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Economic Theory and International Migration

Author(s): George J. Borjas


Source: International Migration Review, Vol. 23, No. 3, Special Silver Anniversary Issue:
International Migration an Assessment for the 90's (Autumn, 1989), pp. 457-485
Published by: The Center for Migration Studies of New York, Inc.
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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.

Economics studies the allocation of scarce resources among alternative uses.


Labor is a scarce resource that maybe "allocated" to different labor markets.
An economic theory of immigration analyzes the allocation of labor across
international boundaries. The theory is based on the behavioral assumption
that individuals migrate because it is in their benefit (either in terms of
psychic satisfaction or income) to do so. Individual behavior, of course, is
constrained by their wealth and by the existence of immigration policies
that limit (or encourage)
the entry of persons into particular geographic
areas.
In this framework, the economic approach to the theory of immigration
addresses three questions:

1. What factors determine the direction, size and composition of the


immigrant flow? That is, given any initial sorting of the population
across countries, international differences in income opportunities,
political conditions and immigration policies imply that incentives
exist for some individuals to migrate to other countries. An economic
This researchwas funded by a grant fromthe National Instituteof Child Health and
Human Development,GrantNo. 1 R01 HD22544-01.

IMR Volume xxiii, No. 3

457

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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

immigrant skills than the source country (Kwok and Leland,


1982). Finally, some theories conjecture that the impact of migration on
natives in the receiving country is likely to be small because immigrants take
(or are forced to take) jobs that natives refuse to accept (Piore, 1979).
All these theories, of course, focus on extremely narrow topics within the
economics of immigration and may not even be logically consistent with
each other. However, recent analytical developments
make it likely that a
comprehensive economic theory of immigration can and will be developed.
These recent models, based on the neoclassical principles of utility-maxi?
have
mization for individuals
for employers,
and pro fit-maximization
already provided insightful interpretations of empirical observations. This
study presents a survey of this recent literature.
Before proceeding to a discussion of these models, it is instructive to begin
with what are perhaps the earliest analytical studies of immigration in the
economics literature. The question of factor (in particular labor) mobility,
of course, forms an integral part of international trade theory. The standard

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model in trade theory, due to Hecksher, Ohlin and Samuelson, begins by


assuming that labor is immobile across countries. In the absence of immigra?
tion flows, neoclassical trade theory yields two fundamental theorems that
are very relevant to the study of migration (Ethier, 1986; Jones, 1987):
1. The Hecksher-Ohlin
Theorem: A country exports goods that make
intensive
use
of the country's relatively abundant factors.
relatively
That is, if a country has a relatively large population (i.e., it is relatively
abundant in labor), and if labor is intensively used in the production
of, for example, textiles, the country will export textiles.
Free trade in goods will
Theorem:
2. The Factor-Price Equalization
equalize the prices of factors across countries. That is, even in the
absence of migration flows, the existence of free trade in goods will
lead to the equalization
of the wage rates of labor and the price of
capital across countries.
These two theorems imply that since a labor abundant country is export?
ing those goods that are relatively intensive in the production of labor, it is,
in a sense, exporting labor. The export of labor intensive goods leads to the
of wage rates across countries even if labor itself is immobile.
equalization
In other words, the trading of goods substitutes for the trading of people.
The introduction
of immigration
into the Hecksher-Ohlin-Samuelson
framework, therefore, does not fundamentally alter the results of the
analysis since the international immigration of income-maximizing
persons
is simply another way of ensuring that factor prices are equalized across

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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immigrant flow, the impact of changes in immigration policy, etc.


Recent theoretical developments,
therefore, ignore the international
trade aspects of labor migration and focus solely on the study of migration
flows. They have borrowed, however, one of the key insights of the inter?
national migration literature: that there exists an "immigration market."
Just as goods are traded across international boundaries in the international
goods market, people are also "traded" across the same boundaries in the
immigration market. The survey begins with a description and charac?
terization of equilibrium in this marketplace.
THE

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.

