Deck 8: Labor Mobility

Question 1

Suppose a worker with an annual discount rate of 10 percent currently resides in Pennsylvania and is deciding whether to remain there or to move to Illinois. There are three work periods left in the life cycle. If the worker remains in Pennsylvania, he will earn $20,000 per year in each of the three periods. If the worker moves to Illinois, he will earn $22,000 in each of the three periods. What is the highest cost of migration that a worker is willing to incur and still make the move

Answer 1

If X and Y are two places where a person is living and would like to live in future respectively, then the present value (PV) of income at places X and Y with the wage rate (w and w') and discount rate(r) can be calculated as below :
M=Migration cost
Therefore the net gain to migration would be :
If this equation gives a positive result, then only the migration would be beneficial otherwise the labor should continue with the present job and location.
The highest migration cost that the worker would be willing to take would be the point where the net present value of wages is equal to migration cost (net gain is equal to zero). If the net present value is greater than migration cost then the worker would not migrate. If a worker gets $20,000 in Pennsylvania and $22,000 if she/he moves to Illinois, then at a discount rate of 10%, the maximum migration cost that the worker could incur is equal to:
.Where I and P represents Illinois and Pennsylvania.
The maximum migration cost that the worker is willing to take would be $5472.

Question 2

Show how workers who wish to maximize the present value of lifetime earnings calculate the net gains to migration, and discuss how this net gain depends on incomes in the states of origin and destination and on migration costs.

Answer 2

The international labor mobility depends mainly on three factors:
- Net present value of continuing in the job at same place
- Net present value of switching the job and location
- The marginal cost of migration
Labors evaluate their net present value before taking the decision of changing location for better opportunities. This can be expressed in the form of equation.
If X and Y are two places where a person is living and would like to live in future respectively, then the present value (PV) of income at places X and Y with the wage rate (w and w') and discount rate(r) can be calculated as below :
M=Marginal cost
Therefore the net gain to migration would be:
If this equation gives a positive result, then only the migration would be beneficial otherwise the labor should continue with the present job and location.

Question 3

Suppose high-wage workers are more likely than low-wage workers to move to a new state for a better job.
a. Explain how this migration pattern can be due solely to differences in the distribution of wages.
b. Explain how this migration pattern can take place even if the cost to move is greater for high-wage workers.

Answer 3

If high wage worker are more likely to move to a new state for a better job, then the following points hold true:
(A)The migration of high wage worker is solely due to wages. In other words, the new state provides better wages to skilled labors than the origin state. The movement of skilled labor would be towards a high paying job.
(B)The migration of a worker from one place to other depends on three factors:
- Net present value of continuing the present job
- Net present value of switching the job and location
- The marginal cost of migration
Labors evaluate their net present value before taking the decision of changing location for better opportunities. The labors will migrate if the net present value of wages is greater than the migration cost.
If X and Y are two places where a person is living and would like to live in future respectively, then the present value (PV) of income at places X and Y with the wage rate (w and w') and discount rate(r) can be calculated as below :
M=Marginal cost
Therefore the net gain to migration would be:
If this equation gives a positive result, then only the migration would be beneficial otherwise the labor should continue with the present job and location.
If the worker moves even when the migration cost is high, this means the new wage that is offered in new state would be much higher.

Question 4

Show how one can use the human capital framework to obtain an estimate of migration costs.

Question 5

Mickey and Minnie live in Orlando. Mickey's net present value of lifetime earnings in Orlando is $125,000, while Minnie's is $500,000. The cost of moving to Atlanta is $25,000 per person. In Atlanta, Mickey's net present value of lifetime earnings would be $155,000, while Minnie's would be $510,000. If Mickey and Minnie choose where to live based on their joint well-being, will they move to Atlanta Is Mickey a tied-mover or a tied-stayer or neither Is Minnie a tied-mover or a tied-stayer or neither

Question 6

Why is there a difference between the private gains to migration and the family's gains to migration Discuss how this difference generates tied stayers and tied movers. Can both the husband and the wife be tied movers

