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The Economic Consequencesof the International
Migration of Labor
Gordon H. Hanson
NBER and University of California, San Diego, La Jolla, California 92093;
email: gohanson@ucsd.edu

Annu. Rev. Econ. 2009. 1:179–207

Key Words

First published online as a Review in Advance onJune 4, 2009

immigration, emigration, brain drain, globalization

The Annual Review of Economics is online at
econ.annualreviews.org
This article’s doi:
10.1146/annurev.economics.050708.143247
Copyright © 2009 by Annual Reviews.
All rights reserved
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Abstract
In this paper, I selectively discuss recent empirical work on theconsequences of global labor mobility. I examine how international migration affects the incomes of individuals in sending andreceiving countries and of migrants themselves. Were a social planner to choose the migration policies that would maximize global
welfare, she would need to know, among other values, the elasticities of wages, prices, taxes, and government transfers withrespect to national labor supplies as well as how these parameters
vary across countries. My goal is to evaluate the progress of theliterature in terms of providing these inputs.

179

1. INTRODUCTION

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Given its prominent coverage by national media, the economic consequences of international migration would seem to be one of the burning issues or our time. In receiving
countries, public debate about immigration drives national politics, with recent electoral
campaigns in Australia, Denmark, France, Switzerland, and the United States each devoting substantial attention to the topic. Immigrants are blamed for disrupting civil society,draining public coffers, and lowering wages, among other woes (Huntington 2004). At thesame time, skilled immigrants receive credit for spurring innovation and the growth oftechnology sectors (Freeman 2006). Sending countries are no less conflicted about labormobility. Emigration has brought a welcome financial windfall in the form of remittances(Acosta et al. 2007), but it also threatens to drain poor economies of their most educatedworkers (Docquier & Rapoport 2009).
To an economist, it is no surprise that international migration is contentious. By
arbitraging the vast differences in wages that exist between countries, labor flows alter
the distribution of income in sending and receiving economies alike. In this dimension,international migration is similar to international trade. Both are mechanisms for globalization that create winners and losers. But there are other dimensions in which trade andmigration differ significantly. In most receiving countries, immigrants pay taxes and havethe right to draw on at least some public services, changing the net tax burden on native
residents. Once they become citizens, immigrants generally obtain the right to vote,altering domestic politics (Razin et al. 2002). In sending countries, emigrants cause corresponding fiscal and political disruptions by their departure. Differences between trade andmigration are evident in policy (Hatton & Williamson 2005). While most countries now
belong to the World Trade Organization, and maintain a nominal commitment to lowering trade barriers, a multilateral agreement that would allow international labor mobility
is a dim prospect, at best.1
What does economic research have to say about the costs and benefits of internationalmigration? Should we expect economists to advocate for the free international movementof labor as intensely as they tend to support free trade? The persistence of large differencesin average income between countries is prima facie evidence that allowing greater international labor mobility would raise world welfare (Pritchett 2006). Allowing labor to moveacross borders more freely would be a simple and obvious way to help narrow global
income gaps.
In this paper, I selectively discuss recent empirical work on the consequences of global
labor mobility. I examine how international migration affects the incomes of individuals in
sending and receiving countries and of migrants themselves. Were a social planner tochoose the migration policies that would maximize global welfare, she would need toknow, among other values, the elasticities of wages, prices, taxes, and government transfers with respect to national labor supplies as well as how these parameters vary acrosscountries. My goal is to evaluate the progress of the literature in terms of providing these
inputs. In considering the effects of labor mobility, I give equal weight to sending and
1

The closest sending and receiving countries have come to negotiating a multilateral deal on migration are discussions under Mode IV of the Doha Development Agenda of the World Trade Organization, which if adopted would
permit the temporary movement of service providers across borders, addressing a limited set of international laborflows. Because of their narrow scope, even if enacted, the provisions discussed would likely increase global laborflows by only a modest amount. For analyses of the economic impacts of Mode IV liberalizations, see Jansen &Piermartini (2005) and Schiff (2007).

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receiving countries, meaning neither receives in-depth treatment. For discussions on how
immigration affects receiving countries, see Borjas (1999a) and Card (2005), and on
research into how emigration affects sending countries, see Docquier & Rapoport (2009)
and Hanson (2007).2
Is there a case to be made against the unfettered movement of labor? In low-income
sending countries, the complaint has long been that the wrong individuals leave (Bhagwati &Hamada 1974). In most of the developing world, the more skilled have the highest propensity
to emigrate (Docquier & Marfouk 2006). If there are positive spillovers associated with humancapital (Lucas 1988) or education is financed through taxation (Bhagwati & Rodriguez
1975), the emigration of skilled labor can hinder economic development (Benhabib &Jovanovic 2007). Possible corrections include taxing the emigration of skilled labor(McHale 2009) or requiring receiving countries to admit more unskilled workers fromthe developing world (Pritchett 2006).
In high-income receiving countries, in contrast, the concern is that the wrong individuals are trying to get in (Borjas 1999b), though this position has generated controversy(Card 2005). In the United States and Europe, the average immigrant has much lessschooling than the average native worker. Increased inflows of low-skilled labor may
exacerbate distortions created by social-insurance programs or means-tested entitlement
programs (Wellisch & Walz 1998), which would possibly increase the net tax burden on
native residents (Borjas & Hilton 1996) and thereby fuel political opposition to immigration (Hanson et al. 2007, Facchini & Mayda 2006).
By assessing the economic consequences of labor mobility, one could determine whether
existing restrictions on immigration are justifiable on welfare grounds or whether they
are welfare-reducing policies, resulting from lobbying by special interests (Facchini &Willmann 2007) or concerns about the impact of immigration on voters (Benhabib 1996;
de Melo et al. 2001). Though a World Trade Organization for international migration isunlikely to form any time soon, one would still like to know whether such a venture would
be worthwhile. In addition to providing policy makers with guidance on setting the scale ofinternational migration, one would want the literature to give insight on its desired composition. Emigration pessimists suggest labor outflows are too skilled, while immigration
pessimists suggest labor inflows are not skilled enough. Both positions cannot be right.
Unfortunately, policy makers would be hard pressed to infer the effects of internationalmigration on global welfare from the existing literature. The issue is not so much that
economists disagree on the magnitudes in question. Rather, the problem is that the empirical literature tends to eschew a global general equilibrium perspective. There has been an
immense amount of work on how immigration affects U.S. wages, but this is just one
outcome of interest. There has been comparatively little work on the impact of immigration on nonlabor income, the consequences of emigration for labor markets in sending
countries, how global labor flows affect fiscal balances in labor-importing or laborexporting economies, or what changes in opportunities for emigration mean for the
incentive to acquire skill. To be sure, economists have made progress on each of these
topics. But taking the literature as a whole gives the impression that the most relevant
consideration for evaluating migration’s impact is how foreign labor inflows affect the2
Nor do I address the growing literature on the causes of international migration. See Mayda (2005), Clark et al.
(2007), Rosenzweig (2007), Brücker & Defoort (2006), Belot & Hatton (2008), and Grogger & Hanson (2008) forrecent work on the topic.

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earnings of low-skilled U.S. workers. If we want policy makers to make informed choices
about migration policy, we have a lot more work to do.
In Section 2, I summarize facts about international migration that emerge from recently
available data. In Section 3, I outline a simple framework for evaluating the welfare
consequences of international migration. In Section 4, I discuss empirical research on theconsequences of labor flows for incomes in sending and receiving countries and for
migrants and their family members. Finally, in Section 5, I consider directions for futureempirical work.

