(BQ) Part 2 book Contemporary labor economics has contents: Mobility, migration, and efficiency; the economic impact of unions; the economic impact of unions bargaining; labor market discrimination; government and the labor market - legislation and regulation; the distribution of personal earnings,...and other contents.
9 www.downloadslide.com Chapter Mobility, Migration, and Efficiency After reading this chapter, you should be able to: Distinguish between the various types of labor mobility and explain the relative importance of each Use the analytical framework of human capital investment to explain the migration decision of a household Discuss the determinants of migration Discuss the economic consequences of labor migration Explain how capital and product flows affect wage differentials and labor mobility Summarize the history of U.S immigration policy and critically evaluate the economic impact of illegal immigration You most likely know someone who has recently changed employers, occupations, or job locations Indeed, the movement of workers—labor mobility—is one of the striking features of labor markets Alvarez, an auto mechanic, moves from Arizona to Arkansas Pearson, a public school teacher, quits to become a private detective Kioski, an executive of a North Carolina firm, gets transferred to New Mexico In the real world, changes are common in such things as product demand, labor productivity, levels of human capital, family circumstances, and personal attitudes toward nonwage amenities These changes induce some workers to switch employers, occupations, geographical locations, or some combination of all three Also, employers respond to changing economic circumstances by hiring, transferring, or discharging workers; closing or expanding present facilities; or moving operations to new locations Combined, these actions of workers and employers produce much movement of labor from employer to employer, occupation to occupation, and place to place Careful observation often reveals that this mobility arises in response to t ransitional www.downloadslide.com 264 Chapter 9 Mobility, Migration, and Efficiency wage differentials, which tend to erode as markets move toward equilibrium Mobility is central to the operation of labor markets; it promotes allocative efficiency by shuffling workers to society’s highest-valued employments TYPES OF LABOR MOBILITY The boxes in Figure 9.1 categorize several important kinds of labor mobility The columns of the boxes identify locational characteristics of the employment change, and the rows indicate occupational characteristics Let’s describe the kind of labor mobility associated with each box Box I: Job Change/No Change in Occupation or Residence Box I indicates mobility in which neither the worker’s occupation nor residence changes This form of mobility occurs frequently—for example, when electrical engineers switch employers within California’s Silicon Valley or when automobile salespeople quit one dealership to work for another This category also includes transfers of employees from one of a firm’s units to another in the same local area—for example, when a bank employee is reassigned from one branch of a local bank to another FIGURE 9.1 Types of Mobility Mobility can take several forms, four of which are summarized by boxes I through IV Specifically, it can involve a job change, but no change in occupation or residence (box I); an occupational change, but no change in residence (box II); a geographic move to a job in the same occupation (box III); or geographic migration accompanied by a change in occupation (box IV) Different Same I III II IV Occupation Same Different Type of Mobility Location www.downloadslide.com Chapter 9 Mobility, Migration, and Efficiency 265 Box II: Occupational Change/No Change in Residence This box identifies changes in occupation not accompanied by changes in residence Much of this occupational mobility involves moves to closely related occupations, such as when a carpenter takes a job in a lumberyard or when a production worker is promoted to a supervisory position within a firm But in other cases, this mobility is characterized by a significant occupational change: For example, a part-time warehouse employee who completes college might accept a job as a securities broker in the same town Approximately out of 10 workers in the United States is employed in a different occupation than he or she was in the previous year A vast majority of these changes in occupation are accounted for by people who are less than 35 years old Many of these changes also involve geographic mobility (box IV) Box III: Geographic Change/No Change in Occupation Geographic mobility pertains to movements of workers from a job in one city, state, or nation to another About 12 percent of the total U.S population changes residences each year Moves from one county or state to another are involved in 34 percent of these residency changes Transfers of employees by companies range between 400,000 and 500,000 