Neoclassical economic theory assumes that individuals maximize utility:


individuals "search" for the country of residence that maximizes
their
As
noted
the
search
is
constrained
the
individual's
above,
well-being.
by

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financial resources, by the immigration regulations imposed by competing


host countries and by the emigration regulations of the source country. In
the immigration market the various pieces of information are exchanged
and the various options are compared. In a sense, competing host countries
make "migration offers" from which individuals compare and choose. The
information gathered in this marketplace leads many individuals to con?
clude that it is "profitable" to remain in their birthplace (i.e., they find it
expensive to migrate to another country). Conversely, other individuals
conclude that they are better off in some other country. The immigration
market nonrandomly sorts these individuals across host countries. An im?
of economic
the kind of
portant contribution
theory is to describe
that
takes
in
this
equilibrium sorting
marketplace.
place
It is important to note that although the idea of an immigration market
is somewhat novel in the immigration literature, the notion that different
agents are considering the allocation of resources among alternative uses
and that this allocation is guided by a market basically defines economics.
Formally, there is little difference between the problem of allocating in?
dividuals among countries and the problem of allocating individuals among
jobs. In both problems, individuals consider a number of options to which
they can allocate their time. Firms (or countries) offer different "employ?
ment" contracts. Individuals compare these offers and nonrandomly sort
themselves among the available jobs (countries).
This approach to the economics of immigration makes it very clear that
both host and source countries can have a major impact on the number and
of the immigrant flow by altering immigration
composition
policies.
Similarly, changes in the levels of economic activity in the various countries
will also have a major impact on the size and composition of the immigrant
flow since these changes basically alter the nature of the "offer" made by
competing countries to potential migrants. It will be seen that this approach
of the types
leads to a very clear ? and empirically testable?categorization
of immigrant flows that arise in a world where individuals search for the
"best" country.

A MODEL

OF

IMMIGRATION

The characteristics of the sorting generated by the immigration market are


best understood in a simple model where there are only two countries, the
source country and the host country (See, Borjas, 1988; Roy, 1951). The
to a larger number of countries complicates the technical
generalization
of
the
model
without fundamentally changing the key characteristics
aspects
of the sorting. In addition, it may be assumed that individual migration is
of incomes across countries. Obviously, incomeguided by comparisons
maximization is a very strong assumption since individuals also consider

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other aspects of the countries in their migration decisions (e.g., weather,


culture, the crime rate, etc.). It can be shown, however, that (under some
is a necessary condition for utility max?
assumptions) income-maximization
imization (Hirshleifer, 1970). The income-maximization
hypothesis has
been used successfully in the human capital literature, and its use here is
justifiable because the model then leads to an empirically testable charac?
terization of the optimal sorting of immigrants across countries.
Residents of the source country have (log) earnings
terized by the earnings function:
logw0

X(50 + e0

which are charac?

(1)

where w0 are the individual's


earnings in the source country (country 0),
X is a vector of observable demographic characteristics (such as education
and age) and e0 is a random variable which is assumed to be normally
distributed with mean zero and variance a ^. In addition, the disturbance
variables X.
e0 is assumed to be uncorrelated with the socioeconomic
It is useful to interpret e0 as the component of earnings associated with
unobserved "ability" or "luck" among individuals with the same observable
skills (i.e., with similar demographic variables X). It should also be noted
that the assumption that e0 is normally distributed, although standard in the
literature, is quite applicable for the problem at hand. Since the logarithm
of earnings is assumed to be normally distributed, earnings will be log-nor?
mally distributed and positively skewed (i.e., a long tail to the right of the
earnings distribution). The assumed shape of the earnings distribution,
therefore, is quite close to the actual shape of observed income distributions
for many countries (Lydall, 1968).
The earnings structure facing individuals participating
market of the host country (Country 1) is given by:
logw1

X61 + e1

in the labor

(2)

where el is also assumed to be normally distributed with mean


variance a ^ and el is also independent of X.

zero and

The random variables e0 and el have correlation coefficient/?. If/? is positive


and near unity, the labor markets of the host country and the source country
"value" unobserved ability in the same way. That is, persons who are able
or "lucky" due to unobservable
factors perform well in both countries. On
the other hand, if/? is small or negative, persons who do relatively well in
one country find that the other country does not value their skills as highly
skills are,
(and perhaps will attach a negative value to them). Unobserved

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in a sense, "specific" to the country of origin. It seems reasonable to suppose


that for most pairings of source and host countries, the parameter/? is likely
to be positive and large. There are, however, interesting cases where this
assumption need not be true.