2. TRENDS IN INTERNATIONAL MIGRATION

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Perhaps the most striking fact about international migration is that it is so uncommon. As
summarized in (Figure 1), data compiled by the United Nations imply that in 2005 individuals residing outside of their country of birth comprised just 3% of the world’s population. Moreover, during the past two decades, the stock of international migrants has grown
only modestly, rising from 2.2% of the world population in 1980 to 2.9% in 1990 andincreasing only marginally after that. Given substantial differences in average incomes
between countries, the small scale of global migration is surprising. In 2005, per capita
GDP (adjusted for purchasing power parity) was $33,600 in high-income OECD countries,
compared with $9200 in Eastern Europe and Central Asia, $8400 in Latin America and the
Caribbean, $6200 in the Middle East and North Africa, $3900 in East Asia and the Pacific,$2100 in South Asia, and $1700 in Sub-Saharan Africa. Of course, differences in average
income may overstate the gain to migration. In Section 4, I discuss recent estimates of crosscountry earnings differences, which indicate that although per capita GDP differences do
exaggerate the income gain to moving abroad these gains are still substantial.
One explanation for the small scale of international migration is that receiving-country
restrictions on immigration are binding. Table 1 shows the share of the population that isFigure 1
Fraction of world population comprised of international migrants.
Source: United Nations (2006).
182

HansonTable 1 Percentage of foreign-born population in total population
ChangeCountry

1995

2000

2005 1995–2005

Australia

23.0

23.0

23.8

10.5

13.5

Austria
Belgium

9.7

10.3

12.1

2.4

Canada

16.6

17.4

19.1

2.5

4.2

5.1

0.9

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0.8

Denmark

4.8

5.8

6.5

1.7

Finland

2.0

2.6

3.4

1.4

10.0

8.1

b

FrancecGermany

11.5

d

12.5
10.3

GreeceHungary

2.8

2.9

3.3

0.5

Irelande

6.9

8.7

11.0

4.1

Italyd2.5

Luxembourg

30.9

33.2

33.4

2.5

Mexico

0.4

0.5

0.4

0.0

9.1

10.1

10.6

1.5

New Zealand

16.2

17.2

19.4

3.2

Norway

5.5

6.8

8.2

2.7

5.4

5.1

6.3

0.9

Slovak Republicd

2.5

3.9

Spaind5.3

NetherlandsePolandPortugal

Sweden

10.5

11.3

12.4

1.9

Switzerland

21.4

21.9

23.8

2.4

Turkey1.9

United Kingdom

6.9

7.9

9.7

2.8

United States

9.3

11.0

12.9

3.6

a

Source: OECD [2006 (1995 data), 2007].
2000 value is from 1999.
c2004 value is from 2003.
d2000 value is from 2001.
e
1995 value is from 1996.
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Annu. Rev. Econ. 2009.1:179-208. Downloaded from arjournals.annualreviews.org
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foreign born in select OECD countries. Aside from tiny Luxembourg, the countries withthe largest immigrant presence in 2005 are Australia (24%), Switzerland (24%), New
Zealand (19%), and Canada (19%). Australia, New Zealand, and Canada are uniqueamong receiving countries in using a point system (rather than quotas) to govern applications for admission, in which individuals with higher levels of skill are favored for entry.
Next in line in terms of the scale of immigration are the large economies of Germany(13%), the United States (13%), France (10%), and the United Kingdom (10%). The
United States alone hosts 40% of immigrants living in OECD countries, making it theworld’s largest receiving country. The United States uses a quota system to govern legal
immigration, with two thirds of visas reserved for family members of U.S. citizens orresidents. European countries tend to place more emphasis on an individual’s refugee orasylee status when making immigrant admission decisions (Hatton & Williamson 2004).
In the past decade, there have been substantial increases in foreign-born population sharesin a number of rich countries, with the largest changes over 1995–2005 occurring in
Ireland (4.1%), the United States (3.6%), New Zealand (3.2%), the United Kingdom(2.8%), Norway (2.7%), Canada (2.5%), Belgium (2.4%), and Switzerland (2.4%).
One indication that receiving-country restrictions on immigration are binding is that
inflows of illegal immigrants are both a substantial share of total immigration and these rates
are on the rise. In the United States, Passel (2006) estimates that in 2007 there were 12
million illegal immigrants, which accounted for 30% of the U.S. foreign-born population,
up from 28% in 2000 and 19% in 1996. More than two thirds of U.S. illegal immigrants arefrom Mexico and Central America, suggesting that proximity facilitates illegal entry (Hanson2006). In Europe, Jandl (2003) estimates that in 2003 there were 4 million illegal immigrants
in the 15 European Union countries, with the largest stocks in Germany, the United Kingdom, Italy and France. Greece, Italy, Portugal, and Spain have engaged in repeated recent
legalizations of illegal immigrants, meaning that the current stock of illegal immigrants inthese countries understates the number of immigrants who gain entry illegally.
In high-income OECD nations, low-income countries are an important source of
migrants. Table 2, using data from Beine et al. (2007), shows the share of the immigrant
population in OECD countries by sending region. In 2000, 67% of immigrants in theOECD were from a developing country, up from 54% in 1990. Among developing sending
regions, Mexico, Central America, and the Caribbean are the most important, accountingfor 20% of OECD immigrants in 2000, up from 15% in 1990. Half of this region’s
migrants come from Mexico, which in 2000 was the source of 11% of OECD immigrants,
making it the world’s largest supplier of migrants. The next most important developing
source countries are Turkey (3.5% of immigrants); China, India, and the Philippines (eachwith 3%); Vietnam, Korea, Poland, Morocco, and Cuba (each with 2%); and Ukraine,
Serbia, Jamaica, and El Salvador (each with 1%).
Among sending countries, there is substantial variation in the propensity to emigrate.
As of 2000, there were 22 developing nations with 10% or more of their adult population
having migrated to the OECD, and 16 with emigration rates above 5%. At the otherextreme, 52 developing countries had emigration rates below 1%. There is strong persistence in which countries send more people abroad, as seen in Figure 2, which plots
emigration rates in 1990 and against those in 2000. Countries with the highest emigration
rates tend to be small, poor countries that are relatively close to the United States.
Within sending countries, emigrants tend not to be drawn randomly from the population.
Figure 3, taken from Grogger & Hanson (2008), plots the log odds of emigration for individuals
184

HansonTable 2

Share of OECD immigrants by sending region, 2000aAnnu. Rev. Econ. 2009.1:179-208. Downloaded from arjournals.annualreviews.org
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Low-income sending region

Share of immigrants by OECD receiving region

Change in OECD share

All OECD North America Europe Asia, Oceania

1990–2000

Mexico, Central America, Caribbean 0.202

0.374

0.025

0.002

0.053

Southeast Asia

0.102

0.137

0.039

0.160

0.016

Eastern Europe

0.099

0.049

0.161

0.116

0.042

Middle East

0.063

0.032

0.113

0.029

0.001

South Asia

0.052

0.052

0.055

0.036

0.011

North Africa

0.044

0.009

0.098

0.018

0.006South America

0.041

0.050

0.031

0.035

0.010

Central and South Africa

0.036

0.021

0.061

0.021

0.007

Former Soviet Union

0.029

0.023

0.042

0.010

0.002

Pacific Islands

0.004

0.003

0.001

0.027

0.000

Total

0.672

0.750

0.626

0.454

0.132

Western Europe

0.244

0.152

0.336

0.368

0.111

Asia, Oceania

0.055

0.062

0.018

0.156

0.010

North America

0.029

0.037

0.020

0.023

0.011

Total

0.328

0.251

0.374

0.547

0.132High-income sending regionaData shown for 2000 on the share of different sending regions in the adult immigrant population of the entire OECD and of three OECD
subregions. High-income North America includes Canada and the United States, and high-income Asia and Oceania includes Australia, Hong
Kong, Japan, Korea, New Zealand, Singapore, and Taiwan.
Source: author’s calculations using data from Beine et al. (2007).

with tertiary education (13 or more years) against the log odds of emigration for individuals withprimary education (0–8 years). Nearly all points lie above the 45 line, indicating that in mostcountries individuals with more education are more likely to leave. Migrants thus appear to bepositively selected in terms of schooling. It is high emigration rates for the more educated thatraise concerns about brain drain from developing countries. Even though they are positively
selected, migrants often have education levels far below those of native residents, owing to thefact that many come from countries with low average levels of schooling.
More-skilled emigrants tend to cluster in locations where the reward to skill is relatively high. This phenomenon of positive sorting is evident in Table 3, also taken from
Grogger & Hanson (2008), which gives the share of international migrants residing inOECD countries by major destination region. Countries in which the reward to beinga skilled worker is relatively large attract a disproportionate share of more-educatedemigrants. In the United States and Canada, the difference in earnings between highskilled and low-skilled workers is much greater than in continental Europe; this difference
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Figure 2
Persistence in emigration rates.
Source: author’s calculations using data from Beine et al. (2007).

