1. CHAPTER 8 8-1 Geographic Migration as a Human Capital Investment
8-2 Internal Migration in the US
8-4 Immigration in the US
8-5 Immigration Performance in the US Labor Market
8-6 The Decision to Immigrate
8-7 PA: Labor Flows in Puerto Rico
8-9 Job Turnover: Facts
8-10 The Job Match
8-11 Specific Training and Job Turnover
8-12 Job Turnover and Age-Earnings Profile
Give a brief overview of the presentation. Describe the major focus of the presentation and why it is important.
Introduce each of the major topics.
To provide a road map for the audience, you can repeat this Overview slide throughout the presentation, highlighting the particular topic you will discuss next.

2. Introduction
Workers continually search for higher-paying jobs and firms search for cheaper workers.
Labor mobility is the mechanism labor markets use to improve the allocation of workers to firms (equalization of VMP across labor markets).
Real life: Not so simple. A lot of unknowns (job opportunities, workers’ productivity, etc.)

3. Introduction Determinants of Labor Mobility.
Migration: The act of moving from one place to another
Immigration: The act of moving from one country to another
Aim to answer questions as below:
What are the determinants of migration?
How do the migrants differ from the persons who choose to stay?
What are the consequences of migration on migrants and the local workers in the destination?

4. 8-1 Geographic Labor Migration as an Investment in Human Capital
Main assumption:
Mobility decisions are guided by comparing present value of lifetime earnings among alternative employment opportunities in different locations.
View migration as a form of human capital investment
Similar to the analysis in chapter 6, pick the location associated with the highest net present value of lifetime earnings (takes the moving costs into consideration!)

5. 8-1 Geographic Labor Migration as an Investment in Human Capital
Improvements in economic opportunities in the destination location   the net gains to migration and the likelihood of the move.
Improvements in economic opportunities in the current location   the net gains to migration and the likelihood of the move.
An  in migration costs   the net gains to migration, the probability of a move 
A worker decides to move if the net gain from moving is positive.

6. Internal Migration in the U.S.
Many studies  determine if size and direction of the migration flows are consistent with theory
These studies relate the rate of migration to variables explaining the differences in economic conditions (wages, unemployment, etc.) across these regions.

7. Internal Migration in the U.S.
The Impact of Region Specific Variables on Migration
Prob (migration) is sensitive to the income differential between the destination & origin
 10% Δw (destination vs origin)   Prob(migration)=7%.
There is a +ve correlation between improved employment conditions and the probability of migration.
 10%Δ emp. growth in origin   Prob(migration)=2%.
There is a -ve correlation between the distance and the probability of migration.
 100% Δ distance between locations   Prob(migration)=50%.

8. Internal Migration in the U.S.
The Impact of Region Specific Variables on Migration
These correlations help us understand the direction of the some of the major internal migration waves in the U.S.
African-American migration from South to North between 1900 and 1960s (90% to 60% concentration in South)
Better employment opportunities and less discrimination
Downsizing of the defense industry and a considerable decrease in the level of employment (750,000 jobs between and 9.1% local UR vs 7% national UR) in California reversing the trends of migration

9. Internal Migration in the U.S.
The Impact of Worker Characteristics on Migration
The age of a worker (-ve correlation) plays an important role in migration demographics.
Older workers less likely  to move less time to recoup returns
There is a +ve correlation between a worker’s educational attainment and the probability of migration
Highly educated may experience efficiency gains in job search/discovering employment opportunities.
Workers that migrate are more likely (+ve correlation) to return to the location of origin (return migration) and are more likely to migrate again (repeat migration).