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]

where Jtis a "time-equivalent"


(i.e. , Jt = C/w0).

measure

+ (el-e0)

(3)

of the costs of migration

The key behavioral


assumption is that individuals compare earnings
streams in the various countries and choose to reside in the country with the
largest earnings, net of migration costs. The definition of the index function
in (3) implies that individuals migrate to the host country when the index
variable I is positive, and individuals remain in the source country when I
is negative or zero. The second equality in (3) follows by assuming a linear
to the index function.
approximation

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It is easier to illustrate the key results of the model when it is assumed


that the "time-equivalent"
measure of mobility costs are constant across
individuals in the source country. This assumption does not say dollar
mobility costs are constant (since it is the ratio of C to w0 that is assumed
constant). Instead, it is basically assuming that individuals with higher
earnings capacities find it more expensive to migrate. This correlation may
be caused by the higher foregone earnings associated with unemployment
spells in the host country while the individual is searching for job, higher
costs of moving household goods, etc. The relaxation of this assumption
does not change the fundamental results of the analysis in any way.
Three important questions are easily addressed within this framework.
First, what factors determine the size of the migration flow generated by the
income-maximization
hypothesis? Second, what types of selection in the
observed
X are created by the endogenous
characteristics
migration
decision? In other words, are the individuals who migrate characterized by
high or low levels of X? Third, what types of selection in the unobserved
characteristics e are created by the endogenous migration decision? In other
words, are immigrants characterized by high levels of ability (high e) or by
low levels of ability (low e)?
The Size

of the Migration

Flow

Individuals migrate when the index variable I is positive. The probability


that an individual (with characteristics X) born in the source country
migrates to the host country is given by:
P = Pr[v > -X((5L - <50) + Ji] = 1 - O(z)

(4)

where v = el - e0, z = [-X^


d0) + ji] I ay-, and <J>is the cumulative
distribution function for a normal random variable. Inspection of equation
(4) reveals several properties of the emigration rate in an economy popu?
lated by income-maximizing
individuals:
?

X) is higher

The emigration rate (for persons with characteristics


greater the mean income in the source country

X) is lower the

X) is lower the

The emigration rate (for persons with characteristics


the greater the mean income in the host country

The emigration rate (for persons with characteristics


greater the level of migration costs

The emigration rate (for persons with characteristics X) is higher


the greater the payoff to the observed demographic variables X in the
host country relative to the payoff in the source country.

ECONOMIC

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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

For simplicity, suppose that the observed vector of demographic variables,


of only a single factor ? education.
X, is composed
Suppose also that
education is normally distributed in the population of the source country,
so that the educational attainment of the population can be described by the
equation:
X=jux

+ 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

migrate to the host country when the index variable I in


is
(3)
equation
greater than zero. It is, therefore, possible to calculate the
conditional mean of educational
attainment among persons who find it
Individuals

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INTERNATIONAL

profitable to migrate, E(X|I>0).


be shown that: 3
E(X\I>0)=fix

MIGRATION

REVIEW

Using the normality assumptions,

+ k(dl-d0)

it can

(6)

where k is a positive number.


The conditional expectation in (6) is composed of two terms. The first is
the mean of educational attainment in the population in the source country,
jux, while the second is the "selectivity bias" generated by the fact that
persons who migrate are not randomly selected from the population.
Equation (6) reveals that the mean educational attainment of migrants
will differ from the mean in the source country as long as (dl - d0) ^0. The
analysis thus shows that the mean schooling level of migrants will be greater
or less than the mean schooling level in the country of origin depending on
which of the two countries (i.e., the source or the host country) values
schooling more.

Define the migrant flow to be positively selected in terms of educational


attainment if migrants are more likely to be composed of highly educated
individuals. Equation (6) shows that this type of positive selection will occur
when (dl - d0) > 0, so that the labor market in the host country attaches a
higher value to schooling than the labor market in the source country.
Define the migrant flow to be negatively selected in terms of educational
attainment if migrants are more likely to be composed of individuals with
little schooling. Equation
(6) shows that negative selection is generated
when the host country pays a lower "price" for educational skills than the
source country (i.e., (dl - d0) < 0). Put succintly, educated persons migrate
to the country that values educated labor the most. Therefore, international
labor flows are no different from the flows of goods implied by international
trade theory. Workers, like goods, flow to the country that is willing to pay
the most for them.
Selection

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 ? .