annually In recent years, net immigration to the United States has been about million people per year In many cases, geographic moves cause changes in jobs but not changes in occupations Examples: An executive for an aerospace firm gets transferred from Wichita to Seattle; a farmworker moves from Mexico to the United States; a corporate lawyer leaves a New York City law firm to join one in Boston; a professional football player gets traded from New Orleans to Chicago Box IV: Geographic Change/Change in Occupation WW9.1 Approximately 30 percent of geographic job-related moves are accompanied by changes in occupations; thus, these changes represent both geographic and occupational mobility For example, a discharged steelworker might leave Pennsylvania to take a job as a construction worker in Arizona Or perhaps a high school teacher might move from a small town to take a position as an insurance claims adjuster in a distant urban area To limit our focus and retain clarity, we will confine our attention to geographic mobility (boxes III and IV) in the remainder of the chapter But much of the analysis that follows can also be directly applied to the other forms of labor mobility MIGRATION AS AN INVESTMENT IN HUMAN CAPITAL Labor migration has been extensively studied by economists, sociologists, demographers, and geographers One important way economists have contributed to the understanding of geographic mobility is through the development and testing of the human capital model of migration We know that human capital consists of the www.downloadslide.com 266 Chapter 9 Mobility, Migration, and Efficiency 9.1 World of Work The Decline in Geographic Mobility* Migration rates within the United States rose gradually from 1900 to 1980, but since then they have steadily dropped In the 1981–1990 period, the annual interstate migration rate was 2.9 percent By the 2001–2010 period, it had dropped to 1.7 percent Migration rates have fallen for both short- and long-distance moves and for nearly all subgroups of the population Molloy, Smith, and Wozniak examine the causes of the post–1980 decline in migration rates They find that shifts across demographic and socioeconomic groups can little to explain the decline They offer four other possible explanations of the fall in migration First, the rise of two-career couples may have made such couples less willing to move Second, the rise in telecommuting has reduced the need for workers to move for a job but is unlikely to play a major role as the share of workers working at home rose from 2.1 percent in 1980 to only 4.1 percent in 2009 Third, locations may become less specialized in the goods and services produced, and so the available jobs are more similar across the country There is some evidence to support this hypothesis as the share of the population in densely populated cities has fallen, while the share in less dense metropolitan areas has risen Lastly, amenities have become more similar across areas and so there is less of a need to move Molloy, Smith, and Wozniak also examine the role of the decline in the housing market and the economy since the drop in migration since 2005 They argue that the economy did not play a large role since migration dropped before the start of the recession The housing market is a more likely candidate since the timing of the decline in the housing market more closely matches the drop in migration The housing market decline may affect migration since those homeowners with negative equity (their mortgage exceeds the value of their home) may be less willing to move However, Molloy, Smith, and Wozniak discount the role of the housing market decline since the drop in migration rates was similar for renters and homeowners, and states with a higher portion of homes with negative equity did not have a larger drop in migration * Based on Raven Molloy, Christopher L Smith, and Abigail Wozniak, “Internal Migration in the United States,” Journal of Economic Perspectives, Summer 2011, pp 173–96 income-producing skill, knowledge, and experience embodied within individuals This stock of capital can be increased by specific actions—investments in human capital—that require present sacrifices but increase the stream of future earnings over one’s lifetime Such actions include obtaining more education, gaining added training, and maintaining one’s health Migration to a higher-paying job is also a human capital investment because it entails present sacrifices to obtain higher future earnings Will migration occur in all situations where a potential exists for increased lifetime earnings? The answer is no because there are costs associated with the migration investment that must be weighed against the expected gains The main costs are transportation expenses, forgone income during the move, psychic costs of leaving family and friends, and the loss of seniority and pension benefits According to our analysis in Chapter 4, if the present value of the expected increased earnings exceeds the present value of