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Does emigration really increase the wages of non-emigrants?

Alessio Brown's picture
Although immigration and its effect on labor markets in receiving countries is a frequent focus of research and public concern, there is less known about the impact of emigration on sending countries. Yet, as Benjamin Elsner explains in his recent study for IZA World of Labor, emigration actually has positive and large effects on wages in sending countries.
 


Nearly all countries are sending countries, even those that are traditionally viewed as receiving countries such as the US, Australia and Germany. However, the effect on wages is most evident when considering smaller sending countries. This is partly due to people being unable to move internally in the country to make up for job shortages. It also makes up a much larger percentage of the population. For instance, if 10 million Mexicans emigrate to the US, this accounts for around 4% of the US population, yet 10% of the Mexican population.

As many studies have shown, in the short-term, the average effects on wages for non-emigrants are largely positive. When many (generally highly-skilled) workers leave a country there becomes a shortage of people who can do these jobs. As a result, non-emigrants with similar (substitutable high) skills become more in demand. These workers also gain in bargaining power as they have the option of emigrating themselves. As Elsner shows, this is clearly illustrated through the response of the unions to the high Lithuanian emigration between 2004 and 2007. During this period around 9% of all Lithuanian workers emigrated to the UK and Ireland, and the remaining workers, especially young labor market entrants, managed to successfully negotiate higher wages.



However, as Elsner insightfully demonstrates, it is important to look at the impact on the wage distribution: not all non-emigrants reap positive results from emigration. High-skilled and low-skilled workers often work together as complements, so if there is a shortage of one, there is less need for the other. For example, most Mexican emigrants are either high- or medium-skilled. As a result, although this emigration increased the wages of high- and medium-skilled non-emigrants by around 5%, it actually decreased the wages of low-skilled non-emigrants by 1%.

For long-run emigration, the effects are likely to be smaller due to trade, internal migration and foreign aid dampening. Furthermore, they may even have a negative effect on the sending country’s economy as a whole. Elsner points out that there is the potential for the entire economy to become less productive: if many high-skilled workers emigrate this drains the country of its most innovative workers, which results in a decrease of everyone’s wages.

Nonetheless, Elsner offers advice to counteract the negative effects that emigration can have on the wages of non-emigrants. In sending countries, the policy focus should be on providing more education and training. Since low-skilled workers are generally the losers among the non-emigrants by giving these workers the option to adapt to changes in the labor market, and adjust their skills, they can fill the gap left by the high-skilled emigrants. As a result, these low-skilled workers would not experience negative impacts to their wages, and there would be less risk that the economy would become unproductive.

Benjamin Elsner says of his work, that: “What is surprising about these findings is not that emigration affects wages, but rather the magnitude of the effect. This suggests that labor markets function differently in low- and middle-income countries. Emigration can shed more light on how these markets work, and, with more and more data becoming available, is at the core of an exciting research agenda on migration and labor markets in developing countries.”

IZA World of Labor is an open-access labor economics resource designed to assist policy-making by presenting empirically founded research on markets and related economic policy measures in an innovative way, to meet the needs of stakeholders in labor markets worldwide.