Question 7

Suppose a worker's skill is captured by his efficiency units of labor. The distribution of efficiency units in the population is such that worker 1 has 1 efficiency unit, worker 2 has 2 efficiency units, and so on. There are 100 workers in the population. In deciding whether to migrate to the United States, these workers compare their weekly earnings at home ( w 0 ) with their potential earnings in the United States ( w 1 ). The wage-skills relationship in each of the two countries is given by:
w 0 = 700 + 0.5 s ,
and
w 1 = 670 + s ,
where s is the number of efficiency units the worker possesses.
(a) Assume there are no migration costs. What is the average number of efficiency units among immigrants Is the immigrant flow positively or negatively selected
(b) Suppose it costs $10 to migrate to the United States. What is the average number of efficiency units among immigrants Is the immigrant flow positively or negatively selected

Question 8

Show how cohort effects in the immigrant flow affect the interpretation of the cross-sectional age-earnings profiles of immigrants.

Question 9

Suppose the United States enacts legislation granting all workers, including newly arrived immigrants, a minimum income floor of dollars. (Assume there is positive selection of migrants from the home country to the United States before the policy change.)
a. Generalize the Roy model to show how this type of welfare program influences the incentive to migrate to the United States. Ignore any issues regarding how the welfare program is funded.
b. Does this welfare program change the selection of the immigrant flow In particular, are immigrants more likely to be negatively selected than in the absence of a welfare program
c. Which types of workers, the highly skilled or the less skilled, are most likely to be attracted by the welfare program

Question 10

Describe how the immigrant flow is chosen from the population of the country of origin. Why are some immigrant flows positively selected and other immigrant flows negatively selected

Question 11

In the absence of any legal barriers on immigration from Neolandia to the United States, the economic conditions in the two countries generate an immigrant flow that is negatively selected. In response, the United States enacts an immigration policy that restricts entry to Neolandians who are in the top 10 percent of Neolandia's skill distribution. What type of Neolandian would now migrate to the United States

Question 12

How do quits and layoffs help improve labor market efficiency

Question 13

A country has two regions, the North and the South, which are identical in all respects except the hourly wage and the number of workers. The demand for labor in each region is:
w N = $20 -.5 E N and w S = $20 -.5 E S ,
where E N and E S are millions of workers. Currently there are 6 million workers in the North and 18 million workers in the South.
(a) What is the wage in each region
(b) If there were no shocks to the economy, migration over time will result in an equalization of wages and employment. What would be the long-run wage and employment level in each region
(c) Return to the original set-up where there are 6 million workers in the North and 18 million workers in the South. As a policy maker, you decide not only to allow 2 million immigrants of working age to enter your country, but you have the authority to resettle the immigrants wherever you want. How should you distribute immigrants across the regions to maximize the country's immigration surplus Besides maximizing the immigration surplus in the short-run, in what other ways does your distribution of immigrants help the economy

Question 14

How should one interpret the fact that-all other things equal-workers with a lot of seniority are less likely to separate from their jobs than newly hired workers

Question 15

Phil has two periods of work remaining prior to retirement. He is currently employed in a firm that pays him the value of his marginal product, $50,000 per period. There are many other firms that Phil could potentially work for. There is a 50 percent chance of Phil being a good match for any particular firm, and a 50 percent chance of him being a bad match. If he is in a good match, the value of his marginal product is $56,000 per period. If he is in a bad match, the value of his marginal product is $40,000 per period. If Phil quits his job, he can immediately find employment with any of the alternative firms. It takes one period to discover whether Phil is a good or a bad match with a particular firm. In that first period, while Phil's value to the firm is uncertain, he is offered a wage of $48,000. After the value of the match is determined, Phil is offered a wage equal to the value of his marginal product in that firm. When offered that wage, Phil is free to (a) accept; (b) reject and try some other firm; or (c) return to his original firm and his original wage. Phil maximizes the present value of his expected lifetime earnings, and his discount rate is 10 percent. What should Phil do

Question 16

How should one interpret the fact that-all other things equal-workers with a lot of seniority earn more than newly hired workers

Question 17

Under 2001 tax legislation enacted in the United States, all income tax filers became eligible to deduct from their total income half of the expenses incurred when moving more than 50 miles to accept a new job. Prior to the change, only tax filers who itemized their deductions were allowed to deduct their moving expenses. (Typically, homeowners itemize their deductions and renters do not itemize.) How would this change in tax policy likely affect the mobility of homeowners and renters

Question 18

Suppose the immigrant flow from Lowland to Highland is positively selected. In order to mitigate the "brain drain" Lowland experiences as a result of this migration, public officials of Lowland successfully convince all Lowlanders who migrate to Highland to remit 10 percent of their wages to family members.
a. What effect will this policy have on the immigrant flow
b. Provide a graph that details the extent to which this policy will limit the brain drain.