these investment costs, the person will choose to move If the opposite is true, the individual will conclude that it is not worthwhile to www.downloadslide.com Chapter 9 Mobility, Migration, and Efficiency 267 igrate, even though the earnings potential in the destination area may be higher m than in the present location.1 Equation (9.1)—a modification of Equation (4.3) in Chapter 4—gives the net present value of migration: N E − E N C Vp = a − − Z a n (1 + i) (1 + i) n n=1 n=1 (9.1) where Vp = present value of net benefits E2 = earnings from new job in year n E1 = earnings from existing job in year n N = length of time expected on new job i = interest rate (discount rate) n = year in which benefits and costs accrue C = direct and indirect monetary costs resulting from move in the year n Z = net psychic costs of move (psychic costs minus psychic gains) In Equation (9.1), if Vp > 0, implying that the expected earnings gain exceeds the combined monetary and net psychic investment costs, the person will migrate If, conversely, Vp < 0, the person will remain in his or her present job and location All else being equal, the greater the annual earnings differential (E2 − E1) between the two jobs, the higher will be the present value of the net benefits (Vp), and the more likely it will be that an individual will migrate THE DETERMINANTS OF MIGRATION: A CLOSER LOOK Various factors besides the annual earnings differential (E2 − E1) influence the discounted present value of the total earnings and costs streams in Equation (9.1) and thereby affect the present value of the net benefits and the decision to migrate These factors or determinants of migration include age, family circumstances, education, distance, and unemployment Age Migration studies consistently find that age is a major factor determining the probability of migration All else being equal, the older that a person is, the less likely he The classic article about this topic is by Larry A Sjaastad, “The Costs and Returns of Human Migration,” Journal of Political Economy, suppl., October 1962, pp 80–93 For a survey of labor mobility models, see Michael J Greenwood, “Internal Migration in Developed Countries,” in Mark R Rosenzweig and Oded Stark (eds.), Handbook of Population and Family Economics (Amsterdam: Elsevier, 1997), pp 647–720 Also see John Kennan and James R Walker, “The Effect of Expected Income on Individual Migration Decisions,” Econometrica, January 2011, pp 211–51 www.downloadslide.com 268 Chapter 9 Mobility, Migration, and Efficiency or she is to migrate There are several reasons for this, each having to with reducing the gain in net earnings from migrating or increasing the costs of moving First, older migrants have fewer years to recoup their investment costs Given a specific cost of migrating, the shorter the time period one has to gain the annual earnings advantage, the smaller the Vp term in Equation (9.1) A young person may view a relatively small wage differential as significant over his or her lifetime; a person who is two or three years away from retirement is not likely to incur migration costs to achieve this same short-lived annual differential Second, older people tend to have higher levels of human capital that are specific to their present employers Age, length of time on a job (job tenure), and annual wages are all positively correlated The longer a person’s job tenure, the greater the amount of on-the-job training and employer-financed investment of a specific variety he or she is likely to have This human capital, by definition, is not transferable to other jobs; thus, the wage one receives after several years of job tenure partially reflects a return on a specific investment in human capital and is likely to be higher than the wage obtainable elsewhere Regardless of the length of time available to recoup the investment costs, older people may, therefore, be less likely to migrate.2 The cost of moving is a third age-related consideration affecting migration Older people often have higher migration costs than younger people For example, a young person may be able to transport possessions across the country in a 4-by-8-foot U-Haul trailer, whereas an older person may need to hire a professional mover who uses a moving van Or as another example, a younger person who migrates may lose little seniority or future pension benefits, whereas an older person may incur very large costs of this type.3 Also, the psychic costs of migration may rise with age Older people are more likely than younger workers to have roots in their present communities, children in the local school systems, and an extensive network of workplace friends The higher these net psychic costs—Z in Equation (9.1)—the lower the value of Vp and the less likely one is to migrate Finally, the inverse relationship between age and migration exists partially because people are most mobile after completing lengthy investments in human capital Many people begin “job shopping” at the end of high school—ages 18 to 