In this framework, the economic approach to the theory of immigration addresses
... Finally, some theories conjecture that the impact of migration on natives in ...
Economic Theory and International Migration Author(s): George J. Borjas Source: International Migration Review, Vol. 23, No. 3, Special Silver Anniversary Issue: International Migration an Assessment for the 90's (Autumn, 1989), pp. 457-485 Published by: The Center for Migration Studies of New York, Inc. Stable URL: http://www.jstor.org/stable/2546424 . Accessed: 10/03/2011 06:43 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=cmigrations. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact
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Economic International
Theory
And Migration
George J. Borjas University of California, Santa Barbara and National Bureau of Economic Research The modern literature on the economics of immigration focuses on three related issues: 1) what determines the size and skill composition of immigrant flows to any particular host country; 2) how do the immigrants adapt to the host country's economy; and 3) what is the impact of immigrants on the host country's economy? This article reviews the theoretical framework and empirical evidence provided by the economics literature on these questions. It demonstrates that the economic approach, using the assumptions that individual migra? tion behavior is guided by the search for better economic opportunities and that the exchanges among the various players are regulated by an immigration market, leads to substantive insights into these issues.
Economics studies the allocation of scarce resources among alternative uses. Labor is a scarce resource that maybe "allocated" to different labor markets. An economic theory of immigration analyzes the allocation of labor across international boundaries. The theory is based on the behavioral assumption that individuals migrate because it is in their benefit (either in terms of psychic satisfaction or income) to do so. Individual behavior, of course, is constrained by their wealth and by the existence of immigration policies that limit (or encourage) the entry of persons into particular geographic areas. In this framework, the economic approach to the theory of immigration addresses three questions:
1. What factors determine the direction, size and composition of the immigrant flow? That is, given any initial sorting of the population across countries, international differences in income opportunities, political conditions and immigration policies imply that incentives exist for some individuals to migrate to other countries. An economic This researchwas funded by a grant fromthe National Instituteof Child Health and Human Development,GrantNo. 1 R01 HD22544-01.
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theory of migration must provide some insights into which way the flows go, how large the flows are and which kinds of individuals become immigrants. 2. How do immigrants adapt to the host country? After migration takes place, immigrants find themselves in a foreign (and sometimes hostile) environment. A learning process about the host country's cultural, political and economic characteristics begins to take place and the immigrant begins to "assimilate." An economic theory of migration should describe the process by which this type of assimilation takes place and describe which factors make it more likely for successful assimilation to take place. 3. What is the impact of immigration on the economies of the sending and receiving countries? The large migration flows that occur across international boundaries will lead to significant changes in economic conditions in both the source and host countries. A theory of immigra? tion should describe the adjustments that take place in the various labor markets as the flows occur. addresses No single, unified theory of immigration that simultaneously all these issues yet exists. Instead, a number of theories or hypotheses have been developed to explore each (or a specific aspect) of the various questions individually. Thus we have theories (e.g., Hicks; 1939 and Sjaastad, 1962) which view migration as a human capital investment, and hence imply that migration is more likely the higher the returns and the lower the costs. Other theories explain the "brain drain" in terms of asymmetric information regarding the skill level of immigrants: the host country has more informa? tion about
immigrant skills than the source country (Kwok and Leland, 1982). Finally, some theories conjecture that the impact of migration on natives in the receiving country is likely to be small because immigrants take (or are forced to take) jobs that natives refuse to accept (Piore, 1979). All these theories, of course, focus on extremely narrow topics within the economics of immigration and may not even be logically consistent with each other. However, recent analytical developments make it likely that a comprehensive economic theory of immigration can and will be developed. These recent models, based on the neoclassical principles of utility-maxi? have mization for individuals for employers, and pro fit-maximization already provided insightful interpretations of empirical observations. This study presents a survey of this recent literature. Before proceeding to a discussion of these models, it is instructive to begin with what are perhaps the earliest analytical studies of immigration in the economics literature. The question of factor (in particular labor) mobility, of course, forms an integral part of international trade theory. The standard
