Econ 430 notes
Previous Concepts::Labor shortage/surplus, Scale and Substitution effects,
Chapter 10: Worker Mobility:
Once a new job is found, workers face monetary, and possibly psychic, costs of moving to new
surroundings—and in the case of immigration, the need to learn a new language and adapt to a new
culture makes these costs particularly burdensome.
Migration and Labor turnover as a n investment in Human Capital: The
human-capital model views mobility as an investment in which costs are borne in some early periodto
obtain returns over a longer period.
If the present value of the benefits associated with mobility exceeds the costs, both monetary and
psychic, we assume that people will decide to change jobs or move, or both. If the discounted stream of
benefits is not as large as the costs, then people will decide against such a change.
What determines the present value
of the net benefits of mobility—
that is, the benefits minus the costs
—determines the mobility decision.
Human-capital theory helps us
understand which workers are
most likely to undertake
investments in geographic mobility
and the directions in which
mobility flows will take place.
Human-capital theory predicts that
migration will flow from areas of
relatively poor earnings
possibilities to places where
opportunities are better. Studies of migratory flows support this prediction
Costs and benefits of migration:
Because immigrants are self-selected, and the costs of immigration are so high, personal discount rates
(or orientation toward the future) are critical and likely to be very different for immigrants and
nonimmigrants. Immigrants—like others who make significant investments in human capital— are more
likely to have lower-than-average personal discount rates.
Some countries have a more compressed (equal) earnings distribution than is found in the United States.
In these countries, the average earnings differential between skilled and unskilled workers is smaller,
implying that the returns to human-capital investments are lower than in the United States. Skilled and
professional workers from these countries (northern European countries are most notable in this regard)
have the most to gain from emigration to the United States. Unskilled workers in countries with more
,equality of earnings are well paid compared with unskilled workers here and thus have less incentive to
move. Immigrants to the United States from these countries, therefore, tend to be more skilled than the
average worker who does not emigrate.
In countries with a less equal distribution of earnings, than is found in the United States, skilled workers
do relatively well, but there are large potential gains to the unskilled from emigrating to the United
States. These unskilled workers may be blocked from making human-capital investments within their
own countries (and thus from taking advantage of the high returns to such investments that are implied
by the large earnings differentials). Instead, their human capital investment may take the form of
emigrating and seeking work in the United States. Less-developed countries tend to have relatively
unequal earnings distributions, so it is to be expected that immigrants from these countries (and
especially Mexico, which is closest) will be disproportionately unskilled.
Most studies of the returns to immigration have focused on comparisons of immigrants’ earnings with
those of native-born workers in the host country. For men who immigrated to the United States decades
ago, the path of their earnings relative to those of native-born Americans with similar amounts of labor
market experience.
While not reflecting the experience of recent immigrants, three generalizations about the relative
earnings of immigrants over time:
• Immigrants earn substantially less than their native-born counterparts when they first arrive in
the United States.
• Each succeeding cohort of immigrants has done less well upon entry than its predecessor
• The relative earnings of immigrants rise over time, which means that their earnings rise faster
then those of natives, especially in the first 10 years after immigration
That immigrants initially earn substantially less than natives is hardly surprising. Even after controlling for
the effects of education (the typical immigrant is less educated than the typical native), immigrants earn
less owing to their difficulties with English, their unfamiliarity with American employment opportunities,
and their lack of American work history (and employers’ consequent uncertainties about their
productivity).
The earnings of immigrants rise relatively quickly, which no doubt reflects their high rates of investment
in human capital after arrival. After entry, immigrants typically invest in themselves by acquiring work
experience and improved proficiency in English, and these investments raise the wages they can
command
Return migration highlights another important fact: immigration, like other human-capital investments,
entails risk—and not all such investments work out as hoped.
Characteristics of who is likely to migrate:
Age is the single most important factor in determining who migrates. There are two explanations for the
fact that migration is an activity primarily for the young. First, the younger one is, the longer the period
over which benefits from an investment can be obtained, and the larger the present value of these
benefits. Second, a large part of the costs of migration is psychic—the losses associated with giving up
,friends, community ties, and the benefits of knowing one’s way around. As we grow older, our ties to the
community become stronger and the losses associated with leaving loom larger.