19—which may result in geographic moves.4 Migration is even more pronounced for college graduates who enter regional and national labor markets It, therefore, is not surprising that the peak age for labor migration in the United States is 23 Family Factors The potential costs of migrating multiply as family size increases; therefore, we would expect married workers to have less tendency to migrate than single people, other factors such as age and education being constant Furthermore, it seems Jacob Mincer and Boyan Jovanovic, “Labor Mobility and Wages,” in Sherwin Rosen (ed.), Studies in Labor Markets (Chicago: University of Chicago Press, 1981), pp 21–63 For evidence that the prospect of leaving behind an employer-provided pension constitutes a high cost of changing jobs, see Steven Allen, Robert Clark, and Ann McDermed, “Pensions, Bonding, and Lifetime Jobs,” Journal of Human Resources, Summer 1993, pp 463–81 William Johnson, “A Theory of Job Shopping,” Quarterly Journal of Economics, May 1978, pp 261–78 www.downloadslide.com Chapter 9 Mobility, Migration, and Efficiency 269 logical to expect higher migration rates for married workers whose spouses either not work or work at low pay If both spouses earn a high wage, the family’s cost in forgoing income during the move will be high; and when combined with the possibility that one spouse will not find a job in the destination location, this cost reduces the net present value to the family from migration Finally, the presence of school-age children can be expected to reduce the likelihood of migration The parents and children may conclude that the psychic costs associated with the move are too great relative to the expected monetary gain These particular predictions from the human capital model are supported by empirical evidence Mincer has found that (1) unmarried people are more likely to move; (2) the wife’s employment inhibits family migration; (3) the longer the wife’s tenure, the less likely a family will migrate; and (4) the presence of school-age children in the family reduces migration.5 Education Within age groupings, the level of educational attainment beyond high school is a major predictor of how likely one is to migrate within the United States The higher one’s educational attainment, all else being equal, the more likely it is that one will migrate.6 Several reasons have been offered for this relationship College graduates and those with postgraduate training—MBAs, PhDs, lawyers, CPAs—search for employment in regional and national labor markets in which employers seek qualified employees These markets often have substantial job information and participants who possess excellent ability to analyze and assess the available information The potential for economic gain from migration also may be increased by the heterogeneity of many of the workers and positions.7 Union wage scales and minimum wage rates reduce wage differentials within occupations not requiring college training On the other hand, the wide disparities of pay for professional and managerial employees provide more opportunity to move to jobs entailing greater responsibility and pay Less specialized workers may have a greater opportunity to increase their earnings through occupational mobility within their present locale (box II in Figure 9.1) That route may not be open to highly specialized workers, who, therefore, may use geographic migration to achieve gains in earnings Other factors are also at work here College-educated workers are more apt to get transferred to new geographic locations and, if not transferred, are more likely Jacob Mincer, “Family Migration Decisions,” Journal of Political Economy, October 1978, pp 749–74 Where both the husband and the wife have a college degree, the probability of migration is percent lower when the wife works See Dora L Costa and Matthew E Kahn, “Power Couples: Changes in the Locational Choice of the College Educated, 1940–1990,” Quarterly Journal of Economics, November 2000, pp 1287–315 Also see Janice Compton and Robert A Pollak, “Why Are Power Couples Increasingly Concentrated in Large Metropolitan Areas?” Journal of Labor Economics, July 2007, pp 475–512 Larry H Long, “Migration Differentials by Education and Occupation: Trends and Variations,” Demography, May 1973, p 245 Also see Michael A Quinn and Stephen Rubb “The Importance of Education–Occupation Matching in Migration Decisions,” Demography, February 2005, pp 153–67 For evidence that highly educated workers are more likely to migrate in response to positive labor demand changes, see Abigail Wozniak, “Are College Graduates More Responsive to Distant Labor Market Opportunities?” Journal of Human Resources, Fall 2010, pp 944–970 www.downloadslide.com 270 Chapter 9 Mobility, Migration, and Efficiency than those with fewer years of schooling to have new jobs already in place upon migrating Thus, the probability of their failing to find a job once they move to the new area is zero, and the expected earnings gain over their