Figure 3
Positive self-selection by education of emigrants, 2000. The log odds are defined as the log ratio ofadult emigrants with a given education level relative to the entire adult population of a country(emigrants plus nonemigrants) with the same education level.
Source: Grogger & Hanson (2008).
186

HansonTable 3

Share of OECD immigrants by destination region and education, 2000a
Education group

Destination
regionPrimary

Secondary

Tertiary

North America

0.514

0.352

0.540

0.655

Europe

0.384

0.560

0.349

0.236

Australia andOceania

0.102

0.088

0.111

0.109

0.355

0.292

0.353

All OECD

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AllaData show the share of immigrants in OECD countries by schooling group and destination region for North
America (Canada, Mexico, the United States), Australia and Oceania (Australia, Japan, New Zealand, Korea), andEurope (other OECD members as of 2000).
Source: Grogger & Hanson (2008).

is even larger once one accounts for Europe’s more progressive tax system. The UnitedStates and Canada receive 51.4% of the OECD’s immigrants, but 65.5% of its immigrants
with tertiary schooling. Europe, in contrast, receives 38.4% of the OECD’s immigrants,
but only 23.6% of its tertiary-schooled immigrants. Realizing potential global welfare
gains from migration may require not just allowing individuals to emigrate from lowincome countries in larger numbers but also allowing them to sort themselves acrossreceiving countries according to labor-market rewards to skill.
The small scale of international migration suggests that rich-country restrictions on immigration are at least partially effective at impeding labor inflows from abroad. Migrating
legally involves costs associated with obtaining a visa, which can easily run into the tens of
thousands of dollars. Illegal entry is also subject to costs, with fees for smuggler services tocross the U.S.-Mexico border in 2006 and 2007 averaging around $3000 (Hanson 2006) andfees to migrate from China and other distant countries to the United States surpassing$30,000. Either because of fixed costs to emigration or because of larger gains in labormarket earnings from moving abroad, more-educated individuals tend to dominate labor
outflows from poor sending countries to rich destinations. Though migrants tend to be moreeducated than those that remain in sending countries, they often have much lower educationlevels than native residents in receiving countries. As a consequence, immigration from poor
countries tends to increase receiving countries’ relative supplies of individuals with low
education levels.

3. WELFARE CONSEQUENCES OF INTERNATIONAL MIGRATION
What information would one need to gauge the effects of international migration on
national and global welfare? Let V(p, yi) be the indirect utility enjoyed by an individualwith factor type i who faces price level for consumption goods and services, p, and who
receives after-tax income available for consumption, yi.3 To keep things simple, I examine
3
I take liberties with the indirect utility function by treating p as a price index and thus a scalar. If there was morethan one good in consumption, this would require redefining V(.). So long as preferences are homothetic, there
would be no other complications.

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the welfare effects of migration in static terms. Another simplification is to assume there
are just two types of individuals, high skilled (i = H) and low skilled (i = L), where all
workers supply labor inelastically. A third simplification is to impose constant returns toscale in production, such that goods’ prices are a function of unit factor costs. Consider
the migration of low-skilled labor from a low-income sending country (e.g., Mexico) to ahigh-income receiving country (e.g., the United States). For country c, the impact of
migration on national welfare is given by
X @V c @p @V c @yi iidW c ¼
þ
dLc ;
aci
ð1Þ
@L
@p
@y
@L
i
i

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where aci is the fraction of the population with skill type i. The first term in the brackets inEquation 1 is the impact of migration on consumer prices; the second is the impact of
migration on factor income. In the United States, there would be an increase in the supplyof low-skilled labor (dLc > 0), whereas in Mexico there would be a decrease (dLc 5 0).
Suppose preferences are homothetic and the marginal utility of income, @Vci/@yi, is aconstant. In this case, the impact of migration on national welfare in country c can be
written as


@yL
@yH
dW c ¼ bc þ lc Lc
þ Hc
dLc ;
ð2Þ
@L
@L
where lc is the marginal utility of income divided by the population (Lc þ H c ) andbc ¼ ð@Vic =@pÞð@p=@LÞdLc would be positive in the United States (so long as immigration
lowers the average price of goods) and negative in Mexico (so long as emigration raises theaverage price of goods). Stating the change in welfare relative to national income,Y c ¼ Lc ycL þ H c ycH , Equation 2 becomesccdW c  c
c
c c M
c c M
ð3Þ
¼
b
þ
l
y
e
þ
y
e
;
L LL c
H HL
Yc
L
Hc
where ~bc ¼ bc =Y c , ycL ðycH Þ is the share of low-skilled labor (high-skilled labor) in national
income, eiL ¼ ð@yi =@LÞðL=yi Þ is the elasticity of income for factor type i with respect to the
supply of low-skilled labor, and Mc = dLc. Immigration (emigration) of low-skilled labor
lowers (raises) low-skilled wages in the United States (Mexico) but raises (lowers) highskilled wages in the United States (Mexico), owing to the fact that ecLL 50 and ecHL > 0.
For the United States, the term in brackets is equivalent to the immigration surplus,
described by Borjas (1999a), but expressed in terms of two factors of production, as inEuwals & Roodenburg (2004). For the United States, the immigration surplus is positive,
because immigration raises GNP, defined to exclude migrant income. The change in
Mexico’s GNP, defined to include the incomes of nonmigrants and migrants, is also
positive. Because GNP increases in both countries, global welfare rises.
Figure 4 captures the changes in income more formally, where I assume there is a single
good and that migration equalizes wages for low-skilled labor in the two countries. The
horizontal width of the box in Figure 4 gives the total labor supply in the United States
 . U.S. (Mexico) labor demand is given by Dus (Dmx), with origin 0us (0mx).
and Mexico, L
In the premigration equilibrium, at point 1, U.S. labor supply is Lus
1 and Mexico’s labor
Lus , causing U.S. wages to exceed Mexican wages: yus > ymx .
supply is L
1
L
L
If low-skilled labor is allowed to move freely between the countries, there will be
migration from Mexico to the United States up to the point where U.S. and Mexican
188

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Figure 4
Changes in income as a function of migration for Mexico (MX) and the United States (US).
L represents the labor supply, and D is the labor demand. See text for additional details.

wages are equalized at yL , shown by point 2, with low-skilled wages rising in Mexico andfalling in the United States. U.S. labor supply expands to Lus
2 and Mexico’s contracts to  Lus , as Lus  Lus workers move between countries. In the United States, the loss inL
2
2
1
income for native low-skilled workers is given by area A and the gain in income for native
high-skilled workers is given by area AþB. The change in U.S. GNP equals area B, whichis the immigration surplus. Migrants earn income CþDþE, meaning that U.S. GDP(which includes the income that migrants earn in the United States) rises by an amountequal to area BþCþDþE.
In Mexico, native high-skilled workers have an income loss equal to area DþF, due tothe departure of low-skilled labor. Nonmigrating native low-skilled workers have an
income gain equal to area F and migrating native low-skilled workers have an income
gain equal to area CþD. Mexico’s gain in GNP equals area C, though it has a loss in GDP
equal to area DþE. The gain in world national income equals BþC, as migration eliminates differences in labor productivity between countries. To ensure that internationalmigration generates Pareto gains in welfare, U.S. low-skilled workers would have to
receive an income transfer equal to at least A and Mexican high-skilled workers would
have to receive a transfer of at least DþF.
A change in the environment that could affect the implications of migration for income
is the introduction of redistributive taxes and transfers. Redefine yi as after-tax, or net,
income, which depends on pretax wage income, wi, the income-tax rate, ti, and government transfers, gi, such thatyci ¼ wci ð1  tic Þ þ gci :ð4ÞUnder the assumption that wcH > wcL (i.e., there are positive returns to skill), an economy with progressive taxes that redistributes income from high-income to low-incomecindividuals would have that tH> tLc and gcH =wcH 5gcL =wcL . Returning to Equation 3, thewww.annualreviews.org  International Migration of Labor

