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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.
457
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INTERNATIONAL
MIGRATION
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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
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
459
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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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.
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
461
A MODEL
OF
IMMIGRATION
462
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X(50 + e0
(1)
X61 + e1
in the labor
(2)
zero and
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
463
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 <50and d l indicate the price that the source
and host countries are willing to pay for the individual's socioeconomic
characteristics. For instance, suppose that one of the variables in the X vector
is education. Then its coefficient in (1) indicates the percentage return to
an additional year of education in the source country, or the "rate of return"
to education in the source country, while the coefficient of education in (2)
gives the rate of return to education in the host country.
Finally, note that because the random terms e0 and el are assumed to
have zero mean, the term Xc50 gives the expected earnings for an individual
with demographic
characteristics X in the source country, while the term
the
for an individual
with the same
expected
Xdl gives
earnings
other
characteristics
in
the
host
In
words, the terms
country.
demographic
characteristics X
and
the
mean
of
a
with
person
Xc50
earnings
Xd? give
selected at random from the population. This "random" person, by con?
struction, has unobserved characteristics with value zero.
Suppose that individuals considering the possibility of migrating from the
source country to the host country face mobility costs C. Define an index
function by:
I = log
w0 + C
*[X<ai-<50)-jr]
measure
+ (el-e0)
(3)
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INTERNATIONAL
MIGRATION
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of the Migration
Flow
(4)
X) is higher
X) is lower the
X) is lower the
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
465
The first three of these predictions are well known and have been widely
tested in both the immigration literature and in the literature that analyzes
internal migration patterns in the United States (See, for example, Jasso and
Rosenzweig, 1985; and the survey by Greenwood, 1975). These predictions
date back to the analysis of Hicks (1939) and form the theoretical core of
the human capital approach to the economics of migration (Sjaastad, 1962).
The fourth prediction, although it has not been stressed in the literature,
also follows from the model: Individuals with a certain level of schooling are
more likely to migrate the higher the rate of return to schooling in the host
country relative to the rate of return to schooling in the source country.
There is a sense in which these theoretical predictions are unsatisfactory.
They simply are too obvious. The insight that, given the assumption that
individuals are income-maximizers,
persons migrate away from low income
areas to high income areas when mobility costs are low is tautological.
Although historically these have been the insights stressed by the literature,
the income-maximization
model summarized by equations (1 )-(3) has much
more to say about the types of sorting generated by the immigration market.
Selection
in Observed
Characteristics
+ ex
(5)
where jux is the mean of education in the source country and ex is a normal
random variable describing the heterogeneity of educational attainment in
that ex has mean zero and variance a ^. It
is worth stressing that the assumptions underlying the analysis in this section
? that X
only has a single characteristic and that X is normally distributed
?are
made for purely pedagogical reasons. The analysis can be generalized
to any number of demographic
of
variables. Moreover, the assumption
normality only simplifies the mathematics, without changing the nature of
the results.
the source country. It is assumed
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INTERNATIONAL
MIGRATION
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+ k(dl-d0)
it can
(6)
in Unobserved
Characteristics
in
As equations (1) and (2) show, individual earnings can be decomposed
terms of the returns to observable skills (X<5) and the "returns" to unobservable ability (e). We have seen that selection on the basis of the observable
variables X is guided solely by differences in the coefficient
demographic
vectors d0 and d ? .
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
467
Qo
Q1
E<eo|X,I>0)
E<ei|X,I>0)
Of) <7l
-^(/o--?)
ov
On <7i
-^(^-/>)
Of)
?r
<7i
(7)
(8)
where
A = <p(z) / (1- <X>(z)) and <p is the density function of the standard
normal. The variables Q0 and Q1? therefore, measure the labor market skills
of the migrant flow across the two countries in terms of the unobserved
characteristics of the immigrant pool.
Positive
Selection:
Qjq>0
and
Qj>0
468
INTERNATIONAL
MIGRATION
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with characteristics X). Inspection of equations (7) and (8) reveals that a
necessary and sufficient condition for this selection to occur are that:
p >p
wherep
and &i>o0
(9)
_
aA
(a0
is defined by min | ? , ? |).
Selection:
Qq<0
and
Qj<0
This type of selection arises when the host country draws persons who have
below average incomes in the source country and who, holding charac?
teristics X constant, perform poorly in the host country's labor market. The
necessary and sufficient conditions for negative selection to occur are:
p >p
and ol <a0
(10)
Negative selection requires that the correlation in earnings across the two
countries /? be sufficiently positive, but that the source country exhibits
more income inequality than the host country. Intuitively, negative selection
arises when the host country "taxes" high-income workers relatively more
than the source country and provides better insurance for low income
workers against poor labor market outcomes. This opportunity set leads to
large incentives for low ability persons to migrate since they can improve
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
469
their situation in the host country. Conversely, high ability persons have
lower incentives to migrate since income opportunities in the home country
are relatively good.