lifetimes is increased Finally, people who have college degrees may attach fewer psychic costs Z to leaving their hometowns Many college students initially migrate to new areas to attend school in the first place, and this experience may make it easier for them to move again when new economic opportunities are present Or perhaps the fact that these people moved geographically to attend college indicates that they have lower innate psychic costs of or stronger preferences for migration than those who did not make that same choice initially For whatever reasons, studies show that people who move once are more inclined to migrate again Distance The probability of migrating varies inversely with the distance a person must move The greater the distance, the less information a potential migrant is likely to possess about the job opportunities available Also, transportation costs usually increase with distance Finally, the longer the physical distance of the move, the more probable it is that psychic costs will be substantial With respect to such costs, it is one matter to move across town, another to move to a nearby state, and still another to migrate across the country or to another nation Psychic costs may be partially reduced, but not necessarily eliminated, by following “beaten paths” and congregating in specific neighborhoods within the destination area Migrants often follow the routes previously taken by family, friends, and relatives These earlier migrants ease the transition for those who follow by providing job information, employment contacts, temporary living quarters, and cultural continuity But the longer the distance of the move, the less available the information about wage disparities and the greater the psychic cost; thus, the likelihood is less that one will migrate.8 Unemployment Rates On the basis of the human capital model, high unemployment rates in an origin location should increase the net benefits from migrating and push workers away That is, an unemployed person must assess the probability of gaining employment in the origin location relative to the probability of gaining employment at the potential destination Although evidence on this matter is surprisingly mixed, studies support the following generalizations: (1) Families headed by unemployed people are more likely to migrate than others, and (2) the rate of unemployment at the origin positively affects out-migration.9 Such out-migration may not always be as great as See Henry Herzog, Jr., and Alan M Schlottmann, “Labor Force Migration and Allocative fficiency,” Economic Inquiry, July 1981, pp 459–75; and Paul S Davies, Michael J Greenwood, and E Haizheng Li, “A Conditional Logic Approach to U.S State-to-State Migration,” Journal of Regional Science, May 2001, pp 337–60 See Julie DaVanzo, “Does Unemployment Affect Migration? Evidence from Micro Data,” Review of Economics and Statistics, November 1978, pp 32–37; and Davies, Greenwood, and Li, ibid Also see Raven E Saks and Abigail Wozniak, “Labor Reallocation over the Business Cycle: New Evidence from Internal Migration,” Journal of Labor Economics, October 2011, pp 697–739 www.downloadslide.com Chapter 9 Mobility, Migration, and Efficiency 271 we might expect, however, when the decision makers are mainly older and less educated workers or when unemployment compensation and other income transfers are relatively high Does the unemployment rate at the possible destination influence the migration decision by affecting the probability of getting employment and therefore increasing the expected value of discounted net benefits? No definitive conclusion can be reached for this question For one thing, the general unemployment rate does not always reflect the probability that a specific individual will find employment Also, in-migration itself can increase unemployment rates at the destination Nevertheless, one generalization is possible: Currently unemployed workers tend to migrate to destinations with lower-than-average unemployment rates Other Factors Many other factors may influence migration, and we list only a few of them here First, studies show that home ownership deters migration.10 Second, a higher rate of international immigration into an area tends to reduce in-migration rates and raise out-migration rates among native-born workers.11 This appears to be the result of depressed wages associated with increased international immigration Third, state and local government policies may influence labor migration Examples: (1) High personal tax rates that reduce disposable income may impede migration to the hightax area, (2) high levels of per capita government spending on services may increase in-migration, and (3) government policies that attract new industries are likely to cause greater migration to a particular locale Fourth, location characteristics have differing impacts on the migration decisions across age cohorts The business environment has a larger impact than consumer amenities on the decisions of younger, well-educated