10. Probability of Migrating across State Lines in 2005-2006, by Age and Educational Attainment

11. Internal Migration in the U.S.
Return and Repeat Migration
Workers who have just migrated are more likely (+ve correlation)
to return to the location of origin (return migration): 13%
are more likely to migrate again (repeat migration): 15%
Two factors can generate return and repeat migration flows:
Finding out that the initial migration decision was a mistake, hence the worker may move again to correct it.
Might be the career path that maximizes the PV of lifetime earnings in some occupations, even in the absence of uncertainty. (stepping-stone career paths)

12. Internal Migration in the U.S.
Why is there so little migration?
The answer is that: Migration costs may be very high.
Consider the simplistic case where a worker lives indefinitely.
The worker is indifferent between moving or not if the net gains from moving (PVB - PVA - MC) is equal to zero:

13. Internal Migration in the U.S.
Why is there so little migration?
Now if we divide both sides by wB, we would express moving costs as a fraction of the wages in the origin country (A):
Assuming a 5% discount rate, 20% wage premium in the destination country relative the average wage in the origin:
This formula would indicate that migration costs for a worker who is indifferent between migrating and staying should be 25 times his/her salary!!! Ex: If wA=20,000, then MC=$500k

14. 8-3 Immigration in the United States
There has been a resurgence of immigration to the United States in recent decades.
The United States receives the largest immigrant flow in the world.
The mix of countries of origin has changed substantially over time.
In the 1950s, 6% of immigrants came from Asia.
Presently, 31% of immigrants come from Asia.

15. Legal Immigration to the U.S. by Decade, 1820-2010
Congress enacted the national-origins quota system in 1920s, exercised preference towards immigrants from northwestern Europe.

16. 8-5 Immigrant Performance in the U.S. Labor Market
How do immigrants do in the U.S. labor market?
Compare the current earnings of newly arrived immigrants with the current earnings of immigrants who migrated years ago: Problematic! Explanation will follow
Immigrants who can adapt well and are successful in new jobs make a significant contribution to economic growth.
The economic impact of immigration depends on the skill composition of the immigrant flow.

17. The Age-Earnings Profiles of Immigrant and Native Men in the Cross Section
Immigrant earnings are initially below the earnings of natives. Explanation: Lack of U.S. specific skills (language, credentials, information)
Immigrant earnings profiles is steeper than the native-age earnings profile. In time, immigrants seem to experience economic assimilation and their earnings converge to to those of natives.
After residing in the U.S for 14 years, immigrants earn more than natives.

18. Assimilation and Cohort Effects
Main result from the previous figure (8-4):
Recent immigrants earn less than the ones that migrated many years ago (Story of economic assimilation)
Problematic: Draw inferences about a dynamic problem using a static (cross-sectional) sample (Cohort effects)
Inherent differences may exist between recent immigrants and ones who migrated 20 years ago

19. Assimilation and Cohort Effects
Consider a hypothetical situation where we ASSUME:
Separate immigrant waves with distinct productivities
Three waves/cohorts of immigrants: 1960, 1980 and 2000
Productivity of cohorts decline in time  i.e cohort is least productive
Suppose Native workers are as productive as 1980 cohort
No wage convergence in time  Age-earnings profiles are parallel
Suppose we observe the data from 2000 census
Suppose all immigrants arrive at the age of 20:
2000 wave (20yrs), 1980 wave (40yrs), 1960 wave (60yrs)

20. Assimilation and Cohort Effects
Using a snapshot of population with cross-sectional data to make dynamic inference when cohort effects are present leads to erroneous results!!!!
Connect P*,Q* and R* to trace out the age-earnings profile of immigrants using cross-sectional data (CC line – Bold Black)
This approach makes it seem as if there is wage convergence
CC crosses Native workers’ age-earnings profile at 40yrs of age, suggesting that immigrant earnings overtake those of natives after being in US for 20 years!

21. Assimilation and Cohort Effects
Fig 8-6: The Wage Differential between Immigrant &Native Men
at the Time of Entry
There is a NEGATIVE wage differential between the newly arrived immigrants and native workers: Newly arrived immigrants earn less
The wage differential has grown across time: Recent newly arrived immigrant cohorts are less productive than the older newly arrived immigrants

22. Assimilation and Cohort Effects
Fig 8-7: Evolution of Wages for Specific Immigrant Cohorts over the Life Cycle (Relative to Wages of Comparably Aged Native Men)
The cohorts that arrived in 1970s or 1980s start out at a much greater disadvantage, making the wage convergence to native workers unlikely.

