1. The Brain Drain: Evidence from U.S. European Expatriates Gilles Saint-Paul Munich Economic Summit June 5 2008

2. The Concern Europe has pledged to become the most advanced knowledge society in the world 2 years from now (!) For this it is crucial to retain the most talented individuals: entrepreneurs, innovators, researchers, designers, artists… Yet it is observed that these top people quite often move to the United States

3. The suspects High marginal tax rates High tax on wealth in some countries Regulatory barriers put a drain on creative activities: – Product market regulation – Labor market regulation – Large state involvement in education, media…

4. How serious is the problem ? I will look at the characteristics of European expatriates in the United States I will compare them to their non-expat compatriots, as well as the U.S. labor market I will do my best to approximmate « Exceptional » individuals

5. Data: U.S. census, 1990 and 2000 Country of birth used as defining variable – Potential measurement error due to Americans born abroad Look at 6 countries: UK, Belgium, France, Germany, Italy, Spain

6. How many people?

7. Is that significant? Brain drain affects GDP per capita and the distribution of income in the home country if migrants have different characteristics from non-migrants Otherwise, only effect is on total population But then it would not be called a brain drain …unless Europe were only populated by brains

8. Example 10 % of the workforce is “Skilled” They earn 30 % of total wages Assume 1 % of the population emigrates Assume 30 % of them are “Skilled” The wage gap between the two would go up by 2.2 %, with +1.6 % for the skilled, -0.6 % for the unskilled GDP per capita = -0.4 %

9. Example II Assume now that the exodus is highly concentrated among the skilled (100 %) The inequality measure would increase by 10 % Skilled: + 7 %, Unskilled -3 % GDP per capita: -2.1 %

10. Do people eventually return?

11. Expats are highly employable

13. Expats are highly educated

14. Skilled workers are more represented, the higher the skill level

15. The process of skill concentration is accelerating:

16. So what ? Assume 0.5 % of the population has a PH.D. Assume 1 % of the population goes to the U.S. Assume 10 % of them have a Ph.D.  1 out of 5 Ph.Ds work in the U.S. Key question: are they the best ones ?

17. An extrapolation Since emigration rates are larger, the larger the education level, we can assume that the best Ph.Ds are more likely to emigrate According to Zucker et al. (2003), the top 5 % Ph.Ds. are critical for innovation and growth Assume the fraction of expatriates is twice higher in the top quartile of any skill range This would imply that 40-80 % of the “stars” are in the U.S.

18. The European Wage Premium:

19. The wage premium is higher for highly educated Europeans

20. Implication We know that highly educated workers are overrepresented Within each education group, highly talented workers are also over represented Furthermore, such overrepresentation is stronger for the highly educated

21. Expatriates are more likely to be entrepreneurs than Americans…

22. …and much more likely than their fellows left at home According to the Global Entrepreneurship Monitor, the fraction of entrepreneurs in Europe is around 4-5 %, about half its level in the U.S.

23. Conclusion The skill composition of expatriates is much better than in the source countries. Moderate consequences: – +2-3 % in the relative wage of the skilled – -0.5-0.7 % GDP per capita But effects could be much larger if “superstars” matter The loss in such individuals could be as high as 50 % The long-term growth potential of Europe would be reduced substantially