Education: While age is probably the best predictor of who will move, education is the single best
indicator of who will move within an age group. Access to information and potential gains in earnings
are also IMP and tend to be acquired through education.
Distance: Human-capital theory predicts that as migration costs rise, the flow of migrants will fall. The
costs of moving increase with distance for two reasons. First, acquiring trustworthy information (often
from friends or colleagues) on opportunities elsewhere is easier—especially for workers whose jobs are
in “local” labor markets—when employment prospects are closer to home. Second, the time and money
cost of a move and trips back to see friends and relatives, and hence the psychic costs of the move, rise
with distance.
The impact on the receiving country and the “immigration surplus”:
Two opposing views of illegal immigration can be considered naïve:
• One view is that every employed illegal immigrant deprives a citizen or legal resident of a job.
According to this view, if x illegal immigrants are deported and others are kept out, the number
of unemployed Americans would decline by x.
• At the opposite end of the policy spectrum is the equally naive argument that the illegals
perform jobs no American citizen would do…" if you didn’t have rough laborers. We haven’t got
the rough laborers anymore..”
Both arguments are simplistic because they ignore the slopes of the demand and supply curves.
Consider, for example, the
labor market for the job of
“rough laborer”—any job
most American citizens find
distasteful. Without illegal
immigrants, the restricted
supply of Americans to this
market would imply a
relatively high wage (W1 in
Figure 10.2). N1 citizens
would be employed. If illegal
immigrants entered the
market, the supply curve
would shift outward and
perhaps flatten (implying
that immigrants were more
responsive to wage increases
for rough laborers than citizens were). The influx of illegals would drive the wage down to W2, but
employment would increase to N2
Are Americans unwilling to do the work of rough laborers?
, At the market wage of W2, many more immigrants are willing to work at the job than U.S. citizens are.
Only N3 citizens would want these jobs at this low wage, while the remaining supply (N2 - N3) is made
up entirely of immigrants. If there were no immigrants, however, N1 Americans would be employed at
wage W1 as rough laborers. Wages would be higher, as would the prices of the goods or services
produced with this labor, but the job would get done. The only shortage of American citizens is at the
low wage of W2; at W1, there is no shortage (review chapter 2 for a discussion of labor shortages).
Would deporting those illegal immigrants working as rough laborers create the same number of jobs for
U.S. citizens?
No. If the N2 - N3 immigrants working as laborers at wage W2 were deported and all other illegal
immigrants were kept from the market, the number of Americans employed as laborers would rise from
N3 to N1 and their wages would rise from W2 to W1 (Figure 10.2). N2 - N1 jobs would be destroyed by
the rising wage rate associated with deportation. Thus, while deportation would increase the
employment and wage levels of Americans in the market for laborers, it would certainly not increase
employment on a one-for-one basis.
The claim that immigration is harmful to American workers is often based on a single-market analysis like
that contained in Figure 10.2, where only the effects on the market for rough labor are examined. As far
as it goes, the argument is plausible. When immigration increases the supply of rough laborers, both the
wages and the employment levels of American citizens working as laborers are reduced. The total wage
bill paid to American laborers falls from W10N1B in Figure 10.2 to W20N3D. Some American workers
leave the market in response to the reduced wage, and those who stay earn less. Even if the immigration
of unskilled labor were to adversely affect domestic laborers, however, it would be a mistake to conclude
that it is necessarily harmful to Americans as a whole.
Immigration of “cheap labor” clearly benefits consumers using the output of this labor. As wages are
reduced and employment increases, the goods, and services produced by this labor are increased in
quantity and reduced in price.
Employers of rough labor (to continue our example) are benefited, at least in the short run. In Figure
10.2, profits are increased from W1AB to W2AC. This rise in profitability will have two major effects.
Raising the returns to capital, it will serve as a signal for investors to increase investments in plant and
equipment. Increased profits will also induce more people to become employers. The increases in
capital and the number of employers will eventually drive profits down to their normal level, but in the
end, the country’s stock of capital is increased and opportunities are created for some workers to
become owners.