This result, however, says nothing about which types of individuals in


terms of the unobserved characteristics e are the most likely to migrate.
3
Heckman (1979, 1987) presentsa detaileddiscussionof the mathematicaland economic
structuresof modelsof self-selection.

ECONOMIC

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There is one reason why selectivity in unobserved ability is likely to be very


important. It is well known that the explanatory power of earnings functions
like (1) and (2) is relatively small, regardless of the specification of the vector
X. It is not uncommon, for example, for earnings function of this type to
have an R2 of less than 20 or 30 percent. In other words, an exhaustive set
of variables X "explains" less than a third of the variance in earnings among
individuals. Unobserved
differences among individuals either in 'skills/
or
Tuck'
dominate
'ability'
earnings distribution data.
Consider the conditional expectations E(e0|X,
I>0) and E(e1|X, I>0).
The first expectation gives the average "residual" in the source country for
persons who decided to emigrate from that country. The second expectation
gives the average residual of the immigrants in the country of destination.
Note that these conditional means "hold constant" the vector of charac?
teristics X, so that they are asking the following question: given X, what
kinds of persons migrate? The normality assumptions
imply that these
conditional expectations are given by:

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.

that if persons who emigrated from the source country are of


In
skills or ability, one would expect that Qo=0.
"average" unmeasured
addition, if these immigrants have an ability level equal to that of the native
Non-zero
population in the host country, one would expect that Qi=0.
values of Q0 and Q1? therefore, indicate the extent to which the self- selection
of the immigrant pool leads to a foreign born population
that is not of
skills.
of
the
definitions
of
unmeasured
average
Inspection
Qq and Qj
reveals that three cases are possible.
Note

Positive

Selection:

Qjq>0

and

Qj>0

By definition, positive selection exists when immigrants have above average


abilities in the source and host countries. In other words, the earnings of
persons emigrating to the source country are above average (among in?
dividuals with characteristics X) and the earnings of these immigrants in the
host country are also above average (compared to the earnings of natives

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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

is a positive constant (the parameter/?

(9)
_

aA
(a0
is defined by min | ? , ? |).

If the correlation coefficient in the earnings across the two countries is


sufficiently high and if income is more dispersed in the host country than in
the country of origin, immigrants arriving in the host country will be
selected from the upper tail of the source country's income distribution, and
will outperform demographically
similar natives upon arrival to the host
country. Intuitively, this occurs because the source country, in a sense, is
"taxing" high ability workers and "insuring" low ability workers against
poor labor market outcomes. These taxes and subsidies are, of course,
reflected in the fact that the host country's income distribution has more
inequality than the source country's income distribution. Since high income
workers benefit relatively more than low income workers from migration
to the host country, a "brain drain" is generated. The host country, with its
greater degree of inequality in earnings opportunities, becomes a magnet
for persons who are likely to do well in the labor market.4
Negative

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

It is of interestto note thatthe means of the income distributions


or the level of mobility
costsdo not enterthe conditionin equation (9). Mean income levels, therefore,do not affect
the typeofselectionthatis generated.Note, however,thatthe variablesQq and Q^ depend on
A. Since A is an inversefunctionof the probabilityof migration,mean income levels do affect
the "intensity"
of the selection.

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)

If the correlation coefficient in earnings across the two countries p is


negative or "small," the composition of the migrant pool is likely to resemble
a refugee population. For instance, it is likely thatp is negative for countries
that have recently experienced a Communist takeover. The change from a
market economy to a Communist system is often accompanied
by structural
changes in the income distribution and by confiscation of entrepreneurial
assets and redistribution to other persons. In essence, the income distribu?
tion in the source country becomes a mirror image of its pre-revolution
income distribution ? persons who did well prior to the political upheavals
see their assets vanish and given to persons who were not able to perform
well in a market economy. The model thus predicts that immigrants from
such systems will be in the lower tail of the "revolutionary" income distribu?
tion, but will outperform the average worker in the host country since the
immigrant has characteristics that are well suited for the market economy
in the host country.
This simple model, therefore, provides a useful categorization of the factors
that determine the ability distribution of the migrant pool. Several important
implications are generated which give some insight into a number of empirical
findings in the literature. For example, many studies have documented the fact
that refugee populations perform quite well in the U.S. labor market when
compared to native workers of similar demographic characteristics. These
empirical results can be understood in terms of the income-maximization
hypothesis: prior to the political changes which led to a worsening of their
economic status, refugees were relatively well off in their country of origin.
Changes in political regimes devalue their skills, but ability is once again
valuable when they migrate to a market economy. There is, therefore, no
reason to resort to the arbitrary distinctions between "economic" and "noneconomic" migration to explain the refugee experience.
The theoretical
empirical