189

elasticity of net income with respect to the supply of low-skilled labor, eciL , would accountfor how immigration affects not just pretax labor income, wci , but also the tax rate, tic , andgovernment transfers, gci . This elasticity can be written as
eciL ¼ rcw;i Zcw;iL ð1  ti Þ  rct;i Zct;iL þ rcg;i Zcg;iL ;ð5ÞAnnu. Rev. Econ. 2009.1:179-208. Downloaded from arjournals.annualreviews.org
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where for factor type i rch;i is the share of income type h in net income and Zch;iL is theelasticity of income type h with respect to the migration of low-skilled labor (where w =pretax wages, g = government transfers, and t = taxes).
To interpret Equation 5, consider the impact of low-skilled immigration on high-skilllabor in the United States. Based on Figure 4, an inflow of low-skilled foreign labor raises
wages for high-skilled U.S. workers (because Zcw;HL > 0). However, it may also raise the net
tax burden on these individuals. If in the United States the net tax burden (tic wci  gci ) is
positive for the high skilled and negative for the low skilled and immigrants have theright to receive government transfers, then low-skilled immigration could increase U.S.
government spending by more than it increases tax revenues. To balance the government
budget, the Unites States would have to increase tax rates and/or decrease governmenttransfers. Were the United States to keep its progressive tax system in place, the net tax
burden on the high skilled would rise, offsetting their gain in pretax income. For U.S. lowskilled workers, the loss from low-skilled immigration may be greater than without a tax
system in place. Not only would their pretax wage fall as a result of the increase in lowskilled labor supply (because Zcw;LL 5 0), but they could also face lower transfers and/or
higher taxes.
If the sending country also has a progressive tax system, the departure of low-skilled
emigrants could reduce the net tax burden on nonmigrants, allowing the government todecrease taxes on the high skilled and/or raise transfers to the low skilled. However, thetax effects from low-skilled emigration are less clear-cut once one accounts for life-cyclefeatures of taxes and transfers. Many of the transfers individuals receive over their lifetime
come in their youth in the form of public education and subsidized health care. If lowskilled workers enjoy these transfers while young and emigrate before entering the labor
force, sending-country governments would be denied the returns on the investments they
have made in these individuals. In principle, low-skilled emigration has the potential toincrease the net tax burden on nonmigrants in the sending country. With an increase inhigh-skilled emigration, the change in net tax revenue for the sending country is likely tobe negative, given the magnitude of the investments sending-country governments make intheir education and the high incomes these individuals earn.
Equations 3 and 5 give a partial inventory of the parameters policy makers would needto know to assess the welfare consequences of international migration. These include theelasticities of wages, tax rates, government transfers, and consumption prices with respect
to national labor inflows and outflows. Allowing labor supply to be elastic would exacerbate the welfare effects of tax and transfer policies.
The effects of migration on skill accumulation are also important, given the centralityof human capital to the process of economic growth. Theoretical literature has devoted
substantial attention to the impact of emigration on the incentive to acquire human capitalin sending countries (Docquier & Rapoport 2009). Absent distortions, moving labor froma low-productivity to a high-productivity environment raises global income. However, if
there are positive externalities associated with learning (e.g., Lucas 1988), the exodus ofskilled labor from a country may have adverse consequences for economic development in
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sending countries (Bhagwati & Hamada 1974). In theory, the impact of brain drain on asending country can be positive or negative. Miyagiwa (1991) developed a model inwhich, because of human-capital spillovers, the migration of skilled labor from a lowwage, skill-scare economy to a high-wage, skill-abundant economy reinforces the incentive for brain drain, depleting the low-wage country of skilled labor. In Wong & Yip(1999), the negative effects of brain drain on the stock of human capital reduce the laborexporting country’s growth rate.
It is also possible, however, that emigration would on net increase the supply of humancapital in a country, creating a brain gain (Stark & Wang 2002). With high incomes forskilled labor in rich countries and uncertainty over who will succeed in emigrating, theoption of moving abroad may induce individuals to accumulate enough additional humancapital to compensate for the loss in skill to labor outflows (Beine et al. 2001). Mountford(1997) shows that in the presence of human-capital externalities an emigration-induced
increase in the incentive to acquire skill can help an economy escape a poverty trap andmove to a high-growth equilibrium.
To assess the welfare consequences of international migration, policy makers would
need to know, in addition to the elasticities in Equation 5, how labor mobility affects the
incentive to acquire skill in sending and receiving countries. The framework I have outlined, while very simple, has demanding informational requirements for assessing thewelfare effects of migration. I next examine how successful the literature has been inmeeting these informational requirements.

4. EMPIRICAL RESEARCH ON INTERNATIONAL MIGRATION
I begin the discussion by considering the gain in income to migrants as well as the evidence
on the extent to which migrants share these gains with family members in the sending
country. I then consider the impact of global labor flows on labor-market earnings, net tax
burdens, and skill acquisition in sending and receiving countries.

4.1. Income Gains to Migrants
Consider the income gain to migrating from Mexico to the United States. In 2000, percapita GDP in Mexico was $9700 compared with $34,500 in the United States (allmonetary figures discussed in this section are in 2000 U.S. dollars and adjusted forpurchasing power parity). Although the income gain from leaving Mexico for the UnitedStates is likely to be large, it is surely overstated by the difference in average income,reported in Table 4.
One issue is that workers in Mexico and the United States have different levels of
education and labor-market experience. At the very least, one would want to compare
incomes for individuals with similar observable characteristics. Using data from U.S. andMexico population censuses, Hanson (2006) reports that in 2000 the average hourly wage
for a 28–32-year-old male with 9–11 years of education was $2.40 in Mexico and $8.70
for recent Mexican immigrants in the United States. At a labor supply of 35 hours per
week and 48 weeks per year this would yield a yearly income gain of $10,600. Combining
household data in developing countries with data from the U.S. Census, Clemons et al.
(2008) estimate that in 2000 the annual income gain to migration for a 35-year-old urban
Mexican male with 9–12 years of education was $9200.
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Table 4

Gain in annual income for immigrants migrating from Mexico to the United Statesa

Income measure

Reference

Value

U.S.-Mexico difference in per capita GDP

World Bank (2009)$24,800

U.S.-Mexico difference in average annual earnings of
28–32-year-old males with 9–11 years of education

Hanson (2006)$10,600

Estimated gain in annual earnings from U.S. migration for
Clemons et al. (2008) $9200
a 35-year-old urban Mexican male with 9–12 years of education
Average gain in income for a legal immigrant from Mexico
with 9–12 years of education

Rosenzweig (2007)$15,900aAnnu. Rev. Econ. 2009.1:179-208. Downloaded from arjournals.annualreviews.org
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All figures are in 2000 U.S. dollars and adjusted for purchasing power parity.

Simply by controlling for observable characteristics, the estimated gain to migrationfrom Mexico to the United States falls from $25,000 to $10,000. Even still, migrants andnonmigrants with similar education and experience may not be comparable. They may
differ in terms of unobserved cognitive ability, motor skills, or motivation. The data in
Figure 3 suggest that emigrants are positively selected in terms of schooling. If migrants
are also positively selected on unobserved characteristics, the estimated $10,000 gain
would overstate the benefits from Mexican emigration. Using a range of econometrictechniques, Clemons et al. (2008) attempted to control for self-selection on unobservables
in migration as well as for the possibility that the gains to migration include compensation
for the cost of moving abroad. They found that observed gains to migration overstate true
gains by 1.25–1.5 times. For the Mexico-U.S. case, the gain to migration would fall from
$10,000 to between $6700 and $8,000.
A better comparison would be to examine income for the same individual, before andafter migration. Rosenzweig (2007) uses data from the New Immigrant Survey to estimate
the change in income for new U.S. permanent legal immigrants in 2003. He compared
immigrants’ current U.S. earnings with their earnings in the last job they held in theircountry of origin. For a legal immigrant from Mexico with 9–12 years of education, theaverage gain in income is $15,900 (at 35 hours a week and 48 weeks a year). Comparing
the same individuals in two countries corrects for selection of unobservables but introduces other complications. If preparation for migration means a reduction in labor supply,
Rosenzweig’s estimates may overstate the gains to migration.4
An alternative way to gauge the income gain to migration would be to compare theincomes of two individuals from the same source country where one is randomly selected
to migrate to a particular destination and the other is not. McKenzie et al. (2006) use datafrom New Zealand’s visa lottery to examine such an experiment. They compared theincome of lottery losers in Tonga (i.e., those who applied for the visa lottery and were
rejected) with the incomes of lottery winners who migrated from Tonga in New Zealand.
The average increase in income is 263%, which is half as large as the difference in Tongan
and New Zealand per capita GDP. McKenzie et al. also compared the incomes of lottery
losers in Tonga with the incomes they expected to have earned if they had migrated.
4

Since Rosenzweig (2007) examines legal immigrants, his figures are not directly comparable to Hanson (2006) or
Clemons et al. (2008), whose samples include legal and illegal immigrants.