workers The reverse is true for workers near retirement age.12 Fifth, in the case of international migration, the language spoken at the destination is a prime factor affecting mobility Immigration quotas and emigration prohibitions also greatly influence international migration In addition, many international migrants are pushed from their present places of residence by political repression and war Sixth, union membership may be a determining factor By providing workers with a voice with which to change undesirable working conditions, unions may reduce voluntary “exits” and reduce mobility and migration (Chapter 11) Or from a different perspective, perhaps the wage gains that unions secure for workers reduce the incentive for members to migrate to new jobs Seventh, some scholars suggest that people increasingly have placed a high priority on crime and climate in their migration decisions.13 Although extremely diverse, these factors share a common 10 Richard K Green and Patric H Hendershott, “Home Ownership and Unemployment in the U.S.” Urban Studies, 2001, pp 1509–20 11 George J Borjas, “Native Internal Migration and the Labor Market Impact of Immigration,” Journal of Human Resources, Spring 2006, pp 221–58 12 Yong Chen and Stuart S Rosenthal, “Local Amenities and Life-Cycle Migration: Do People Move for Jobs or Fun?” Journal of Urban Economics, November 2008, pp 519–37 13 Richard J Cebula, “Migration and the Tiebout–Tullock Hypothesis Revisited,” Review of Regional Studies, Winter–Spring 2002, pp 87–96 www.downloadslide.com 272 Chapter 9 Mobility, Migration, and Efficiency feature: They all influence Vp in Equation (9.1) by affecting the expected gains from migrating, the expected costs, or some combination of each.14 THE CONSEQUENCES OF MIGRATION The consequences of domestic and international migration have several dimensions Initially we will examine the individual gains from migration by asking, What is the return on this form of investment in human capital? We then will analyze the increased output accruing to society from migration There we will also attempt to sort out the distribution of net gains Who benefits? Who loses? Personal Gains People expect to increase their lifetime utility when they voluntarily decide to migrate from one area to another One interesting way to conceptualize this expected gain is to ask, What amount of money would we have to pay to entice the migrant to reject the job opportunity? This dollar amount is an estimate of the migrant’s expected gain from moving to the new location Empirical Evidence Empirical studies confirm that migration increases the lifetime earnings of the average mover.15 The estimated rate of return is similar to that on other forms of investment in human capital, meaning it generally lies in the 10 to 15 percent range Caveats At least five cautions or complications must be mentioned when generalizing about rates of return to migration Uncertainty and Imperfect Information Migration decisions are based on expected net benefits, and most are made under circumstances of uncertainty and imperfect information High average rates of return not imply positive returns for all migrants In many instances, the expected gain from migration simply does not materialize—the anticipated job is not found at the destination, the living costs are higher in the new area than anticipated, the psychic costs of being away from family and friends are greater than expected, and the anticipated raises and promotions are not forthcoming Thus, there are major backflows in migration patterns.16 14 For a very readable summary of the various factors affecting migration, see Raven Molloy, Christopher L Smith, and Abigail Wozniak, “Internal Migration in the United States,” Journal of Economic Perspectives, Summer 2011, pp 173–96 15 For example, see Kristen Keith and Abagail McWilliams, “The Returns to Job Mobility and Job Search by Gender,” Industrial and Labor Relations Review, April 1999, pp 460–77 16 Among foreign-born immigrants, return migration is more likely among those who not perform well in the U.S labor market See George J Borjas and Bernt Bratsberg, “Who Leaves? The Outmigration of the Foreign-Born,” Review of Economics and Statistics, February 1996, pp 165–76 See also Patricia B Reagan and Randall J Olsen, “You Can Go Home Again: Evidence from Longitudinal Data,” Demography, August 2000, pp 339–50 ... Source: U.S Department of Homeland Security, 20 13 Yearbook of Immigration Statistics 2, 000 1,600 1,400 Immigrants 1 ,20 0 1,000 800 600 400 20 12 2010 20 08 20 06 20 04 20 02 1998 1996 1994 19 92 1990 1988... (3A ) VTPA )1B) Workers (2B) VMPB Annual Wage (3B) VTPB $21 ,000 $ 21 ,000 19,000 40,000 $25 ,000 $ 25 ,000 23 ,000 48,000 ( (2A) (1A ) VMPA Workers Annual Wage Labor Market B 21 ,000 69,000 17,000 57,000... Urban Studies, 20 01, pp 1509 20 11 George J Borjas, “Native Internal Migration and the Labor Market Impact of Immigration,” Journal of Human Resources, Spring 20 06, pp 22 1–58 12 Yong Chen and