for the
analysis also provides an interesting explanation
States
has
that
of
United
the
to
the
finding
migrants
"quality"

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declined in the postwar period (where quality is defined as the wage


differential between migrants and natives with the same demographic
Prior to the 1965 Amendments
to the Immigration and
characteristics).
to
the
States
was
United
Nationality Act, immigration
regulated by numeri?
cal quotas. These quotas were based on the ethnic population of the United
States in 1920 and thus encouraged immigration from Western European
countries and restricted migration from other continents, particularly Asia.
The favored countries in the pre-1965 period have one important charac?
teristic: their income distributions are probably much less dispersed than
those of countries in Latin America or Asia. The 1965 Amendments
abolished the restrictions on immigration from non-European
countries,
established a 20,000 numerical limit for legal migrants from any single

country and led to a substantial increase in the number of immigrants


originating in Asia and Latin America. The new flow of migrants thus
originates in countries that are much more likely to have greater income
inequality than the United States. Therefore, it would not be surprising to
find that the standardized earnings of immigrants declined as a result of the
1965 Amendments.

In addition, the 1965 Amendments


led to a fundamental shift in the
mechanism by which visas were allocated among potential migrants: the
role played by observable skills and occupational characteristics was deemnumber of visas began to be allocated
phasized and the overwhelming
according to the types of kinship relationships existing between potential
migrants and persons currently residing in the United States. The economic
model of immigration also suggests that this change in the statutes will lead
to a substantial decline in immigrant quality. In particular, the family of the
migrant that resides in the United States provides a "safety net" that insures
the immigrant against poor labor market outcomes and unemployment
periods in the months after migration. Low skilled persons who could not
migrate without family connections to the United States, and hence without
that insurance, will now find it worthwhile to do so. In effect, the kinship
regulations in the immigration law create a lower bound in the income levels
that low skilled immigrants can attain in the United States, and hence make
it more likely that immigrants are negatively selected from the population.
It is remarkable that the conditions determining selection in terms of
unobserved
ability have nothing whatsoever to do with the conditions
characteristics.
determining selection in terms of observed demographic
Selection on the basis of unobserved ability depends entirely on the extent
of income inequality in the host and source countries, and in the correlation
between earnings in the two countries. Selection on the basis of observed
characteristics, on the other hand, depends on parameters
demographic
the
measuring
price attached by each country's labor market to that par-

ECONOMIC

THEORY

AND INTERNATIONAL

MIGRATION

471

ticular skill. Any permutation of selection mechanisms in unobserved and


observed characteristics is, therefore, theoretically possible. That is, nega?
tive selection
in unmeasured
skill (or ability)
may be occurring
with
in
or
vice
versa. Thus, the
selection
education,
simultaneously
positive
flow
of
educated
immigrant
maybe composed
relatively highly
persons, but
these highly educated persons do not do well in the host country and did not
do well in the source country (compared to other highly educated persons)
prior to their migration. An important insight, therefore, is that the empiri?
cal observation that the migrant flow to any given host country is composed
of highly educated individuals does not imply that these highly educated
persons are the most productive highly educated persons in the country of
origin.
This implication of the economic theory of immigration reveals that little
can be learned from comparisons
of unstandardized
average earnings
between migrants and natives in any host country. These comparisons
incorporate the differences in both observed and unobserved characteristics
and confound the two types of selections that characterize the immigrant
flow. Simply because the average migrant earns more than the average
native does not imply a positive selection of the immigrant population. This
observation is consistent with a positive selection in observed characteristics
(such as education) and a (weak) negative selection in ability. Similarly, the
observation that immigrants have lower earnings than natives does not by
itself imply that the migrant population is negatively selected. This empiri?
cal observation
is consistent with negative selection in the observed
characteristics (the migrants may have little education), but weak positive
selection in the unobserved characteristics. The analysis, therefore, provides
an important theoretical reason for focusing on the study of standardized
earnings comparisons between immigrants and
which hold constant differences
comparisons,
tween natives and immigrants, reveal the types
characteristics and can be interpreted within the
theory of immigration.