Refugee
Sorting:
Qjj<0
and
Qj>0
This kind of selection occurs when emigrants have below average ability (in
the source country), but immigrants perform quite well in the host country's
labor market. The necessary and sufficient condition for this type of selec?
tion to occur is:
P<P
(11)
for the
analysis also provides an interesting explanation
States
has
that
of
United
the
to
the
finding
migrants
"quality"
470
INTERNATIONAL
MIGRATION
REVIEW
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
471
INTERNATIONAL
472
MIGRATION
REVIEW
ADAPTATION
OF
(1987b, 1988)
by the empiri?
IMMIGRANTS
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
473
For instance, it has been shown that women's incentives to invest in human
capital are adversely affected by the fact that they spend a smaller fraction
of their adult life in the labor market than do men (Mincer and Polachek,
1974). This result implies that refugees, since they are basically "stuck" in
the host country, have much greater incentives to adapt to the host country
than other immigrants who have higher probabilities of return migration.
In other words, immigrant flows characterized by high return migration
propensities will "assimilate" faster than immigrant flows characterized by
low return migration propensities.
Xjy+aIj+y3ljyj
(12)
charac?
where w- is the wage of person j; X- is a vector of socioeconomic
L is a dummy
teristics (e.g., education, age, region of residence, etc.);
variable indicating if person j is an immigrant; and y. is the number of years
that person j has resided in the host country.5 Since the individual's age is
being held constant, the coefficient /? traces out the impact of residence in
the host country on the relative performance of immigrants in the labor
market. The coefficient /?,by definition, provides a measure of the extent
to which immigrants adapt or assimilate to the host country's labor market.
It is worth repeating that this definition of assimilation is quite narrow since
it focuses solely on the extent to which the slope of age/earnings profiles of
immigrants differs from the slope of the age/earnings profile of natives.
The model in equation
5
In order to simplifythe discussion,equation (12) does not include higher-ordertermsin
the years-since-migration
variable.The resultssummarizedin thissectionare not affectedby
theinclusionof theseadditionalvariables.
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INTERNATIONAL
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alternative
Recent econometric studies stress the fact that such inferences may be
completely erroneous (Borjas, 1985). The key insight is that cross-section
estimates of (12) provide biased measures of the adaptation process ex?
perienced by immigrants in the host country. The bias is due to the well
known problem that a single cross-section regression cannot differentiate
between aging and cohort effects. In this context, aging effects capture the
change in earnings experienced by a particular immigrant (or a particular
immigrant cohort) as he ages in the host country; while cohort effects
capture productivity (or ability) differences across different immigrant
cohorts.6 In other words, the positive correlation between earnings and
documented by cross-section regressions may arise
years-since-migration
either because immigrants do experience
higher earnings growth than
comparable natives, or because more recent immigrant cohorts have lower
productivities (or are more likely to be negatively selected) than immigrants
from earlier waves.
The importance of this insight is illustrated in Figure 1, which presents
age/earnings profiles for three separate immigrant cohorts. The earliest
cohort arrives, say, in 1960 and is assumed to have the highest productivity
level ? at any age ? in the foreign born population. The most recent cohort
arrives in 1980 and is assumed to have the lowest productivity level in the
immigrant population.
Finally, the middle cohort arrives in 1970 and is
assumed to have exactly the same level of unobserved skills as natives and,
therefore, the age/earnings profiles of these two groups exactly coincide
over the working life cycle.
As drawn in Figure 1, the age/earnings profiles of all the immigrant
cohorts are parallel to the age/earnings profile of the native population. This
implies that immigrants do not experience any assimilation (in the sense
that their earnings do not "catch up" to the earnings of natives). The true
on earnings, after controlling for age, is
impact of years-since-migration
zero.
Suppose a cross-section of data is collected in 1980. Consider the data
available to a researcher analyzing this single data set. A cross-section allows
the observer to identify only one point in each of the immigrant age/earn?
ings profiles. In particular, a point at the age of entry (say 20) is observed
The factthat a single cross-sectionof data cannot separatelyidentifyaging and cohort
effectsis well known in the demographyliteraturebut was ignored by the early studies of
immigrantearnings.A recentstatementof the technicalproblemsis given by Heckman and
Robb (1983).
ECONOMIC
THEORY
AND INTERNATIONAL
475
MIGRATION
1
FIGURE
EARNINGS
1960
1970
and
Cohort
Cohort
natives
CO
CD
or
<
1980
Cohort
for the cohort that most recently arrived (i.e., the 1980 cohort). The earnings
at age 30 are observed for the immigrants that arrived in 1970, while the
earnings at age 40 are observed for the 1960 arrivals. The cross-section
earnings profile thus generated is given by CC. This cross-section regression
line has two important characteristics. First, it is substantially steeper than
the native earnings profile. Hence a cross-section regression will make it
seem as if there is labor market assimilation when, by assumption, there is
none (i.e., a cross-section regression leads to a non-zero estimate of /?).