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model in trade theory, due to Hecksher, Ohlin and Samuelson, begins by assuming that labor is immobile across countries. In the absence of immigra? tion flows, neoclassical trade theory yields two fundamental theorems that are very relevant to the study of migration (Ethier, 1986; Jones, 1987): 1. The Hecksher-Ohlin Theorem: A country exports goods that make intensive use of the country's relatively abundant factors. relatively That is, if a country has a relatively large population (i.e., it is relatively abundant in labor), and if labor is intensively used in the production of, for example, textiles, the country will export textiles. Free trade in goods will Theorem: 2. The Factor-Price Equalization equalize the prices of factors across countries. That is, even in the absence of migration flows, the existence of free trade in goods will lead to the equalization of the wage rates of labor and the price of capital across countries. These two theorems imply that since a labor abundant country is export? ing those goods that are relatively intensive in the production of labor, it is, in a sense, exporting labor. The export of labor intensive goods leads to the of wage rates across countries even if labor itself is immobile. equalization In other words, the trading of goods substitutes for the trading of people. The introduction of immigration into the Hecksher-Ohlin-Samuelson framework, therefore, does not fundamentally alter the results of the analysis since the international immigration of income-maximizing persons is simply another way of ensuring that factor prices are equalized across
countries. This theoretical structure addresses some of the questions that were posed at the outset: which way do immigrant flows go; what happens to the economies of the sending and receiving countries; what will be the size of the immigrant flow? In addition, the Hecksher-Ohlin-Samuelson framework has the advantage that it treats migration flows and goods flows symmetrically. Hence it presents a systematic study of the "internationaliza? tion" of the world economy, whether this internationalization is caused by the trading of goods or by the trading of people. Unfortunately, the model becomes very complex when it is expanded beyond the simplest 2x2x2 framework (i.e., 2 countries, 2 goods, 2 factors of production). Hence, it becomes quite difficult to analyze such questions as the composition of the 9 The derivationof the twotheoremsrequiresa numberof technicalassumptionsthathave notbeen discussedin the text.These include assumptionsabout the preferencesof consumers in bothcountriesand about thetechnologiesused in theproductionofgoods. The introduction ofmigrationintotheHecksher-Ohlin-Samuelson allowsthederivationoftheFactorframework Price Equalization Theorem even if some of the technicalassumptionsdo not hold (Ethier, 1987).
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immigrant flow, the impact of changes in immigration policy, etc. Recent theoretical developments, therefore, ignore the international trade aspects of labor migration and focus solely on the study of migration flows. They have borrowed, however, one of the key insights of the inter? national migration literature: that there exists an "immigration market." Just as goods are traded across international boundaries in the international goods market, people are also "traded" across the same boundaries in the immigration market. The survey begins with a description and charac? terization of equilibrium in this marketplace. THE
IMMIGRATION
MARKET
The
of key idea guiding recent theoretical research in the economics is im? that there exists market" an immigration sorting "immigration migrants across potential host countries (See, Borjas, 1987c). Individuals residing in any source country consider the possibility of remaining there or of migrating to a number of potential host countries. Individuals make the migration decision by considering the values of the various alternatives, and choosing the option that best suits them given the financial and legal constraints that regulate the international migration process. These constraints include not only the individual's financial resources (which determine the extent to which the migration is feasible), but also include the legal environment imposed by both sending and receiving countries. For instance, host countries legislate immigration policies based on the immigrant's skills, wealth, occupation, political background and/or with residents of the host country. These various family relationships statutes generate variations in migration costs among different individuals or among individuals originating in different countries. In a sense, host countries "compete" through these immigration policies for the human and
physical capital of the potential migrants. Host countries with a certain set of immigration regulations (for example, those that make it easy to migrate if the potential immigrant has a family member in the host country) attract different types of persons than host countries with other sets of regulations (for example, a point system based on the individual's skills or occupations). Similarly, source countries may regulate the departure of their residents. In some countries (e.g., the Soviet Union) emigration legislation imposes fines or penalties on potential migrants and makes it very difficult for residents to leave the source country. Source countries, therefore, enter the immigration market by setting emigration policies that regulate the types of individuals that can obtain exit visas.
