Chapter 9

Labor Mobility

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Labor Economics, 4th edition

9 - 3

Introduction

• Labor mobility is the mechanism that labor markets use to improve the allocation of workers to firms

9 - 4

Geographic Labor Migration as Human Capital Investment

• Mobility decisions are guided by comparing present value of lifetime earnings in alternative employment opportunities

• A worker decides to move if the net gain from the move is positive

- Improvements in economic opportunities available in a destination (residence) increases (decreases) the net gains to migration and raises (lowers) the likelihood a worker moves

- An increase in migration costs lowers the net gains to migration, decreasing the probability a worker moves

• Migration occurs when there is a good chance the worker will recoup his human capital investment

9 - 5

Internal Migration in the United States

• Probability of migration is sensitive to the income differential between the destination and origin

• There is a positive correlation between improved employment conditions and the probability of migration

• There is a negative correlation between the probability of migration and distance, where distance is taken as a proxy for migration costs

• There is a positive correlation between a worker’s educational attainment and probability of migration

• Workers that have migrated are more likely to return to the location of origin (return migration) and are more likely to migrate again (repeat migration)

9 - 6

Probability of Migrating across State Lines in 2003-2004, by Age and Educational Attainment

0

2

4

6

8

25 30 35 40 45 50 55 60 65 70 75

Age

Pe

rce

nt

Mig

rati

ng

College Graduates

High School Graduates

9 - 7

Family Migration

• The family unit will move if the net gains to the family are positive

• The optimal choice for a member of the family may not be optimal for the family unit (and vice versa)

- Tied stayer – one who sacrifices better income opportunities elsewhere because the partner is better off in their current location

- Tied mover – one who moves with the partner even though the employment outlook is better at their current location

9 - 8

Tied Movers and Tied Stayers

X

C

D

B

A

F

E

10,000

10,000-10,000

-10,000

Y

Private Gains to Husband (PVH)

Private Gains to Wife (PVW)

PVH + PVW = 0

If the husband were single, he would migrate whenever DPVH > 0 (or areas A, B, and C). If the wife were single, she would migrate whenever DPVW > 0 (or areas C, D, and E). The family migrates when the sum of the private gains is positive (or areas B, C, and D). In area D, the husband would not move if he were single, but moves as part of the family, making him a tied mover. In area E, the wife would move if she were single, but does not move as part of the family, making her a tied stayer.

9 - 9

Immigration in the United States

- There has been resurgence of immigration to the United States in recent decades

- The United States receives the largest immigrant flow in the world

- The mix of countries of origin has altered substantially• For example, in the 1950s only 6% of immigrants were

from Asia, whereas now 31% originated in Asia

9 - 10

Legal Immigration to the United States by Decade, 1820-2000

0

2

4

6

8

10

1810s 1830s 1850s 1870s 1890s 1910s 1930s 1950s 1970s 1990s

Decade

Nu

mb

er o

f le

gal

imm

igra

nts

(in

mill

ion

s)

9 - 11

Immigrant Performance in the U.S. Labor Market

• Immigrants who can adapt well and are successful in new jobs can make a significant contribution to economic growth

• The economic impact of immigration will depend on the skill composition of the immigrant flow

9 - 12

The Age-Earnings Profiles of Immigrant and Native Men in the Cross Section

4,000

5,000

6,000

7,000

8,000

9,000

20 25 30 35 40 45 50 55 60 65

Age

An

nu

al

Earn

ing

s

(1970 D

oll

ars

)

Immigrants

Natives

9 - 13

The Decision to Immigrate

• There will be a dispersion in skills among national-origin groups because different types of immigrants come from different countries

• The general rule: workers decide to immigrate if U.S. earnings exceed earnings in the source country

9 - 14

Cohort Effects and the Immigrant Age-Earnings Profile

Dollars

Age

P

Q

R

P

Q

R

C

C

40 60 20

1960 Wave

1980 Wave and Natives

2000 Wave

P*

Q*

R*

The cross-sectional age-earnings profile erroneously suggests that immigrant earnings grow faster than those of natives.

9 - 15

The Wage Differential between Immigrant and Native Men at Time of Entry

-0.4

-0.3

-0.2

-0.1

0

1955-1959 1965-1969 1975-1979 1985-1989 1995-2000

Year of entry

Lo

g w

ag

e g

ap

9 - 16

Evolution of Wages for Specific Immigrant Cohorts over the Life Cycle

-0.4

-0.3

-0.2

-0.1

0

0.1

1960 1970 1980 1990 2000

Year

Lo

g w

ag

e g

ap

Arrived in 1955-59

Arrived in 1965-69

Arrived in 1975-79 Arrived in 1985-89

Relative wage of immigrants who arrived when they were 25-34 years old

9 - 17

Roy Model

• This model considers the skill composition of workers in the source country

- Positive selection – immigrants who are very skilled do well in the U.S.