One condition in which deportation would create jobs for American citizens on a one-for-one basis:
Previous Concepts::Labor shortage/surplus, Scale and Substitution effects,
Chapter 10: Worker Mobility:
Once a new job is found, workers face monetary, and possibly psychic, costs of moving to new
surroundings—and in the case of immigration, the need to learn a new language and adapt to a new
culture makes these costs particularly burdensome.
Migration and Labor turnover as a n investment in Human Capital: The
human-capital model views mobility as an investment in which costs are borne in some early periodto
obtain returns over a longer period.
If the present value of the benefits associated with mobility exceeds the costs, both monetary and
psychic, we assume that people will decide to change jobs or move, or both. If the discounted stream of
benefits is not as large as the costs, then people will decide against such a change.
What determines the present value
of the net benefits of mobility—
that is, the benefits minus the costs
—determines the mobility decision.
Human-capital theory helps us
understand which workers are
most likely to undertake
investments in geographic mobility
and the directions in which
mobility flows will take place.
Human-capital theory predicts that
migration will flow from areas of
relatively poor earnings
possibilities to places where
opportunities are better. Studies of migratory flows support this prediction
Costs and benefits of migration:
Because immigrants are self-selected, and the costs of immigration are so high, personal discount rates
(or orientation toward the future) are critical and likely to be very different for immigrants and
nonimmigrants. Immigrants—like others who make significant investments in human capital— are more
likely to have lower-than-average personal discount rates.
Some countries have a more compressed (equal) earnings distribution than is found in the United States.
In these countries, the average earnings differential between skilled and unskilled workers is smaller,
implying that the returns to human-capital investments are lower than in the United States. Skilled and
professional workers from these countries (northern European countries are most notable in this regard)
have the most to gain from emigration to the United States. Unskilled workers in countries with more
,equality of earnings are well paid compared with unskilled workers here and thus have less incentive to
move. Immigrants to the United States from these countries, therefore, tend to be more skilled than the
average worker who does not emigrate.
In countries with a less equal distribution of earnings, than is found in the United States, skilled workers
do relatively well, but there are large potential gains to the unskilled from emigrating to the United
States. These unskilled workers may be blocked from making human-capital investments within their
own countries (and thus from taking advantage of the high returns to such investments that are implied
by the large earnings differentials). Instead, their human capital investment may take the form of
emigrating and seeking work in the United States. Less-developed countries tend to have relatively
unequal earnings distributions, so it is to be expected that immigrants from these countries (and
especially Mexico, which is closest) will be disproportionately unskilled.
Most studies of the returns to immigration have focused on comparisons of immigrants’ earnings with
those of native-born workers in the host country. For men who immigrated to the United States decades
ago, the path of their earnings relative to those of native-born Americans with similar amounts of labor
market experience.
While not reflecting the experience of recent immigrants, three generalizations about the relative
earnings of immigrants over time:
• Immigrants earn substantially less than their native-born counterparts when they first arrive in
the United States.
• Each succeeding cohort of immigrants has done less well upon entry than its predecessor
• The relative earnings of immigrants rise over time, which means that their earnings rise faster
then those of natives, especially in the first 10 years after immigration
That immigrants initially earn substantially less than natives is hardly surprising. Even after controlling for
the effects of education (the typical immigrant is less educated than the typical native), immigrants earn
less owing to their difficulties with English, their unfamiliarity with American employment opportunities,
and their lack of American work history (and employers’ consequent uncertainties about their
productivity).
The earnings of immigrants rise relatively quickly, which no doubt reflects their high rates of investment
in human capital after arrival. After entry, immigrants typically invest in themselves by acquiring work
experience and improved proficiency in English, and these investments raise the wages they can
command
Return migration highlights another important fact: immigration, like other human-capital investments,
entails risk—and not all such investments work out as hoped.
Characteristics of who is likely to migrate:
Age is the single most important factor in determining who migrates. There are two explanations for the
fact that migration is an activity primarily for the young. First, the younger one is, the longer the period
over which benefits from an investment can be obtained, and the larger the present value of these
benefits. Second, a large part of the costs of migration is psychic—the losses associated with giving up
,friends, community ties, and the benefits of knowing one’s way around. As we grow older, our ties to the
community become stronger and the losses associated with leaving loom larger.