Neoclassical economic theory assumes that individuals maximize utility: individuals "search" for the country of residence that maximizes their As noted the search is constrained the individual's above, well-being. by
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financial resources, by the immigration regulations imposed by competing host countries and by the emigration regulations of the source country. In the immigration market the various pieces of information are exchanged and the various options are compared. In a sense, competing host countries make "migration offers" from which individuals compare and choose. The information gathered in this marketplace leads many individuals to con? clude that it is "profitable" to remain in their birthplace (i.e., they find it expensive to migrate to another country). Conversely, other individuals conclude that they are better off in some other country. The immigration market nonrandomly sorts these individuals across host countries. An im? of economic the kind of portant contribution theory is to describe that takes in this equilibrium sorting marketplace. place It is important to note that although the idea of an immigration market is somewhat novel in the immigration literature, the notion that different agents are considering the allocation of resources among alternative uses and that this allocation is guided by a market basically defines economics. Formally, there is little difference between the problem of allocating in? dividuals among countries and the problem of allocating individuals among jobs. In both problems, individuals consider a number of options to which they can allocate their time. Firms (or countries) offer different "employ? ment" contracts. Individuals compare these offers and nonrandomly sort themselves among the available jobs (countries). This approach to the economics of immigration makes it very clear that both host and source countries can have a major impact on the number and of the immigrant flow by altering immigration composition policies. Similarly, changes in the levels of economic activity in the various countries will also have a major impact on the size and composition of the immigrant flow since these changes basically alter the nature of the "offer" made by competing countries to potential migrants. It will be seen that this approach of the types leads to a very clear ? and empirically testable?categorization of immigrant flows that arise in a world where individuals search for the "best" country.
A MODEL
OF
IMMIGRATION
The characteristics of the sorting generated by the immigration market are best understood in a simple model where there are only two countries, the source country and the host country (See, Borjas, 1988; Roy, 1951). The to a larger number of countries complicates the technical generalization of the model without fundamentally changing the key characteristics aspects of the sorting. In addition, it may be assumed that individual migration is of incomes across countries. Obviously, incomeguided by comparisons maximization is a very strong assumption since individuals also consider
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other aspects of the countries in their migration decisions (e.g., weather, culture, the crime rate, etc.). It can be shown, however, that (under some is a necessary condition for utility max? assumptions) income-maximization imization (Hirshleifer, 1970). The income-maximization hypothesis has been used successfully in the human capital literature, and its use here is justifiable because the model then leads to an empirically testable charac? terization of the optimal sorting of immigrants across countries. Residents of the source country have (log) earnings terized by the earnings function: logw0
=
X(50 + e0
which are charac?
(1)
where w0 are the individual's earnings in the source country (country 0), X is a vector of observable demographic characteristics (such as education and age) and e0 is a random variable which is assumed to be normally distributed with mean zero and variance a ^. In addition, the disturbance variables X. e0 is assumed to be uncorrelated with the socioeconomic It is useful to interpret e0 as the component of earnings associated with unobserved "ability" or "luck" among individuals with the same observable skills (i.e., with similar demographic variables X). It should also be noted that the assumption that e0 is normally distributed, although standard in the literature, is quite applicable for the problem at hand. Since the logarithm of earnings is assumed to be normally distributed, earnings will be log-nor? mally distributed and positively skewed (i.e., a long tail to the right of the earnings distribution). The assumed shape of the earnings distribution, therefore, is quite close to the actual shape of observed income distributions for many countries (Lydall, 1968). The earnings structure facing individuals participating market of the host country (Country 1) is given by: logw1
=
X61 + e1
in the labor
(2)
where el is also assumed to be normally distributed with mean variance a ^ and el is also independent of X.
zero and
The random variables e0 and el have correlation coefficient/?. If/? is positive and near unity, the labor markets of the host country and the source country "value" unobserved ability in the same way. That is, persons who are able or "lucky" due to unobservable factors perform well in both countries. On the other hand, if/? is small or negative, persons who do relatively well in one country find that the other country does not value their skills as highly skills are, (and perhaps will attach a negative value to them). Unobserved
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in a sense, "specific" to the country of origin. It seems reasonable to suppose that for most pairings of source and host countries, the parameter/? is likely to be positive and large. There are, however, interesting cases where this assumption need not be true.
A few technical points about equations (1) and (2) are worth noting. First, note that the variables w0 and wl do not necessarily have to represent the individual's earnings in any given year. Instead they can be defined in terms of the present value of the earnings profiles of the individual in each of the two potential countries of residence. This interpretation is quite sensible of since it says that migration behavior is determined by a comparison lifetime earnings across potential countries. Second, the parameter vectors
