Chapter 8 Labor Mobility “Immigration is the sincerest form of flattery.” -Jack Paar © 2016 McGraw-Hill 2 ©McGraw-Hill Education Introduction Labor mobility is the mechanism labor markets use to improve the allocation of workers to firms. 3 ©McGraw-Hill Education Geographic Labor Migration as an Investment in Human Capital Mobility decisions are guided by comparing present value of lifetime earnings among alternative employment opportunities in different locations. 4 ©McGraw-Hill Education Geographic Labor Migration as an Investment in Human Capital Improvements in economic opportunities available in a destination location increases the net gains to migration and raises the likelihood a worker moves. Improvements in economic opportunities available in the current location decreases the net gains to migration and lowers the likelihood a worker moves. An increase in migration costs lowers the net gains to migration, decreasing the probability a worker moves. 5 ©McGraw-Hill Education Geographic Labor Migration as an Investment in Human Capital A worker decides to move if the net gain from moving is positive. Migration occurs when there is a good chance the worker will recoup his investment in the move. 6 ©McGraw-Hill Education Internal Migration in the U.S. The probability of migration is sensitive to the income differential between the destination and original locations. 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. • Distance is taken as a proxy for migration costs. © 2016 McGraw-Hill 7 ©McGraw-Hill Education Internal Migration in the U.S. There is a positive correlation between a worker’s educational attainment and the probability of migration. Workers that have migrated are likely to return to the location of origin (return migration) and are more likely to migrate again (repeat migration). © 2016 McGraw-Hill 8 ©McGraw-Hill Education Probability of Migrating across State Lines between 2016 and 2017, by Age 9 ©McGraw-Hill Education 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: someone who sacrifices better income opportunities elsewhere because the partner is better off in the current location • Tied mover: someone who moves with the partner even though his or her employment outlook is better in the current location. © 2016 McGraw-Hill 10 ©McGraw-Hill Education Tied Movers and Tied Stayers 11 If the husband were single, he would migrate whenever ΔPVH > 0 (A, B, and C). If the wife were single, she would migrate whenever ΔPVW > 0 (C, D, and E). The family migrates when the sum of the private gains is positive (B, C, and D). In D, the husband would not move if he were single, but moves as part of the family, making him a tied mover. In E, the wife would move if she were single, but does not move as part of the family, making her a tied stayer. ©McGraw-Hill Education Immigrant Performance in the U.S. Labor Market Immigrants who can adapt well and are successful in new jobs make a significant contribution to economic growth. The economic impact of immigration depends on the skill composition of the immigrant flow. © 2016 McGraw-Hill 12 ©McGraw-Hill Education The Age-Earnings Profiles of Immigrant and Native Men in the Cross Section © 2016 McGraw-Hill 13 ©McGraw-Hill Education The Decision to Immigrate Skills vary across country-of-origin (or source country) immigrant groups. The general rule: Workers decide to immigrate if U.S. earnings exceed earnings in the source country. • The decision ultimately depends on individual skills and the returns to those skills in the source and destination countries. © 2016 McGraw-Hill 14 ©McGraw-Hill Education Cohort Effects and the Immigrant Age-Earnings Profile 15 The crosssectional ageearnings profile erroneously suggests that immigrant earnings grow faster than those of natives. ©McGraw-Hill Education Evolution of Wages for Specific Immigrant Cohorts over the Life Cycle © 2016 McGraw-Hill 16 ©McGraw-Hill Education The Roy Model The Roy model considers the skill composition of workers in the source country. • Positive selection: immigrants who are very skilled do relatively well in the U.S. • Negative selection: immigrants who are unskilled do relatively well in the U.S. • The relative return to skills determines the skill composition of the immigrants from different source countries. © 2016 McGraw-Hill 17 ©McGraw-Hill Education The Distribution of Skills in the Source Country 18 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. ©McGraw-Hill Education The Self-Selection of the Immigrant Flow 19 ©McGraw-Hill Education The Impact of a Decline in U.S. Incomes 20 ©McGraw-Hill Education Decline in U.S. Incomes The previous graphs shows that when U.S. incomes decrease (shift down in the returns-to-skills curve): • Fewer workers migrate to the U.S. • The type of selection (positive vs. negative) doesn‘t change. © 2016 McGraw-Hill 21 ©McGraw-Hill Education Job Turnover: Stylized Facts Newly hired workers tend to leave their jobs within 24 months of being hired, while workers with more seniority rarely leave their jobs. The rate of job loss is highest among the least educated workers. © 2016 McGraw-Hill 22 ©McGraw-Hill Education Job Turnover: Stylized Facts There is a strong negative correlation between a worker’s age and the probability of job separation. • This fits with the hypothesis that labor turnover can be an investment in human capital. • Older workers have a smaller payoff period to recoup the costs associated with job search. Thus, they are less likely to search (or move). © 2016 McGraw-Hill 23 ©McGraw-Hill Education The Job Match Each particular pairing of a worker and employer has its own unique value. Workers and firms might improve their situation by shopping for a better job match. Efficient turnover is the mechanism by which workers and firms correct matching errors and obtain a better and more efficient allocation of resources. © 2016 McGraw-Hill 24 ©McGraw-Hill Education Specific Training and Turnover When a worker 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. © 2016 McGraw-Hill 25 ©McGraw-Hill Education 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 experiencing a good job match will have low probabilities of job separation, and these workers will tend to have seniority on the job.) © 2016 McGraw-Hill 26 ©McGraw-Hill Education Probability of Job Turnover over a 2-Year Period © 2016 McGraw-Hill 27 ©McGraw-Hill Education Impact of Job Mobility on the Age-Earnings Profile 28 The age-earnings profile of movers is discontinuous, shifting up when they quit and shifting down when they are laid off. Long job matches encourage firms and workers to invest in specific training, and steepen the age-earnings profile. As a result, stayers have a steeper ageearnings profile within any given job.