natives. These standardized


in education, age, etc. be?
of selections in unobserved
framework of the economic

This simple model of the immigration decision, therefore, indicates that


the nonrandom
market can be
sorting generated by the immigration
in
a
terms
of
small
number
of
predicted
primitive parameters. There is no
theoretical reason for presuming, as many do, that immigrant flows are
always composed of "the best and the brightest." Under some conditions, it
is likely that the opposite will happen. There is also no theoretical justifica?
tion for assuming that the composition of immigrant flows will be constant
over time or across countries. As economic and political conditions change,
economic theory predicts that the size, direction and composition of im?
migrant flows will also change. In other words, there is no universal "law"

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that must characterize

all immigrant flows.


The model opens up a large number of new research possibilities. For
of why
example, it is no longer necessary to provide ad hoc explanations
the U.S. earnings of immigrants from different countries tend to exhibit so
much variation. The economic theory of immigration suggests that this
in terms of the economic and political condi?
variance can be "explained"
tions that guided the nonrandom sorting of persons across countries at the
time of migration. In fact, recent empirical work by Borjas
suggests that some of the model's implications are supported
cal evidence in the United States.
THE

ADAPTATION

OF

(1987b, 1988)
by the empiri?

IMMIGRANTS

Beginning with Chiswick (1978), the question of how immigrants "adapt"


to labor market conditions in the host country has received intensive study.
The economic model justifying much of this research is a simple application
of human capital theory (Becker, 1975). When immigrants arrive in the host
country, they lack many of the skills that are valuable in the host country
(e.g., language,
knowledge about the location of jobs, etc.). Hence, the
of
earnings
foreign born persons immediately upon arrival are likely to be
natives. Over time, however, since
lower than the earnings of comparable
have
lower
immigrants
relatively
earnings, they also have relatively higher
incentives to invest in human capital than natives (because the costs of
human capital investments are primarily composed of foregone earnings).
of language skills and
This investment process includes the accumulation
the internal migration of foreign born persons within the host country.
to
Immigrant earnings can be expected to rise relatively fast (compared
natives) as the returns to human capital investments are realized. The key

prediction of human capital theory, therefore, is that the age/earnings


profile of immigrants will be steeper than the age/earnings profile of
natives. This "catching-up" of earnings profiles reflects the "assimilation"
or adaptation of immigrants to the host country's labor market. Human
capital theory has also been used to explain the difference in investment
and "noneconomic"
behavior between so-called "economic"
immigrants
(Borjas, 1982). In particular, the returns to human capital investments
depend on the immigrant's perception of how permanent his move to the
host country is likely to be. Political refugees are often characterized by the
fact that there is little chance that political conditions in the source country
will change sufficiently to allow for their return. Hence, political refugees
have significantly lower probabilities of return migration than economic
immigrants.
The incentives to invest in human capital are affected by the length of
the time horizon over which the returns to these investments are collected.

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.

Human capital theory, therefore, generates important predictions about


the process through which immigrants adapt to the host country's labor
market. Unfortunately, little systematic modeling of this process has been
undertaken.
For example, it would seem that the types of investments
chosen by immigrants (who usually arrive in the host country as young
adults) would not be the same as the types of investments chosen by natives.
Similarly, most of the empirical research ignores the direct implication of
human capital theory that measures of the human capital stock (e.g., school?
ing, internal migration, job turnover, on-the-job
training) will have

different lifetime paths for natives and immigrants.


Instead, the literature has focused almost exclusively on measuring the
extent to which the age/earnings profile of immigrants differs from the
natives (i.e., natives with the same
age/earnings profile of comparable
characteristics). This econometric literature is based on the
demographic
cross-section regression model:
logwj

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

(12) has been estimated

using a large number of

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.

