Does emigration increase the wages of non-emigrants in sending countries Updated

Some generalized facts about emigration and sending countries

First, nearly all countries in the world are sending countries, including such traditional receiving countries as Australia, Germany, and the US. The majority of countries have emigration rates between 1% and 10%, but a substantial number have emigration rates way above 10%, some even more than 50%.

Second, high emigration rates are generally concentrated among small states, while large states typically have low emigration rates (Figure 1). Since most receiving countries are large (exceptions like Luxembourg and the United Arab Emirates aside), this means that the same emigration wave translates into a larger labor supply shock in the (small) sending countries than in the (large) receiving countries. For example, ten million Mexican migrants account for about 4% of the US population but about 10% of the Mexican population. Even if labor markets function the same way in both Mexico and the US, the effect in Mexico should be stronger because the emigrants account for a larger change in population.

Finally, for most countries, high-skilled workers are a higher share of emigrants than of the population, often many times higher. Figure 2 illustrates the skill selection of emigrants—to what extent workers with higher education are over-represented among emigrants. The example of Vietnam (VNM) illustrates the importance of selection for understanding emigration: the country has an emigration rate of around 5%, but among the emigrants the share of high-skilled workers is four times the share among all Vietnamese workers [1].

Why would emigration affect the wages of non-migrants?

When thinking about the impact of migration on wages, the general public often has a simple labor market model in mind. More workers mean lower wages, and fewer workers mean higher wages. Emigration of some workers means that fewer workers compete for the same number of jobs in the sending country, which increases the wages of workers who stay behind. While providing a useful starting point, this model is perhaps too simplistic to provide meaningful insights without some important extensions, as will be discussed below.

If workers have different skills, and these skills are complementary, then a large emigration of one group reduces the demand for the other group and thus lowers their wages. On the other hand, if skills are similar, then emigration can increase demand and raise wages for this other group. Take as an example doctors and nurses. If many doctors emigrate, then the wages of the remaining doctors (“substitutes”) rise. But if there are fewer doctors, there is less demand for nurses (“complements”), whose wages decline.

Wage changes are only one of many reactions of an economy to an outflow of workers. Other important adjustment channels are capital flows, trade patterns, production inputs, internal migration, and remittances. Emigration can trigger an outflow of capital, because there are fewer workers to operate machinery. Alternatively, the lack of suitable workers may induce firms to switch from labor-intensive to capital-intensive production. If some regions have more emigrants than others, non-emigrants may move internally to fill the gaps left by emigrants. Emigrants may also affect innovation in the home country: this can have a positive effect if domestic firms benefit from the emigrants’ knowledge, or negative if emigration drains a country of its most talented innovators. Emigrants often send home remittances, which may affect labor supply and reservation wages (the wage at which someone is willing to work). Finally, many countries experience emigration and immigration at the same time. For example, many Polish workers left Poland after 2004, and a few years later Poland saw an increase in immigration from Ukraine. All these adjustments have a feedback effect on wages and may change the level of wages as well as their distribution.

If a country experiences a brain drain, losing its high-skilled workers, the entire economy may become less productive, which lowers the wages for all workers. On the other hand, the possibility of emigration gives people an incentive to invest in their human capital, which may increase productivity [2].

In the simplest model of a labor market, labor supply equals labor demand, labor supply does not depend on wages, and there is no unemployment. In such a world, emigration would affect only wages. In a world with unemployment, emigration can still affect wages, but the effect is smaller.

In theory, as well as in empirical practice, uncovering these effects is challenging because immigrants often work in jobs for which they seem over-qualified. Hence it is unclear which native workers immigrants compete with in the labor market in the receiving country and which native workers in the receiving country will be affected when immigrants return to their countries of origin.

Quantifying the effect of emigration on the wages of non-emigrants

Research on the impact of emigration on the wages of non-emigrants faces several challenges. Some of the challenges are the same as those for studying immigration, while others are specific to emigration and may impose substantial hurdles for producing credible and meaningful results.

The largest emigration-specific challenge is counting emigrants. While most receiving countries keep detailed records of their immigrants through border checks or registration, sending countries typically have no system for counting emigrants, let alone collecting information on their demographic characteristics.

A further challenge is to disentangle correlation from causation. Suppose data were available on the emigration rates of different groups of workers, as well as on the average wage of these workers, both at multiple points in time. And suppose that groups with high emigration rates had, on average, higher wage increases than groups with low emigration rates. Would it be safe to conclude that emigration causes wages to increase? Probably not. The correlation might merely reflect a mechanical effect: if within each group the workers with the lowest wages leave, then the average wage per group increases, but not because emigration changed the wages of the remaining workers.