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Expected gains are only 84%. Relatively small expected gains may reflect informational
asymmetries between domestic and foreign residents regarding labor-market conditions
abroad.
The income gain from migration captures the gross return from moving to anothercountry. Whereas much research has been conducted on the role of migration networks in
migration decisions (e.g., Munshi 2003), there is little work that estimates the actual costof migration. These costs include transport expenses in moving abroad, time lost inchanging labor markets, administrative fees for legal migration, border-crossing costs inillegal migration, the psychic costs of leaving home, and perceived changes in uncertainty
from living and working in another country. The absence of comprehensive data on
migration costs means that we are far from being able to produce estimates of the change
in net income emigration.
Through remittances, migrants share a portion of their extra income with family members
at home. Remittances have increased markedly in East Asia, the Pacific, Latin America, theCaribbean, South Asia, and Sub-Saharan Africa. As of 2005, remittances exceeded official
development assistance in all regions except Sub-Saharan Africa and were greater than 65%
of foreign direct-investment inflows in all regions except Europe and Central Asia. Amongthe smaller countries of Central America, the Caribbean, and the South Pacific, remittances
account for a large share of national income, ranging from 10% to 17% of GDP in the
Dominican Republic, Guatemala, El Salvador, Honduras, Jamaica, and Nicaragua andrepresenting an astounding 53% of GDP in Haiti (Acosta et al. 2007).
Having migrants abroad provides insurance to households, helping them smoothconsumption in response to income shocks, be they domestic or foreign. Yang (2007)
examines changes in remittances to households in the Philippines before and after the
Asian financial crisis. As of 1997, 6% of Philippine households had a member who had
migrated abroad. Some had gone to countries in the Middle East, whose currencies
appreciated sharply against the Philippine peso in 1997–1998, while others had gone toEast Asia, where currencies appreciated less sharply or even depreciated. Consistent
with consumption smoothing, remittances increased more for households whose
migrants resided in countries that experienced stronger currency appreciation against
the peso.
There is some evidence that increases in remittances are associated with increased
expenditure on education and health. Yang (2007) also examines changes in household
expenditure and labor supply in the Philippines. Households with migrants in countries
experiencing stronger currency appreciation vis-à-vis the peso had larger increases inspending on child education, spending on durable goods, children’s school attendance,and entrepreneurial investments. In these households, the labor supply of 10–17-year-old
children fell by more, particularly for boys. Using cross-section data on Mexican states,
Woodruff & Zenteno (2007) found a positive correlation between emigration and business formation. These results suggest migration may help households overcome credit
constraints imposed by the sending-country financial markets.
Differences in per capita GDP across countries appear to overstate the income gainfrom migrating abroad by two to three times. Even after accounting for this bias, thegross income gain to migration is still large. For a young male with some secondary education, Clemons et al. (2008) estimate the median annual gain from migrating to the UnitedStates to be $11,200, whereas Rosenzweig estimates the annual gain to legal migration to theUnited States to be $10,600. The net gains to migration are unknown, however, givenwww.annualreviews.org  International Migration of Labor

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the absence of information about the magnitude of total migration costs. Remittances spreadthe income gains from migration to individuals in sending countries, allow households tosmooth consumption in response to income shocks, and may relax credit constraints onhouseholds.

4.2. Labor-Market Consequences

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The labor-market consequences of international migration have inspired intense debate
among scholars. The vast majority of research has focused on the impact of labor inflows
on the U.S. wage structure. Only recently has the literature begun to examine otherreceiving countries or effects on sending economies. The U.S. literature has been extensively reviewed elsewhere (e.g., Borjas 1999a, Card 2005), allowing me to cover the topic
briefly. I summarize the current state of the debate and identify questions that are central
to resolving it.
Research using data on the national U.S. labor market suggests that immigration
depresses wages for U.S. workers. Borjas (2003a) defines labor markets at the national
level according to a worker’s education and labor-market experience. Over the period
1960–2000, education-experience cells in which immigrant labor-supply growth has been
larger—such as for young high-school dropouts—had slower wage growth, even after
controlling for education- or experience-specific wage shocks. The evidence is consistent
with immigration having depressed wages for low-skilled U.S. workers. The concern about
this approach is that it may confound immigration with other labor-market shocks thathave hurt low-skilled workers, such as skill-biased technological change. Absent controls
for these other shocks, one cannot be sure the attributed wage changes are really due toimmigration.
Applying a similar approach to Canada, Aydemir & Borjas (2007) found comparable
evidence of the wage effects of migration. In Canada, where immigration has been dominated by workers toward the top end of the skill distribution, immigration is negatively
correlated with wages across education-experience cells, with more-educated workers
being the ones who have suffered the largest wage effects. Because Canada is presumably
subject to many of the same technology shocks as the United States, unobserved technology shocks are an unlikely explanation for the wage effects of immigration in bothcountries.
The national-level approach also yields comparable results of the wage effects of
migration in sending countries. Mishra (2007) found a positive correlation between emigration and wages across education-experience cells in Mexico, where emigrants comedisproportionately from the middle of the skill distribution. This means that workers withclose to average levels of education are those who have had the largest wage gains fromlabor outflows. Aydemir & Borjas (2007) obtained similar results and also found that theelasticity of wages with respect to labor supply is roughly similar in Canada, Mexico, andthe United States. In all three countries, a 10% change in labor supply due to migration isassociated with a 4%–6% change in wages.
An older and larger literature has searched for immigration’s impact by correlating thechange in wages for low-skilled U.S. natives with the change in the immigrant presence inlocal labor markets, typically at the level of U.S. cities. These area studies tend to find that
immigration has little if any impact on U.S. wages (Borjas 1999a). Card (2005) argues that
if immigration has affected the U.S. wage structure one should see larger declines in the
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wages of native high-school dropouts (relative to, say, native high-school graduates) in
U.S. cities where the relative supply of high-school dropouts has expanded by more. In
fact, the correlation between the relative wage and the relative supply of U.S. high-school
dropouts across U.S. cities is close to zero.
Yet, one type of cross-sectional evidence is consistent with immigration having lowered
wages. Cortes (2008) found that in the 1980s and 1990s U.S. cities with larger inflows of
low-skilled immigrants experienced larger reductions in prices for housekeeping, gardening, child care, dry cleaning, and other labor-intensive services. A 10% increase in thelocal immigrant population is associated with decreases in prices for labor-intensive services of 1.3% percent. One obvious mechanism through which immigration could havelowered prices is through its effects on wages.5
The area studies approach also has its problems. Immigrants may tend to settle in U.S.
regions in which job growth is stronger, causing one to underestimate the wage impact ofimmigration when using city- or state-level data. As a correction, many studies instrumentfor growth in local immigrant labor supply using lagged immigrant settlement patterns.
But this strategy requires strong identifying assumptions. It would be invalid, for instance,
if the labor-demand shocks that influence immigrant settlement patterns are persistentover time (Borjas et al. 1997).
Research on other receiving countries tends to report negligible estimated impacts ofimmigration on wages. After the collapse of the Soviet Union, there was a massive migration of Russian Jews to Israel, which increased the Israeli population by 12% in the spanof just four years. Over the course of the Russian influx, Friedberg (2001) found thatoccupations that employed more immigrants had slower wage growth, but this correlation
falls to zero once she instruments for immigrants’ occupational choice.6 In applications of
the area studies approach outside of the United States, findings of little or no impact ofimmigration on regional wages include Addison & Worswick (2002) for Australia,
Pischke & Velling (1997) for Germany, Zorlu & Hartog (2005) for the Netherlands andNorway, Carrasco et al. (2008) for Spain, and Dustmann et al. (2005) for the United
Kingdom.7
In light of the theoretical results presented in Section 3, it is surprising that an immigration-induced increase in the relative supply of low-skilled U.S. labor would not depress
relative wages for native workers in this skill group. Yet, the estimated wage impact ofimmigration depends in part on whether one treats the labor market as national or local inscope. The literature offers several possible ways to reconcile the differences in results atthe national and subnational levels.
4.2.1. An immigrant influx in a region induces natives to move out, such that estimating
the labor impact of immigration at the subnational level understates its true effect. The
impact of immigration on the migration of native labor is another issue about which
there is disagreement. Card (2001, 2005) found that across U.S. cities a higher presence
5
In Israel, Lach (2008) found negative prices effects from immigration, which are not limited to labor-intensive
goods. He attributes these to immigrants having more elastic demand and lower search costs.
6
In earlier work, Hunt (1992) and Carrington & de Lima (1996) found evidence of minimal labor-market effects
from the forced return of expatriates in France and Portugal following the end of colonialism.
7
Negative wage effects of immigration have been found in Germany (De New & Zimmerman 1994) and Austria(Hofer & Huber 2003).