Question 19

a. According to standard migration theory, how will skill selection (positive versus negative) change on average as the distance between the source country and the destination country increases
b. Does Table 8-2 lend empirical support for the idea that skill selection is a monotonic function of the distance between countries

Question 20

a. Explain how a universal health care system would likely cause a greater amount of efficient turnover.
b. Defined-benefit retirement plans promise a fixed amount of retirement income to workers, but in order to receive benefits workers must be vested in the plan that usually requires working at the firm for 10 or 15 years. In contrast, a defined contribution retirement plan specifies a fixed amount of money the firm contributes each pay period to a worker's retirement fund, which the worker then largely controls and can access even if she changes jobs. Do defined-benefit or defined-contribution retirement plans allow for more efficient turnover How is the social security system in the United States like a defined-benefit plan How is it like a defined-contribution plan
c. When federal workers in Washington, D.C., move jobs from one federal agency to another, the worker keeps her same health insurance and retirement benefits. In order to quantify the degree to which ease of transfer of benefits affects turnover, two groups of new economist Ph.D.s who accept a job in Washington, D.C., are observed. The first group contains U.S. citizens. The second group contains non-U.S. residents who eventually received permanent resident status after three years of work experience. By law, several government agencies cannot hire non-residents. Among the group of US citizens, 42 percent changed jobs within the first three years of work while 33 percent changed jobs during their fourth to sixth years of work. Among the group of non-U.S. residents, 17 percent changed jobs in the three years before becoming a resident while 29 percent changed jobs in the three years after becoming a U.S. resident. Provide a difference-in- differences estimator of the effect of being a U.S. resident/citizen in Washington, D.C., for Ph.D. economists.

Question 21

The Immigration Reform Act of 2006 provided fewer work visas than were available in previous years for foreign-born college graduates to remain in the United States. The exception is that work visas remained plentiful for college graduates who majored in technical areas such as math, computer programming, and physics.
a. How will this policy likely affect the skill distribution of immigrants to the United States and the age-earnings profile of immigrants in the United States
b. In the future a demographer uses the 2010 U.S. census to study immigrant wages and concludes that the U.S. policy actually had the unintended consequence of attracting immigrants with lower levels of productivity as shown by a flatter age-earnings profile. Using a graph similar to Figure 8-5, show why the demographer's conclusions are sensitive to cohort effects.

Question 22

KAPC, a pharmaceutical company located in rural Kansas, is finding it difficult to retain its employees, who frequently leave after just six months of working at KAPC for jobs at pharmaceutical companies paying higher wages in Chicago. To address its problem with labor turnover, human resource officers at KAPC decide to run an experiment. Of their next 100 newly hired employees, 25 will randomly be selected to receive a housing voucher worth up to $4,000 per year to offset property taxes. To take advantage of this program, the employee must not only be randomly selected into the program but she must also purchase a home. Of the 25 employees selected into the housing voucher program, 7 leave KAPC within 12 months of starting. Of the 75 employees not selected into the program, 37 leave KAPC within 12 months of starting.
a. Provide an estimate of the effect the housing voucher program has on retention at KAPC.
b. Suppose KAPC spends $10,000 in hiring costs each time a position is vacated. Would you endorse expanding the housing voucher program to all new employees Justify your decision.

Question 23

Consider the Roy model of potential immigrant flows as discussed in the chapter.
a. Why is it that a source country can experience both an outflow of low-skill workers and an outflow of high-skill workers at the same time
b. Provide a graph of the returns to skills in the destination and source countries that would suggest both behaviors occur simultaneously.
c. How do the social and economic (that is, tax) policies of the United States encourage both types of flows