474

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data sets in several host countries (See, for example, Chiswick,


1978; Carliner, 1980; DeFreitas, 1980; Chiswick and Miller, 1985; Bloom
and Gunderson, 1987). Much of the conventional wisdom that immigrants
do quite well, and are positively selected, arises from the empirical evidence
obtained from the cross-section estimates of equation (12).

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

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Figure 1, therefore, conclusively shows that the existence of cohort effects


can yield seriously misleading, and erroneous, insights into the adaptation
process experienced
by immigrants in the host country's labor market.
a
researcher
Moreover,
estimating cross-section regressions like those given
no
has
by equation (12)
way of testing whether cohort effects are biasing his
results!
Cohort effects can, in general, be caused by two factors. The first is the
fact that the probability of return migration for foreign born persons seems
to be quite high. For instance, it has been estimated that perhaps as many
as 30 percent of the persons immigrating to the United States return to their
birthplaces within a decade after arrival (Warren and Peck, 1982). It is
extremely unlikely that the return migrants are randomly chosen from the
population of foreign born persons in the host country. If, for example,
immigrants who "fail" in the host country's labor market eventually return
to their birthplace, earlier cohorts of immigrants are overrepresented
by
This sample selection leads to cohort effects like those il?
"successes."
lustrated in Figure 1, and nonrandom
return migration probabilities,
inferences from
therefore, can lead the researcher to draw erroneous
cross-section regressions.
A second reason why cohort effects are likely to be important over time
is implied by the theory of immigration presented in the previous section.
either by changes in immigra?
Changes in the immigration market?caused
tion policies or by changes in political and economic conditions in host and
of the
source countries ? will generally lead to a different composition
lead
to
a
more
flow.
To
the
extent
that
these
negatively
changes
migrant
selected (or a more positively selected) migration flow, the cross-section
regression will again be biased by cohort effects and the estimates cannot
be interpreted

as measures

of the immigrant assimilation.

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

than the earnings growth experienced by natives, is not sufficient to allow


the most recent immigrant cohorts to ever overtake their native counter?
parts. Although there has been much debate concerning the meaning of
these strong results (Chiswick,
1986, Abbott and Beach,
1987), the
"revisionist" literature has contributed one important insight: cohort effects
play an important role and ignoring the trends in productivity across
immigrant cohorts can lead to seriously biased perceptions of the adaptation
process experienced by immigrants in the host country.
Although recent empirical research analyzing the determinants of im?
migrant earnings growth has found substantively important regularities in
the data, it is worth repeating that the theoretical models of economic
assimilation have not been sufficiently developed. For instance, the selection
model presented in the previous section implies that immigrants will be
self-selected not only on the basis of wage levels, but also on the basis of
wage growth. This would imply, for instance, that some cohorts of im?
in the host country than other
migrants are more likely to "assimilate"
cohorts of immigrants, and that these differences would arise because of
differences in political and economic conditions in the source and host
countries at the time of migration. The further development
and refine?
ment of these models will surely provide additional
insights into the
of
assimilation
and
into
the
role
the
meaning
immigration market
played by
in determining immigrant welfare in the host country.
THE
IMPACT
COUNTRYS

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

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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)

For simplicity, it is useful to make some technical restrictions on the produc?


tion technology. The usual restrictions are that higher levels of any input
(holding constant the quantities of the other inputs) increase output at a
diminishing rate. In other words, the production technology obeys the law
of diminishing returns. Secondly, it is often assumed that the production
technology in (13) has constant returns to scale: a doubling of all inputs
doubles output. It is worth noting that this assumption is not necessary for
the derivation of a theory of immigrant impact on the host country's labor
market, but it does simplify the empirical application of the theory substan?
tially.
An important insight provided by economic theory is that in a competitive
market, profit-maximizing firms employ all the factors of production up to
the point where their price, r^ (for the /th factor), is equal to the value of
marginal productivity. Hence:
r,

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

480

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Figure 3 illustrates the impact of the shift in immigrant supply on the


wage and employment level of type /native workers. As equation (14) makes
clear, the marginal productivity of type /workers depends on the size of the
immigrant labor force. Theory, however, does not specify the direction of
this relationship. If the demand function shifts to D; (from its original level
D/), the equilibrium wage and employment level of natives declines. Note
that this shift in the demand curve implies that the productivity of type 1
natives is adversely affected by the increase in the supply of immigrants.
This
Natives and immigrants, therefore, are substitutes in production.
substitutability implies that the employment and earnings opportunities of
native workers of type / are reduced because of competition
from im?
migrants.
On the other hand, if the demand function shifts to D , (from its original
level Dj), the equilibrium wage and employment levels of natives rise. Note
that this shift in the demand curve implies that the productivity of type /
natives increases as immigrants enter the labor market. Natives and imNATIVE