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of low-skilled immigrants is associated with higher levels of employment of low-skilledlabor, with one new immigrant on net adding approximately one new net worker to alabor market, suggesting that native out-migration does not offset the labor supply effects
of arriving immigrant workers. Pischke & Velling (1997) found a similar absence of native
displacement effects in Germany. Borjas (2006), using the regional counterpart to thenational-level education-experience cells in Borjas (2003b), comes to the opposite conclusion. He found that the growth in the native workforce is smaller in regional educationexperience cells in which the growth in immigrant presence has been larger. Moreover, heshowed that not accounting for the internal migration of natives causes area studies
regressions to understate the wage effects of immigration by about half. Hatton & Tani
(2005), using data on regional labor markets in the United Kingdom, also found evidence
that the arrival of immigrant workers displaces local native workers.
We have another instance in which time-series evidence suggests one thing while crosssectional evidence suggests something else. The cross-section evidence is again subject toconcerns about the endogeneity of immigrant settlement patterns, but these concerns havebeen insufficient for the literature to come to a consensus about how immigration affects
the location decisions of natives.
4.2.2. Immigration induces firms to raise investment and increase innovation, partially or
fully offsetting the wage impacts of labor inflows. Although plausible, the impact ofimmigration on investment or innovation at the regional or national level is supported bylittle empirical research. There is some evidence that immigration is associated withchanges in technology or at least with changes in production techniques. Lewis (2005)
found that regions absorb immigrants through their industries becoming more intensive inthe use of immigrant labor. In particular, industries in U.S. metropolitan areas that havereceived larger inflows of low-skilled immigrant labor have increased their relative labor
intensity by more. These industries have also been slower to adopt new technologies,
suggesting changes in labor supply may affect incentives for technology adoption, as in
Acemoglu (1998). Gandal et al. (2004) found evidence of similar within-industry changes
in factor intensity in response to the Russian immigration in Israel in the early 1990s.
Incidentally, the results of Lewis (2005) rule out changes in sectoral mix accounting forregional absorption of immigrant labor, as could occur in a simple Heckscher-Ohlinmodel. He found little evidence that regions have absorbed incoming immigrants byshifting employment toward sectors that are more intensive in low-skilled labor.
4.2.3. Immigrant and native workers are imperfect substitutes in production, such that on
net foreign labor inflows do not hurt native workers (and may actually help them). In
initial work, Ottaviano & Peri (2007) found evidence that immigrant and native laborwere imperfect substitutes. They estimated a negative and significant correlation between
immigrant-native relative wages and immigrant-native relative employment, across Borjas’s (2003b) education-experience cells. However, their results appear sensitive to how
one defines skill groups. Simply by dropping high-school students from the sample, thefinding of imperfect substitutability between immigrants and natives disappears. Moregenerally, Borjas et al. (2008) showed that across a wide variety of specifications one
cannot reject the hypothesis that comparably skilled immigrants and natives are perfect
substitutes in employment, in line with earlier work by Jaeger (1997). Whatever one
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thinks about the wage effects of immigration, low-skilled immigrant and native workers
appear to be in the same labor market.
To date, the literature offers two approaches for estimating the wage effects of migration, which yield quite different results. The national-level approach is subject to concerns
about how one controls for changes in technology, though these should be at least partly
allayed by the fact that countries with very different types of migration shocks exhibit
similar migration wage elasticities. The area studies approach is subject to concerns about
the endogeneity of immigrant settlement patterns, given the difficultly of assessing thevalidity of proposed solutions to this problem.
The literature’s near obsession with the wage impacts of immigration leaves the impression that these are sufficient to identify immigration’s impact on national income. In an
economy without distortions, even if all workers lose from immigration, the income gain
to capital owners will be sufficient to ensure that national income increases. Indeed, it isunlikely that an economy could experience a gain in national income from immigration
without at least some workers being hurt. So far, empirical research has had little to say
about the impact of immigration on nonlabor income.

4.3. Fiscal Consequences
By changing labor supply, international migration may alter a country’s fiscal accounts.
With emigrants being positively selected in terms of schooling, sending countries are
deprived of high-income taxpayers. To the extent that education and health care are
publicly provided, sending countries may have made substantial investments in these
individuals while young only to have receiving countries reap the returns.
Although there is a large body of theoretical literature on the taxation of skilled
emigration (see, e.g., Bhagwati & Wilson 1989), empirical research on the subject issparse. In a recent contribution, Desai et al. (2009) examined the fiscal effects of brain
drain from India. In 2000, individuals with tertiary education accounted for 61% ofIndian emigrants but just 5% of India’s total population. Between 1990 and 2000, theemigration rate for those with tertiary education rose from 2.8% to 4.3%, but from just
0.3% to 0.4% for the population as a whole. Desai et al. examined Indian emigration to
the United States, which in 2000 was host to 65% of India’s skilled emigrants. First, theyused Mincer wage regressions to produce a counterfactual income series that gives emigrants the income they would have earned in India based on their observed characteristics
and the returns to these characteristics in India. On the tax side, they calculated income
tax losses by running the counterfactual income series through the Indian income tax
schedule. They also calculated indirect tax losses using estimates of indirect tax payments
per unit of gross national income. On the spending side, they calculated expendituresavings by taking the categories for which savings would exist and then estimating savings
per individual. Their results suggest Indian emigration to the United States cost India net
tax contributions of 0.24% of GDP in 2000. Remittances by skilled emigrants generated a
tax gain of 0.1% of GDP, partially offsetting these losses. For India, the tax consequencesof skilled emigration appear to be small, though small countries with high emigration rates
may face larger impacts.
In receiving countries, immigration may exacerbate inefficiencies associated with acountry’s system of public finance. Where immigrants pay more in taxes than they receivein government benefits, immigration reduces the net tax burden on native taxpayers. The
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total impact of immigration on native residents—the sum of the immigration surplus (thepretax income gain) and the net fiscal transfer from immigrants—would be unambiguously positive. With progressive income taxes and means-tested entitlement programs in manyreceiving countries, positive fiscal consequences from immigration would appear to be
more likely the more skilled the labor inflow. In contexts where immigrants pay less intaxes than they receive in government benefits, immigration increases the net tax burden
on natives, necessitating an increase in taxes on natives, a reduction in government benefits to natives, or increased borrowing from future generations.
There are also dynamic fiscal effects from immigration (Auerbach & Oreopoulos
1999). If the net tax burden on residents of a country is expected to increase in the future,
immigration increases the tax base over which this burden can be spread and reduces theincrease that natives would have to bear (Collado et al. 2004). But this is true only if thedescendents of immigrants see their incomes rise to a point where they make positive net
tax contributions. If the children of immigrants have their educational attainment lag
behind that of natives, high levels of immigration today could instead increase the future
tax burden on the native population.
In the United States, immigrant households have historically made greater use of subsidized health care, income support to poor families, food stamps, and other types ofpublic assistance (Borjas & Hilton 1996). Immigrant households tend to be larger thannative households, have more children, and have very low incomes, making them eligible
for more types of benefits. In the past decade, however, the difference between immigrantand native use of welfare programs in the United States has fallen or even reversed, largely
because of a sweeping reform of welfare policy in 1996, one effect of which was to restrict
noncitizens from having access to many federally funded benefit programs. While immigrant households still make greater use of public health care than native households, they
make comparable or less use of other types of public assistance (Borjas 2003b, Capps et al.
2005). In the European Union, the concern is that enlargement to include lower income
countries in Central and Eastern Europe will lead to low-skilled migration to higher
income countries and, thus, increases in welfare usage (Sinn 2002).
Calculating the total fiscal consequences of immigration, while straightforward conceptually, is difficult in practice. To estimate them correctly, one needs to know many
details about the income, spending, and employment behavior of the population of immigrants. As a result, there are few comprehensive analyses of the fiscal impact of immigration. In one of the few such studies, Smith & Edmonston (1997) estimated that in 1996
immigration imposed a short-run fiscal burden on the average U.S. native household of$200, or 0.2% of U.S. GDP. In that year, a “back of the envelope” calculation suggests
that, following the logic of Equation 3, the immigration surplus was approximately 0.1%
of GDP (Borjas 1999b), meaning that immigration in the mid-1990s reduced the annual
income of U.S. residents by approximately 0.1% of GDP. Given the uncertainties involvedin making this calculation, this estimate is unlikely to be statistically indistinguishable
from zero. Although we cannot say with much conviction whether the aggregate fiscal
impact of immigration on the U.S. economy is positive or negative, it does appear the total
impact is small.8
Tax and transfer policies create a motivation for a government to restrict immigration,even where the level of immigration is set by a social planner. If immigrants are primarily
8