23. 8-6 The Decision to Immigrate

24. 8-6 The Decision to Immigrate
Studies investigating the determinants of the decline in relative skills across immigrant waves point to a single culprit:
Changing national-origin mix of the immigrant flow
Two factors account for the dispersion in relative wages across national-origin groups:
Skills acquired in advanced, industrialized economies are more easily transferable to the American labor market. Industrial structure of less-developed countries rewards skills that are less useful in the American labor market.
Different types of immigrants come from different countries (heterogeneity of immigrant types)

25. The Roy Model
The Roy model considers the skill composition of workers in the source(origin) country.
Positive selection: Immigrants who are very skilled do relatively well in the U.S.
Certain industrialized countries have an egalitarian income distribution/policy where wealthy/able workers are taxed heavily to insure poor/unskilled workers.
Low return to high level of HC in the origin country 
Incentive for workers with high HC to migrate to U.S.
Immigrants with above-average skills are attracted from certain countries to the U.S.

26. The Roy Model
ii. Negative selection: Immigrants who are unskilled do relatively well in the U.S.
Consider countries with a high rate of return to human capital that typically have high degree of income inequality. Relatively, unskilled workers in U.S. fare better (earn higher income) due to more generous social support systems than these countries.
High return to low level of HC in the destination country  Incentive for workers with low HC to migrate to U.S.
Immigrants with below-average skills are attracted from certain countries to the U.S.
The relative return to skills determines the skill composition of the immigrants from different source countries.

27. The Distribution of Skills in the Source Country
The distribution of skills in the source country gives the frequency of workers in each skill level.
If immigrants have above-average skills, the immigrant flow is positively selected.
If immigrants have below-average skills, the immigrant flow is negatively selected.

28. The Self-Selection of the Immigrant Flow
Skills
Dollars
Do Not Move
Move sP
Source Country
U.S. sN
(a) Positive selection
(b) Negative selection
The relative return to skills determines the skill composition of the immigrants from different source countries.
Both workers and goods flow to those markets where they can get the highest price.
Immigrants who originate in countries that offer a low rate of return to HC will earn more than immigrants who originate in countries that offer a higher rate of return.

29. The Impact of a Decline in U. S
The Impact of a Decline in U.S. Incomes or an Increase in Migration Costs
Skills
Dollars sP
Source Country
U.S. old sN
(a) Positive selection
(b) Negative selection
U.S. new
U.S. old
U.S. new
sP new

30. 8-7 PA:Labor Flows in Puerto Rico
The case study of Puerto Rico confirms an important insight of the Roy model: skills flow to where they receive their highest return.
The rate of return to skills is much higher in Puerto Rico than in the United States, so the Roy model predicts that a relatively higher fraction of the least-educated Puerto Ricans would leave the island.
As of 2000, nearly 45 percent of Puerto Rican-born working age men who lacked a high school diploma had moved to the United States. In contrast, only 30 percent of working age men with at least a college education had moved to the United States.

31. 8-7 PA:Labor Flows in Puerto Rico
Puerto Rico became a possession of the U.S. after the Spanish-American War in The Jones Act of 1917 granted U.S. citizenship to all Puerto Ricans.
Despite the absence of legal restrictions, there was little out-migration until WWII. In 1940, the out-migration rate was 3.1%.
High unemployment in post-ware Puerto Rico and the introduction of low-cost air travel changed this trend. By 1960, it had risen to 21.1%.
The outflow slowed down in 1960s.

32. 8-7 PA:Labor Flows in Puerto Rico
The Puerto Rican case study is interesting for several reasons:
The outflow involved a large fraction of the island’s population and happened fast.
U.S. immigration policy did not restrict the number and skill composition of the Puerto Rican out-migration.
The island was both a source and a destination region.
It turns out that about 80-90% of the in-migrants entering PR wre born in U.S but have PR ancestry (NOT return-migrants!!!)