Second, the cross-section regression line crosses the native age/earnings
that immigrants "overtake" the
profile at age 30. This gives the appearance
of
the
native
in fact, no such event is ever
when,
earnings
population
of
the
cohorts.
experienced by any
immigrant
476
INTERNATIONAL
MIGRATION
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as measures
Figure 1 not only shows what is wrong with cross-section regressions, but
also suggests a way to correct the problem. In particular, if two points were
observed on each age/earnings profile for each cohort, then the researcher
could "track" an immigrant cohort as it ages in the host country, and the
extent to which immigrant earnings growth differs from native earnings
growth could be ascertained. Recent work by Borjas (1985) conducts this
exercise using the 1970 and 1980 U.S. Censuses. The tracking of specific
immigrant cohorts across the two Censuses shows that cohort effects are
and are responsible for much of the immigrant earnings growth
reported in the cross-section literature. In particular, the study of the two
U.S. Census cross-sections reveals that the most recent immigrant cohorts
have substantially lower earnings than earlier immigrant cohorts at similar
points of their U.S. life cycle (as illustrated in Figure 1). Moreover, the
earnings growth experienced
by immigrants, although somewhat greater
sizable
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
477
OF IMMIGRANTS
LABOR
MARKET
ON
THE
HOST
Much of the policy debate surrounding immigration deals with the pos?
sibility that immigrants "take jobs away" from native workers and perhaps
hamper the economic progress of some groups in the host country. Usually
these discussions are conducted in a theoretical and empirical vacuum.
Often it is assumed that immigrants simply take jobs that natives refuse to
accept, or it is assumed that for every immigrant that comes into the host
country, a native worker is displaced (See, Borjas and Tienda, 1987; Green?
wood and McDowell,
1986). Both of these extreme views are often based
more on prior beliefs than on any insights derived from economic theory
or empirical analysis. In addition, these extreme views reflect a fundamental
of the basic economic principles at work.
misunderstanding
A description of how immigrants affect the earnings and employment
opportunities of native workers is obtained only if the process that deter?
mines earnings (and employment levels) for the various labor groups is
economic theory suggests that a natural
precisely modeled. Neoclassical
for
this
of
starting point
type
analysis is the specification of a production
how
technology, describing
immigrants, natives and capital interact in the
478
INTERNATIONAL
MIGRATION
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production process.7 Suppose there are j types of native workers (e.g., blacks,
women, prime-age white males, etc.) and that the quantities of workers in
each of these j groups are given by Xi, X2,..., Xj. Suppose, further, that Xm
gives the number of immigrants in the labor market. Finally, let K be the
level of the capital stock in the labor market. Output, Q, is produced through
the production function:
=
f(Xm, Xv X2,...,Xj,K)
(13)
f^X^.^K)
D,
(14)
where f} = df/dX^ Equation (14), of course, exists for every single input, and
the entire system of j+2 equations (j native factors, immigrants and capital)
gives the factor demand system in this economy. Equation (14) implies that
the wage of every input will depend on the quantities hired of all inputs. In
particular, the productivities of native workers depend on the number of
foreign born workers in the labor market.
To complete the model, it is necessary to specify the supply of the various
factors of production to the labor market. These supply functions give the
quantity of type / labor supplied to the market at various prices, and can, in
general, be written as:
=
(15)
X,
S,(r?Y,)
where Yt is the set of factors which shift the supply curve of input /. The joint
solution of equations (14) and (15) leads to the equilibrium employment and
7 recent
A
surveyof the labor demand literature,includinga descriptionof the various
functionalformstypicallyused in estimationand the econometricproblemsthatarise,is given
by Hamermesh(1987).
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
479
wage levels for all inputs. The familiar solution to the problem is illustrated
in Figure 2 for immigrants, and since labor market equilibrium requires
that die supply of immigrants (S^ equals the demand for immigrants (D? =
?), the market wage of immigrants is given by r* and their employment
level is given by L^One important use of the standard model summarized by equations (14)
and (15) is to predict what happens to the wages of the various labor inputs
as the supply of immigrants shifts exogenously. In particular, suppose that
the supply of immigrants increases. Figure 2 shows that this increase in
immigrant supply (indicated by the supply curve shift to S^) leads to a
reduction in the immigrant wage and to an increase in immigrant employ?
ment. The reduction in the immigrant wage arises because of the principle
of diminishing marginal productivity: as more immigrants enter the labor
market, their marginal productivity declines. In a sense, there is more
competition in the immigrant labor market.
IMMIGRANT
FIGURE
2
WAGE ? IMMIGRANT
EMPLOYMENT
LU
CD
<
<
CD
IMMIGRANT
EMPLOYMENT
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INTERNATIONAL
MIGRATION
REVIEW
3
FIGURE
WAGE ? NATIVE EMPLOYMENT
<
LU
>
NATIVE
EMPLOYMENT
ECONOMIC
THEORY
AND INTERNATIONAL
MIGRATION
481
482
INTERNATIONAL
MIGRATION
REVIEW
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