198This estimate is based on short-run considerations. Allowing for dynamics could change the results.

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individuals with low incomes relative to natives, increased labor inflows may exacerbate
distortions created by social-insurance programs or means-tested entitlement programs,
making a departure from free immigration the constrained social optimum (Wellisch &Walz 1998).9 Pay as you go pension systems create a further incentive for politicians tomanipulate the timing and level of immigration (Scholten & Thum 1996, Razin & Sadka
1999). Given its graying population and unfunded pension liabilities, one may expect
Western Europe to be opening itself more aggressively to foreign labor inflows. However,concerns over possible increases in expenditure on social-insurance programs may temper
the region’s enthusiasm for using immigration to solve its pension problems (Boeri &Brücker 2005).
In the United States, the fiscal consequences of immigration appear to matter for
immigration policy preferences. Hanson et al. (2007) found that U.S. natives who are
more exposed to immigrant fiscal pressures—those living in states that have large immigrant populations and that provide immigrants access to generous public benefits—aremore in favor of reducing immigration. This public-finance cleavage is strongest among
natives with high earnings potential, who tend to be in high tax brackets. Facchini &Mayda (2006) obtained similar results for Europe. More-educated individuals are more
opposed to immigration in countries where immigrants are less skilled and governments
are more generous in the benefits they provide.
The evidence that does exist suggests that the short-run consequences of internationalmigration are modest. However, the literature has examined only a handful of countries.
Although there is theoretical literature on the dynamic consequences of migration as wellas its impacts on political economy, empirical work on these subjects is sparse. We cannot
say much to policy makers about the net fiscal impacts of international migration otherthan preliminary evidence suggests they are not very big.

4.4. Human-Capital Accumulation
International migration has the potential to affect the accumulation of human capital inboth sending and receiving countries. In receiving countries, migration may increase therelative supply of high-skilled labor (e.g., Canada), low-skilled labor (e.g., Spain), or both
high- and low-skilled labor (e.g., the United States). To the extent wages fall for the skill
group whose relative supply increases, native workers have an incentive to select out ofthat skill group. Alternatively, immigration may affect native schooling decisions by increasing competition for scarce educational resources.
Using data on the United States, Borjas (2004) estimated a negative correlation between the number of foreign students and the number of native-born students in university
graduate programs, suggesting that foreign students may crowd out natives. Even withcrowding out, the arrival of foreign students may still lead to an increase in the net supplyof skilled labor in the United States. Stuen et al. (2006) found that university departmentswith more foreign graduate students have more publications in scientific journals, suggesting inflows of foreign students may spur knowledge creation.
Looking lower down the skill ladder, Betts & Lofstrom (2000) and Hoxby (1998)
present evidence that immigration adversely affects college attendance for U.S. natives,
9
In the long run, immigrants may affect voting outcomes directly through their participation in the political process(Razin et al. 2002).

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particularly for minority students. Betts (1999) found that increases in the number ofstudent-age immigrants in a U.S. locality are associated with decreases in the likelihoodthat local black and Latino students will complete a high-school degree. In related work,
Betts & Farlie (2003) found that immigration induces natives to select out of publicschools and into private schools. For Israel, Gould et al. (2009) found that having more
immigrants in one’s grade-school class is associated with a lower likelihood that a student
will subsequently matriculate in or graduate from high school. While the precise mechanisms behind these relationships are unclear, it does appear that the performance of native
students deteriorates following a local influx of immigrant students.
In sending economies, the focus of research has been on how opportunities for emigration affect the incentive to acquire skill. In poor countries, the income gain from emigration is often substantial. Moreover, the gain to migration is larger for individuals withhigher education levels (Rosenzweig 2007, Grogger & Hanson 2008). An increase in theprobability that individuals from a poor sending country will be allowed to emigrate to theUnited States or Europe may thus increase the incentive to obtain higher levels of education. The quantitative impact of this brain gain effect depends on the elasticity of thesending-country supply of educational services and the perceived probability of migrating
successfully. Where seats in colleges and universities are in limited supply, increases in the
demand for higher education may have little effect on the local number of educatedworkers, unless, of course, individuals are able to migrate abroad for their education (seeRosenzweig 2006). Relatedly, where receiving countries allocate immigration visas in anonrandom manner (say, by reserving entry slots for family members of existing U.S.
residents), many sending-country residents may have little hope of moving abroad, leaving
their incentive to acquire skill unaffected by emigration opportunities.
Only a handful of empirical papers have examined the relationship between emigrationand human-capital accumulation. For a cross-section of countries, Beine et al. (2006)
report a positive correlation between emigration to rich countries and the increase in thestock of human capital. This finding is consistent with emigration increasing the incentive
to acquire education. However, it is not clear that one can make inferences about thecausal impact of brain drain on educational attainment from the cross-section correlation
between emigration and schooling. Individuals are likely to treat education and migration
as joint decisions, making the two outcomes simultaneously determined. For causal inference, one would need to observe changes in human-capital accumulation in sending
countries before and after there were unexpected and exogenous shocks in the opportunity
to emigrate. The literature has yet to uncover such experiments in the data, meaning westill have an incomplete sense of how emigration affects supplies of human capital.
In a related line of research, the literature examines whether studying abroad is avehicle for more permanent migration. In the United States, many of the individuals who
succeed in obtaining temporary or permanent immigration visas reserved for skilled workers are foreign students enrolled in U.S. universities. Coming to the United States on a
student visa may increase the likelihood of obtaining an employment visa. Studying
abroad is thus partly about completing higher education and partly about creating opportunities for migration. Rosenzweig (2006) found that the latter effect tends to dominate. In
the United States, the inflow of foreign students is higher from countries where earnings
for skilled workers are lower and where university capacity is higher, not lower.
Other evidence suggests international migration may increase the flow of ideas
between countries. In China, India, and Taiwan, the migration of skilled labor to Silicon200

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Valley—where Indian and Chinese immigrants account for one third of the engineeringlabor force—has been followed by increased trade with and investment from the UnitedStates (Saxenian 2002). Spilimbergo (2009) suggests there is an association between acountry’s democratic tendencies and the political systems of the countries under which its
students did their university training. He found a positive correlation between the democracy index in a sending country and the average democracy index in the countries in whicha country’s emigrant students have studied. Migration flows may also help erode barriers
to trade. Successive waves of emigration from China have created communities of ethnic
Chinese throughout Southeast Asia as well as in South Asia and on the east coast of Africa.
Rauch & Trindade (2002) found that bilateral trade is positively correlated with theinteraction between the two countries’ Chinese populations, consistent with ethnic business networks facilitating trade.
In receiving countries, immigration appears to disrupt the schooling of natives. The
arrival of immigrants in native students’ age and schooling groups is associated withdeterioration in their performance at school or in their access to schooling. The literature
has yet to uncover the mechanisms behind these effects. In sending countries, the literature
has yet to identify how opportunities to emigrate affect the incentive to acquire skill, anissue of first-order performance for understanding how emigration affects economic development. There is indirect and anecdotal evidence that international migration promotes
the flow of ideas between countries.

