17 Labor Market Equilibrium with Labor Mobility W ← L MX L US → P US *MPL US P MX *MPL MX W US L 0 US L 0 MX W MX W1W1 Immigrants AB 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, (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):

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

23 Emigrants as a share of male population by education group, Mexico

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

26 US Immigrant supply shocks, by skill group

27 Immigrant share of Canadian workforce, by education

28 National-level regression (Borjas, 2003) Let y ijt 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: y ext =  p ext + 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 (0.167) (0.092)(0.040) Whites (0.250) (0.079)(0.015) B. IV Blacks (0.172) (0.098)(0.038) Whites (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 High school graduates Some college College graduates All persons Whites High school dropouts High school graduates Some college College graduates All persons

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 East Asia & Pacific Europe & Central Asia1.4 Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa

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 (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?