- Negative selection – immigrants who are unskilled do not do well in the U.S.

- The relative payoff for skills across countries determines the skill composition of the immigrants

9 - 18

The Distribution of Skills in the Source Country

Positively-Selected Immigrant Flow

Frequency

Negatively-Selected Immigrant Flow

SkillssPsN

The distribution of skills in the source country gives the frequency of workers in each skill level. If immigrants have above-average skills, the immigrant flow is positively selected. If immigrants have below-average skills, the immigrant flow is negatively selected.

9 - 19

Policy Application: The Economic Benefits of Migration

• The immigrant surplus is a measure of the increase in national income that occurs as a result of immigrants (and the surplus accrues to natives)

• Immigration raises national income by more than it costs to employ them

9 - 20

The Self-Selection of the Immigrant Flow

Skills

Dollars

Positive Selection

Do Not Move

Do Not Move

MoveMove

sP

Source Country

U.S.

Skills

Dollars

sN

Source Country

U.S.

(a) Positive selection (b) Negative selection

9 - 21

The Impact of a Decline in U.S. Incomes

Skills

Dollars

sP

Source Country

U.S.

Skills

Dollars

sNsN

Source Country

U.S.

(a) Positive selection (b) Negative selection

9 - 22

Earnings Mobility between 1st and 2nd Generations of Americans, 1970-2000

-0.6

0

0.6

-0.4 0 0.4

Relative wage, 1st generation, 1970

Re

lati

ve

wa

ge

, 2

nd

ge

ne

rati

on

, 2

00

0

Mexico

Dominican Republic

Haiti

IndiaPoland

UK

Cuba

Belgium

Sweden

Honduras

Philippines GermanyItaly

China

9 - 23

Job Turnover: Some Stylized Facts

• Newly hired workers tend to leave their jobs within 24 months of hire, while workers with more seniority rarely leave their jobs

• There is strong negative correlation between a worker’s age and the probability of job separation

• The decline in the quit rate fits with the hypothesis that labor turnover is a human capital investment

• Older workers have a smaller payoff period to recoup the costs associated with job search,they are less likely to move

• The rate of job loss is highest among the least educated workers

9 - 24

The Job Match

• Each particular pairing of a worker and employer has its own unique value

• Workers and firms can improve their situation by shopping for a better job match

• Efficient turnover is the mechanism by which workers and firms correct matching errors to obtain a better and more efficient allocation of resources

9 - 25

Specific Training and Turnover

• When a given workers receives specific training, his productivity improves only at the current firm

• This implies there should be a negative correlation between the probability of job separation and job seniority

- As age increases, the probability of job separation decreases

9 - 26

Job Turnover and the Age-Earnings Profile

• Young people who quit often experience substantial increases in their wages

• Workers who are laid off often experience wage cuts• A worker’s earnings depend on total labor market experience

and seniority on the current job• Workers with good match employment will have low

probabilities of job separation and these workers will tend to have seniority on the job

9 - 27

Probability of Job Turnover over a 2-Year Period for Young and Older Workers

0

0.2

0.4

0.6

0.8

0 2 4 6 8 10 12 14

Years on the Job

Pro

bab

ilit

y Young Workers

Layoffs

Quits

Separations

0

0.1

0.2

0.3

0.4

0.5

0 5 10 15 20 25

Years on the Job

Pro

bab

ilit

y

Layoffs

Quits

Separations

Older Workers

9 - 28

Incidence of Long-Term Employment Relationships, 1979-1996

10

15

20

25

30

35

1975 1980 1985 1990 1995 2000

Year

Per

cen

t

Men

Women

9 - 29

The Rate of Job Loss in the United States, 1981-2001

0

4

8

12

16

20

1981-83 1983-85 1985-87 1987-89 1989-91 1991-93 1993-95 1995-97 1997-99 1999-01

Year

Per

cen

t

College graduates

High school dropouts

All workers

9 - 30

Specific Training and the Probability of Job Separation for a Given Worker

Probability of separation

Seniority

If a worker acquires specific training as he accumulates more seniority, the probability that the worker will separate from the job declines over time. The probability of job separation then exhibits negative state dependence; it is lower the longer the worker has been in a particular employment state.

9 - 31

Impact of Job Mobility on Age-Earnings Profile

Stayers

Movers

Age

Wage

t2t3t1

QuitQuit Layoff

The age-earnings profile of movers is discontinuous, shifting up when they quit and shifting down when they are laid off. Long jobs encourage firms and workers to invest in specific training, and steepen the age-earnings profile. As a result, stayers will have a steeper age-earnings profile within any given job.

9 - 32

End of Chapter 9