5. DISCUSSION
Ample evidence exists that international migration raises gross incomes for migrants,
while it redistributes incomes within sending and receiving countries. Because the net
impact of immigration on receiving countries appears to be small and because the gain to
migration appears to be so large (owing to enormous international differences in laborproductivity), it is natural to presume international migration raises global income. At thispoint, however, the literature does not allow one to do much more than make presumptions. Many unknowns in evaluating migration’s impact remain.
Economic theory supports the presumption that international migration expands global output. Moving labor from low-productivity to high-productivity countries improves
allocative efficiency in the world economy. No study suggests there are large negative
consequences from global migration that would overturn this intuition. In the UnitedStates, which is the largest receiving country for immigrants, the short-run net impact ofimmigration, to a first approximation, appears to be a wash (Borjas 1999b). The global
gains from migration are largely captured by migrants themselves, which they share withfamily members at home through remittances. Unless there are large unmeasured negative
externalities from migration or migration exacerbates existing distortions in ways thathave not yet been detected, one would be hard pressed, on economic grounds, to justify
highly restrictive barriers to global labor flows.
While the gross income gain to migration appears to be large, the net gain is unknown.
There is little comprehensive evidence on the magnitude of migration costs. Measuring
these costs may explain why global labor flows are so small. Of course, a portion of
migration costs are a by-product of receiving-country restrictions on immigration. Restrictions raise the premium on obtaining a student visa, or other form of temporary entry,
which facilitate more permanent emigration. They also create an incentive for illegal
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migration, allowing smugglers to capture a portion of the gains to migration and dissipating another portion by subjecting migrants to psychic costs and physical risks associatedwith crossing borders without permission. There is evidence that migrants underestimate
the gains to migration (McKenzie et al. 2006) and use networks to lower assimilation orjob search costs (Munshi 2003), suggesting uncertainty and informational barriers affectlabor mobility.
The impact of immigration on receiving-country labor markets is hotly disputed. The
evidence would seem to favor the argument that wage effects from immigration do exist.
Studies using national-level data, while subject to concerns about their ability to control
for all relevant labor-market shocks, yield consistent qualitative results across sending andreceiving countries (Israel is an exception). The results are also consistent with observedchanges in native labor supply. Studies using local-level data, whose results suggest
immigration has little wage impact, are subject to concerns about the endogeneity ofimmigrant settlement patterns that have yet to be fully resolved.
The literature has focused on the wage effects of immigration, while largely ignoring
impacts on nonlabor income. In theory, one would expect the gains in nonlabor income(plus the gains to workers that complement foreign labor) to more than offset the losses toworkers that compete with immigrant labor. There seems to be an implicit premise inexisting research that knowing how immigration affects wages is sufficient to know how it
affects national income. Grounding empirical work in global general equilibrium may help
address this shortcoming.
The net fiscal consequences of international migration are also poorly understood. In
sending countries, there have only been a handful of studies on emigration’s fiscal impacts
and these have focused on the movement of high-skilled workers to high-income destinations. In receiving countries, the impact of immigration on the net tax burden of the native
population is a central issue in political opposition to labor inflows. Although manystudies exist on how immigration affects government expenditure, there are few on how
it affects government revenue, which makes evaluating the net fiscal impact of labor
inflows difficult. The few studies that do exist are now dated.
A further unknown is the effect of emigration on the incentive to acquire skill insending countries. In the cross section, countries that have higher emigrant stocks abroad
also have faster growth in the number of educated adults, but this association may or may
not be informative about the consequences of brain drain. We still do not know howchanges in the opportunity to emigrate affect human-capital accumulation. Many individuals migrate abroad to complete their education, with many ultimately returning to theirhome countries. This circular migration is important for the accumulation of skill indeveloping countries, though migrants from the poorest countries are those most tempted
to emigrate permanently. The policy implications for developing countries are unclear.
Although a mantra of the development community is that education is a public good, andtherefore deserving of subsidies, improving high-school or university training in the very
poorest nations might actually increase brain drain by making it easier for high-ability
individuals to obtain student visas, and ultimately employment visas, from rich countries(Rosenzweig 2006). Yet, even where migration is permanent, having emigrants abroad
may help a country lower its barriers to trade, investment, and technology flows.
The economics literature has yet to provide policy makers all the inputs they would
need to choose sensible migration policies, even if officials were inclined to base theirdecisions on welfare grounds. Although the evidence suggests international migration
202

Hansonraises global income, we do not know many relevant details that are essential for determining how open borders should be and whether receiving countries should favor immigrants from particular countries or with particular characteristics.

DISCLOSURE STATEMENT
The author is not aware of any affiliations, memberships, funding, or financial holdingsthat might be perceived as affecting the objectivity of this review.

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ACKNOWLEDGMENTS
I thank Oana Tocoian Hirakawa for excellent research assistance.

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Annual Review of
Economics

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Contents

Volume 1, 2009

Some Developments in Economic Theory Since 1940: An Eyewitness AccountKenneth J. Arrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
School Vouchers and Student Achievement: Recent Evidence and Remaining
QuestionsCecilia Elena Rouse and Lisa Barrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Organizations and Trade
Pol Antràs and Esteban Rossi-Hansberg. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
The Importance of History for Economic Development
Nathan Nunn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Technological Change and the Wealth of Nations
Gino Gancia and Fabrizio Zilibotti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
CEOs
Marianne Bertrand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
The Experimental Approach to Development Economics
Abhijit V. Banerjee and Esther Duflo . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
The Economic Consequences of the International Migration of Labor
Gordon H. Hanson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
The State of Macro
Olivier Blanchard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Racial Profiling? Detecting Bias Using Statistical Evidence
Nicola Persico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
Power Laws in Economics and Finance
Xavier Gabaix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
Housing Supply
Joseph Gyourko . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

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Quantitative Macroeconomics with Heterogeneous Households
Jonathan Heathcote, Kjetil Storesletten, and Giovanni L. Violante. . . . . . 319
A Behavioral Account of the Labor Market: The Role of Fairness Concerns
Ernst Fehr, Lorenz Goette, and Christian Zehnder . . . . . . . . . . . . . . . . . . 355
Learning and Equilibrium
Drew Fudenberg and David K. Levine . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
Learning and Macroeconomics
George W. Evans and Seppo Honkapohja . . . . . . . . . . . . . . . . . . . . . . . . 421

Annu. Rev. Econ. 2009.1:179-208. Downloaded from arjournals.annualreviews.org
by University of California - San Diego on 08/18/09. For personal use only.

Sufficient Statistics for Welfare Analysis: A Bridge Between Structural andReduced-Form Methods
Raj Chetty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
Networks and Economic Behavior
Matthew O. Jackson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489
Improving Education in the Developing World: What Have We Learned from
Randomized Evaluations?
Michael Kremer and Alaka Holla . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513
Subjective Probabilities in Household Surveys
Michael D. Hurd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
Social Preferences: Some Thoughts from the Field
John A. List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563
ErrataAn online log of corrections to Annual Review of Economics articles may befound at http://econ.annualreviews.org

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