Education: While age is probably the best predictor of who will move, education is the single best
indicator of who will move within an age group. Access to information and potential gains in earnings
are also IMP and tend to be acquired through education.
Distance: Human-capital theory predicts that as migration costs rise, the flow of migrants will fall. The
costs of moving increase with distance for two reasons. First, acquiring trustworthy information (often
from friends or colleagues) on opportunities elsewhere is easier—especially for workers whose jobs are
in “local” labor markets—when employment prospects are closer to home. Second, the time and money
cost of a move and trips back to see friends and relatives, and hence the psychic costs of the move, rise
with distance.
The impact on the receiving country and the “immigration surplus”:
Two opposing views of illegal immigration can be considered naïve:
• One view is that every employed illegal immigrant deprives a citizen or legal resident of a job.
According to this view, if x illegal immigrants are deported and others are kept out, the number
of unemployed Americans would decline by x.
• At the opposite end of the policy spectrum is the equally naive argument that the illegals
perform jobs no American citizen would do…" if you didn’t have rough laborers. We haven’t got
the rough laborers anymore..”
Both arguments are simplistic because they ignore the slopes of the demand and supply curves.
Consider, for example, the
labor market for the job of
“rough laborer”—any job
most American citizens find
distasteful. Without illegal
immigrants, the restricted
supply of Americans to this
market would imply a
relatively high wage (W1 in
Figure 10.2). N1 citizens
would be employed. If illegal
immigrants entered the
market, the supply curve
would shift outward and
perhaps flatten (implying
that immigrants were more
responsive to wage increases
for rough laborers than citizens were). The influx of illegals would drive the wage down to W2, but
employment would increase to N2
Are Americans unwilling to do the work of rough laborers?
, At the market wage of W2, many more immigrants are willing to work at the job than U.S. citizens are.
Only N3 citizens would want these jobs at this low wage, while the remaining supply (N2 - N3) is made
up entirely of immigrants. If there were no immigrants, however, N1 Americans would be employed at
wage W1 as rough laborers. Wages would be higher, as would the prices of the goods or services
produced with this labor, but the job would get done. The only shortage of American citizens is at the
low wage of W2; at W1, there is no shortage (review chapter 2 for a discussion of labor shortages).
Would deporting those illegal immigrants working as rough laborers create the same number of jobs for
U.S. citizens?
No. If the N2 - N3 immigrants working as laborers at wage W2 were deported and all other illegal
immigrants were kept from the market, the number of Americans employed as laborers would rise from
N3 to N1 and their wages would rise from W2 to W1 (Figure 10.2). N2 - N1 jobs would be destroyed by
the rising wage rate associated with deportation. Thus, while deportation would increase the
employment and wage levels of Americans in the market for laborers, it would certainly not increase
employment on a one-for-one basis.
The claim that immigration is harmful to American workers is often based on a single-market analysis like
that contained in Figure 10.2, where only the effects on the market for rough labor are examined. As far
as it goes, the argument is plausible. When immigration increases the supply of rough laborers, both the
wages and the employment levels of American citizens working as laborers are reduced. The total wage
bill paid to American laborers falls from W10N1B in Figure 10.2 to W20N3D. Some American workers
leave the market in response to the reduced wage, and those who stay earn less. Even if the immigration
of unskilled labor were to adversely affect domestic laborers, however, it would be a mistake to conclude
that it is necessarily harmful to Americans as a whole.
Immigration of “cheap labor” clearly benefits consumers using the output of this labor. As wages are
reduced and employment increases, the goods, and services produced by this labor are increased in
quantity and reduced in price.
Employers of rough labor (to continue our example) are benefited, at least in the short run. In Figure
10.2, profits are increased from W1AB to W2AC. This rise in profitability will have two major effects.
Raising the returns to capital, it will serve as a signal for investors to increase investments in plant and
equipment. Increased profits will also induce more people to become employers. The increases in
capital and the number of employers will eventually drive profits down to their normal level, but in the
end, the country’s stock of capital is increased and opportunities are created for some workers to
become owners.
One condition in which deportation would create jobs for American citizens on a one-for-one basis:
