Emigration and wages: The EU enlargement experiment

https://doi.org/10.1016/j.jinteco.2013.06.002Get rights and content

Highlights

  • The paper estimates the impact of emigration on wages in the sending countries.

  • It exploits a large and sudden emigration wave from Eastern Europe after 2004.

  • Using data from 3 European countries I estimate and calibrate a structural model.

  • I find that emigration increased the wages of young workers.

  • Yet it had no effect on the wages of old workers.

Abstract

The enlargement of the European Union provides a unique opportunity to study the impact of the lifting of migration restrictions on the migrant sending countries. With EU enlargement in 2004, 1.2 million workers from Eastern Europe emigrated to the UK and Ireland. I use this emigration wave to show that emigration significantly changed the wage distribution in the sending country, in particular between young and old workers. Using a novel dataset from Lithuania, the UK and Ireland for the calibration of a structural model of labor demand, I find that over the period of five years emigration increased the wages of young workers by 6%, while it had no effect on the wages of old workers. Contrary to the immigration literature, there is no significant effect of emigration on the wage distribution between high-skilled and low-skilled workers.

Introduction

Lifting the barriers to migration can lead to welfare gains of up to 150% of world GDP (Clemens, 2011). However, while a large body of literature has quantified the gains from migration for the receiving countries and the migrants, little is known about the impact of emigration on the sending countries. Given that migration is heavily restricted, there are few episodes of large migration waves that can be exploited to assess the impact of the lifting of these restrictions on the sending countries.1

This paper exploits a large emigration wave from Eastern Europe to analyze the impact of emigration on the wages of non-migrants in the sending countries. Following EU enlargement in 2004, the UK, Ireland, and Sweden opened their labor markets to workers from Eastern Europe, which prompted a migration wave of 1.2 million workers over 3 years. Indeed, the most-affected sending countries – Latvia, Lithuania, Poland and Slovakia – experienced an outflow of up to 9% of their workforce.2

To estimate the wage effects of emigration, I use a structural factor demand model (Card and Lemieux, 2001, Borjas, 2003). I first take a snapshot of the labor market prior to EU enlargement by estimating the model parameters using microdata from Lithuania. Based on observed immigration data from the UK and Ireland, I then simulate the emigration wave and calculate the wage change as the difference between the equilibrium wage before and after the migration wave. Compared to a reduced-form analysis, this approach allows me to isolate the effect of emigration from other factors that would otherwise impact wages, such as trade, FDI and TFP growth. Furthermore, it also delivers separate wage effects for groups of workers with different education and work experience, thus allowing for an assessment of the distributional impact of emigration.

The main finding is that emigration had a significant impact on the wage structure, and particularly on the wage distribution between old and young workers, causing a substantial wage increase for young workers yet no effect on the wages of old workers. By contrast, I find no difference in the wage effects between high- and low-skilled workers. These wage effects can be decomposed into an own-wage effect, caused by the emigration of workers with the same observable characteristics, and general equilibrium effects, caused by the change in the skill distribution of the workforce. The own-wage effect is positive; namely, a decrease in the number of workers increases their wage, while the sum of the general equilibrium effects, caused by the change in the demographics of the workforce, is negative. The own-wage effect dominates for young workers, who represented the majority of emigrants, while for older workers the two effects cancel each other out.

These findings stress the importance of labor market externalities in the assessment of the welfare impacts of emigration. Eastern Europe experienced a large outflow of young workers – a youth drain – from all education levels. Through the price mechanism of the labor market, the wages of young workers increased more than the wages of older workers. However, most literature on the sending countries assumes away these labor market effects, focusing instead on the human capital externalities. In this literature, high-skilled emigration changes the incentives of non-migrants to invest in education, which can have a negative “brain drain” or a positive “brain gain” effect (Gibson and McKenzie, 2011, Docquier and Rapoport, 2012) on economic growth. While indirect effects may be important for developing countries, this paper finds that the direct wage effects of emigration play a significant role in middle-income countries.

Given that the emigration wave from Eastern Europe was a sudden shock to labor supply, it allows for the identification of a short-run effect on wages. Moreover, the results have a clear interpretation, since all migrants left within a short period in time. By contrast, previous studies on the wage effect of emigration by Mishra (2007) and Aydemir and Borjas (2007) focus on longer time horizons, both finding a positive long-run impact in Mexico between 1970 and 2000. However, the results have to be interpreted as if all workers had left the economy at once, despite actually having left gradually over the last 50 years (Hanson and McIntosh, 2010). Dustmann et al. (2012) study a case similar to that in this paper — emigration from Poland, although the emigration wave in their period of study was rather small, with 2% of the workforce emigrating between 1998 and 2007. Recent evidence from quasi-natural experiments (Elsner, 2013, Gagnon, 2011) shows that emigration increases wages even in the short run. However, both studies use a reduced-form approach, only allowing them to determine an average effect. In this paper, I show that these wage effects only benefit the young workers. Moreover, a comparison with the reduced-form results of Elsner (2013) demonstrates the importance of the general equilibrium effects, without which the predicted wage changes would be considerably higher.

This paper also highlights the importance of wages as an adjustment channel to labor supply shocks in countries of origin. By contrast, the small effects of immigration on wages in migrant-receiving countries found in most studies imply that other channels are more important. Hanson and Slaughter (2002) and Lewis (2003) find that labor supply shocks in US states are mainly absorbed within industries. Industries switch to technologies that are more complementary to the increased type of labor, while there is little evidence of a change in the output mix towards goods produced intensively using the type of labor that has increased most (i.e. the Rybczynski effect). Gandal et al. (2004) and González and Ortega (2011) find similar results for the large immigration waves in Israel and Spain, respectively. Dustmann and Glitz (2011) show that the switching of industries to complementary technologies can be explained by firm entry and exit, given that new firms have no adjustment costs. However, the non-negligible wage effects of emigration found in this paper imply that other adjustment channels must play a lesser role than in receiving countries, with further research required to shed light on this issue.

Finally, this paper reveals that migration affects sending and receiving countries along different skill dimensions. In contrast to most studies on immigration, which find the main distributional effect between high-skilled and low-skilled workers (Borjas, 2003, Manacorda et al., 2011, D'Amuri et al., 2010), I find a significant distributional effect between old and young workers. The wage effect is larger in Eastern Europe than in the main receiving countries, which can be explained by the low degree of substitutability between old and young workers in transition countries: old workers in Eastern Europe were educated under socialism, while young workers received their education in a market economy. Therefore, young workers cannot easily be replaced by old workers, resulting in a stronger reaction of wages on emigration.

The remainder of the paper is structured as follows. Section 2 provides a historical overview and stylized facts concerning the emigration wave from Eastern Europe after 2004. Section 3 sets up the structural model. Section 4 describes the data sources that are used for the estimation of the structural parameters in Section 5. Section 6 details the simulation of the migration wave and calculates the wage effects. Section 7 concludes.

Section snippets

EU enlargement, migration and wages: stylized facts

This section provides an overview of EU enlargement and the subsequent migration wave from the new to old member states of the EU. In 2004, eight former socialist countries from Central and Eastern Europe joined the EU, with the high wage differentials between Western Europe and the accession countries creating a large incentive for workers from these countries to emigrate.3

Structural model

The structural model lays out a system of labor demand curves for workers with different observable skills. To model the heterogeneity in observable skills, the workforce is divided into 12 skill groups, defined by education and work experience. Workers with the same observable characteristics are perfect substitutes and compete in the same labor market. Across skill groups, workers with similar skills are closer substitutes than those with fundamentally different skills. Emigration of workers

Data and descriptive statistics

The empirical analysis requires two datasets: one for the estimation of the structural parameters that characterize the Lithuanian labor market, another for the quantification of the number of emigrants per skill group for the simulations. For the estimation of the structural parameters, I use the Lithuanian Household Budget Survey of the 2 years before and after EU enlargement, namely 2002, 2003, 2005 and 2006.

The number of emigrants per skill group cannot be taken from the source country, as

Identification and estimation of σEXP

Using Eq. (5), I estimate σEXP with the number of workers per skill group as a labor input Lijt.17 An estimation of the demand curve with OLS does not yield consistent estimates, with the results suffering from

Simulation equation

In this section, I simulate the emigration shock that occurred after EU enlargement in this labor market, calculating the new equilibrium wage for each skill group. The calculated wage change is the difference between the equilibrium wages before and after the migration shock, and the results of this simulation have a ceteris paribus interpretation. The fundamental structure of the labor market is held constant, so that the simulations yield the change in wages in absence of other adjustment

Conclusion

This paper exploits the large and sudden emigration wave from Eastern Europe after EU enlargement in 2004 to study how emigration affects the wages of non-migrants. Using Lithuanian microdata, I find that emigration significantly changed the wage distribution, causing an increase in wages on average; however, the wage effect was concentrated among young workers, whose wages increased by around 6% over the period of 5 years, while the wages of older workers were not affected. Contrary to previous

Acknowledgments

I am grateful to Gaia Narciso for all her support and encouragement. Furthermore, I would like to thank the editor Daniel Trefler, two anonymous referees, Catia Batista, Karol Borowiecki, Christian Danne, Tommaso Frattini, Daniel Hamermesh, Emma Howard, Tara McIndoe-Calder, Julia Anna Matz, Annaïg Morin, Gianmarco Ottaviano, Giovanni Peri, Theodore Talbot, Janis Umblijs, Pedro Vicente, Michael Wycherley and the participants at numerous conferences and seminars for helpful suggestions. The

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