3
FIGURE
WAGE ? NATIVE EMPLOYMENT

<
LU
>

NATIVE

EMPLOYMENT

ECONOMIC

THEORY

AND INTERNATIONAL

MIGRATION

481

migrants, therefore, are complements in production. Natives gain from the


entry of immigrants in the labor market.
This elementary model, therefore, shows that the issue of whether im?
and
migrants have a positive or negative impact on the employment
earnings opportunities of natives is an empirical question. The impact of
without
immigrants on the native labor market cannot be ascertained
empirical evidence on the degree of substitutability or complementarity
among the various groups. The model does, however, highlight what the
relevant question in the policy debate should be: how do natives and
immigrants interact in the production process? The answer to this question
completely determines whether the demand curve in the native labor
market shifts up (natives and immigrants are complements)
or down (na?
tives and immigrants are substitutes) as the supply of immigrants increases.
There is also nothing in the theory that restricts immigrants and all native
groups to always have the same technological relationship. In other words,
it is possible that immigrants are substitutes with some native groups and
are complements with others. These relationships, as noted earlier, cannot
be determined by introspection, but are empirical relationships that must
be estimated. The estimation procedure requires that a functional form for
the production technology be specified. Given this specification, it is easy to
derive explicit equations describing the demand system for the various types
of inputs, and given data on earnings and employment of the various groups
in the labor market, the system of demand equations in (14) is estimable.
Several recent studies have estimated these types of models using U.S.
Census data (Altonji and Card, 1987; Bean, Lowell, and Taylor, 1988;
and Topel,
1982; and LaLonde
1987).
Borjas, 1986, 1987; Grossman,
in
in these studies,
the
differences
used
sets
and
data
Despite
methodologies
one result is common to the studies: the impact of immigrants on the
earnings and employment opportunities of natives is very small. A ten

percent increase in the number of immigrants reduces the native wage by


at most one half of one percentage point. Immigrants, however, do have a
significant impact on their own wage. A ten percent increase in the number
of immigrants reduces the immigrant wage by at least two or three percent.
The empirical evidence based on the neoclassical model of labor demand,
therefore, does not support the claims that immigrants have been a major
disruptive force in labor markets in the United States.
Despite the success of this framework in generating a simple empirical
methodology for measuring the impacts of immigrants on the host country's
labor market, it is worth noting that the theoretical model ignores a number
of potential problems that may affect the empirical validity of the results.
In particular, the empirical studies have basically ignored the insight that
the skills of immigrant labor differ across cohorts (as the sorting generated

482

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by the immigration market changes). In addition, the productivity of a


specific immigrant cohort also changes over time as assimilation takes place.
Immigrants, therefore, cannot be treated as a single labor input.
SUMMARY
The modern literature on the economics of immigration has focused on
of
three related questions.
What determines the size and composition
flows
How
do
to
host
the
immigrant
immigrants
any particular
country?
adapt to the host country? What is the impact of immigrants on the host
country? This article summarizes the economic approach to these questions.
A common theme running through the analysis is that the twin assumptions
characterizing neoclassical economic theory (i.e., individuals are maximiz?
ing their well-being and the exchanges among the various players lead to
an equilibrium in the marketplace) lead to substantive insights into each of
the three questions. Economic theory, therefore, leads to unique predictions
regarding the types of selection that characterize immigrant flows, the
adaptation or assimilation experienced
by different immigrants and the
impact of these immigrants on the host country's economy.
More importantly, the development of these theoretical insights guided
(and, in turn, was guided by) a growing body of empirical research. Many
of the predictions of the neoclassical model are roughly consistent with the
observed empirical regularities characterizing the size, composition and
impact of immigrant flows. Further development of the theoretical models
in the economics of immigration, and the continuing empirical research on
the characteristics of immigrants and their interaction with natives in the
host country, will surely lead to a deeper understanding of the immigrant
experience.

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