Moreover, in long-standing sending countries, such as Mexico and the Philippines, emigration did not occur all at once. Rather, people have been emigrating and returning over decades, and so emigration is probably not the only change in the economy. Trade and foreign direct investment, for example, often have the same causes as migration and may affect wages in the sending country. It is therefore difficult to disentangle the impact of migration from the impact of other factors on the wages of non-emigrants.

Despite these challenges, researchers have found ways to plausibly quantify the causal effect of emigration on wages, net of other economic influences. One option is to use simulation methods. Researchers build a model economy that replicates important features of the real world and then simulate how emigration would affect wages in the sending country, while holding trade and capital flows constant.

In purely empirical studies, researchers either compare the wage changes in areas with many emigrants to those in areas with few emigrants, or they compare the wage changes of demographic groups with different emigration rates: young workers emigrate more than old workers, high-skilled more than low-skilled, and so on. Another method for understanding causal effect is natural experiments. Large and sudden emigration shocks are often the only plausible shocks that happened to an economy at that time. Examples are the emigration wave from Central Europe after the EU enlargement in 2004 and the emigration from Honduras in the aftermath of Hurricane Mitch in 1998. While illuminating, such shocks are not common and are of limited use in studying the impact of longer emigration processes. Instead, some researchers have used instrumental variables—forces that affect wages exclusively because they affect emigration. An example of a suitable instrumental variable for emigration is wage increases in the main destination countries, which make emigration more profitable but have no direct impact on the economy of the sending country.

The empirical evidence, 1870–2019

The importance of human capital: Insights from OECD countries

Often overlooked is the fact that most countries, even the most advanced, are also sending countries. After the 2008 recession, for instance, many high-skilled workers left Greece, Italy, and Spain and moved to Northern Europe. At the same time, Italy and Spain received many low-skilled immigrants. While the public seems more concerned about the impact of the immigration of low-skilled workers, a comprehensive study of OECD countries shows that the emigration of high-skilled workers can have significant negative effects on average wages at home [9]. Besides directly lowering the labor supply of high-skilled workers, the emigration of high-skilled workers drains the country of its most innovative and productive workers, which makes the entire economy less productive and decreases everyone's wages. These effects are small for most OECD countries (a 0.5% decrease in average wages over a ten-year period) but are large for small countries with high emigration rates, such as Cyprus and Ireland, where the predicted decrease in average wages is 2–3%. These average effects mask a strong distributional effect. Because the emigration is heavily skewed toward high-skilled workers, low-skilled workers lose a lot more—1% in the median country but up to 6% in some countries.

Emigration and wage inequality: Lessons from EU Enlargement

An important recent migration episode was the EU enlargement in 2004 and 2007, which, overnight, allowed citizens from ten Central European countries to move to work in Ireland, Sweden, and the UK and subsequently in the rest of the EU. The lifting of internal EU migration restrictions triggered a large and sudden emigration wave, which provides laboratory conditions for studying the impact on labor markets.

Two cases of emigration receive particular attention in the economic literature: Lithuania, from which 9% of the workforce emigrated to the UK and Ireland, and Poland, which had an emigration rate of around 5% [10], [11], [12]. Besides providing important insights into labor mobility in Europe, both cases show that emigration can substantially alter the wage distribution. In Lithuania, for example, most emigrant workers were aged 20–30, and the shares of high-skilled and low-skilled workers were similar among emigrants and non-emigrants. As predicted by a simple labor market model, this emigration wave led to wage increases for groups that had many emigrants, such as young workers, while it had a small negative effect for groups with few migrants, such as old workers. In the five years after EU enlargement, emigration led to a 5–8% wage increase among young workers with ten years of work experience or less, while it had zero or a small negative effect on the wages of older workers. For young workers, emigration accounts for about 15% of the total increase in wages over the five years. In Poland, where emigration was dominated by medium-educated workers, the pattern is similar. The wages of medium-skilled workers (workers with skills similar to those of most emigrants) rose significantly, while the wage change for high-skilled workers was close to zero, and low-skilled workers faced declining wages.

Emigration and innovation

An important channel through which emigration affects wages is innovation. This effect can be positive or negative, depending on the direction of knowledge flows. If the most talented innovators emigrate and take their knowledge with them, emigration reduces economic growth in the home country, which ultimately leads to lower wages. A recent study from Italy finds evidence for such an effect. The emigration of large numbers of entrepreneurs dampened entrepreneurial activity and wages [13]. However, the effect can also be positive if emigrants transfer their knowledge to their home country. A study of 32 European countries indeed finds positive effects of emigration on innovation in the sending countries. Through knowledge transfers, emigration can help to reduce the gap in innovation between high- and low-income countries [14].