33. 8-7 PA:Labor Flows in Puerto Rico
Simultaneous presence of the two opposing flows creates a problem: Labour should presumably flow to the highest-paying area.
Easy to reconcile two-way flows with different types of people:
Wage gap(Age adj.), College vs HS grads: 125% (PR) vs 86%(US)
Roy model:
Higher fraction of the least-educated should leave the island of PR.
Higher fraction of the US migrants to PR should be well educated.
Low HC
Low Skill
High HC
High Skill

34. 8-9 Job Turnover: Stylized Facts
Newly hired workers tend to leave their jobs within 24 months of being hired (75%), while workers with more seniority rarely leave their jobs (10 year seniority: 5%).
Strong negative correlation between the probability of job separation and a worker’s age.
This fits with the hypothesis that labor turnover can be an investment in human capital.
Older workers have a smaller payoff period to recoup the costs associated with job search. Thus, they are less likely to search (or move).

35. 8-9 Job Turnover: Stylized Facts

36. 8-9 Job Turnover: Stylized Facts
The period of “job shopping” and frequent turnover seems to end by the time that workers are in their 30s.
Important differences between workers who quit vs are laid off:
On average, young men who quit get at least a 5% wage increase (relative to those of stayers).
Young men who are laid off suffer a 3% wage cut.
Differences between these workers (quit vs laid off) persist in the post-separation employment prospects as well:
U.K. Study: Workers affected by a mass layoff experienced a 15-20% wage reduction in post-separation outcomes.

37. 8-10 The Job Match Neo-classical model:
The equilibrium allocation of workers across firms  Maximizes the VMP of labor across firms.
A worker’s VMP would not increase if he/she were to switch to another firm, so no incentive for job separation.
Real life:
Nevertheless, quits and layoffs are commonly and persistently observed in the labor markets.
Job Turnover arises partly because of the differences in worker abilities and working conditions. Moreover, there is uncertainty on both sides (worker productivity & job opportunities.)

38. 8-10 The Job Match Notion of Job Match:
Workers and firms might improve their situation by shopping for a better job match.
If there was perfect information, workers will be instantaneously matched with jobs that produce the maximum overall surplus for both sides. Not the case in real life where there is uncertainty.
Job (efficient) turnover is the mechanism by which workers and firms correct matching errors and obtain a better and more efficient allocation of resources.

39. 8-11 Specific Training and Turnover
When a worker receives specific training, his productivity improves only at the current firm.
Once firm-specific skills are acquired, worker’s productivity exceeds his wage and worker’s wage should exceeds the wage he could get elsewhere.
This implies there should be a -tive correlation between the probability of job separation and job seniority.
Tempting to conclude (via cross-sectional evidence) that labor turnover rates  workers get more experienced.
However, need to show that a given worker’s probability of job separation will be lower with more seniority.

40. 8-11 Specific Training and Turnover
Consider a market with two types: Movers and Stayers
Movers: Grass is greener elsewhere, incur costs & move!
Stayers: Doubt that things will improve elsewhere, stay!
Movers: high propensity for turnover, unlikely for them to acquire a lot of seniority.
Stayers exhibit inertia, they tend to have higher job tenure.
–ve correlation with seniority and turnover
However, this correlation arises workers with low job tenures are likely to be movers, not because the probability of job separation declines with seniority.
Empirical evidence for moves vs stayers phenomenon.
Even after controlling for differences, the prob of job termination in the 1st year is 50%, 2nd year is 30% and the 3rd year is 25%. After 10 years, it is less than 3%.

41. 8-12 Job Turnover and the Age-Earnings Profile
Young people who quit often experience substantial increases in their wages, whereas workers who are laid off often experience wage cuts.
Job turnover causes an immediate shift on the level of mover’s age-earnings profile
The age-earnings profile of movers is discontinuous, shifting up when they quit and shifting down when they are laid off.
Long job matches encourage firms and workers to invest in specific training, and steepen the age-earnings profile.
As a result, stayers have a steeper age-earnings profile within any given job.

42. 8-12 Job Turnover and the Age-Earnings Profile
Many studies document that workers who have been on the job for a long time earn more than newly hired workers, even after controlling for age.
The wage gap between two similarly aged workers with one year of seniority difference is on the order of 2-3%.
Though this is consistent with specific training hypothesis, there is a heated debate in the literature. +ve correlation between earnings and job tenure across workers may exist due to randomly distributed good vs bad job matches.
In particular, workers in good matches would experience high wage growth with seniority but the ones in bad matches would not.
Hence, in this scenario, job tenure would not impact earnings. The empirical evidence is mixed and undecisive.