‘To move or not to move?’ How migration across regions generates greater economic benefits

For a long time, economists have argued that free trade among countries encourages the movement of resources from regions where they are valued less to regions where they are valued more. For example, if apples are selling at a higher price in the U.S. than in Europe, entrepreneurs sensing an opportunity to make profits would buy apples in Europe and sell them in the U.S. This logic of arbitrage applies not just in the case of ordinary goods but also in the case of labour. People who live in low-wage countries tend to move to countries with higher wages. But such migration does not happen instantaneously. Various frictions can discourage people from moving to a different region even when the geographical differences in wages are much larger than moving costs. These frictions may be due to cultural differences, personal anxieties, barriers to free immigration etc. So, in essence, there is significant scope for the misallocation of labour among various regions in the world.

In “The Gift of Moving: Intergenerational Consequences of a Mobility Shock,” Emi Nakamura, Josef Sigurdsson, and Jon Steinsson investigate the long-term benefits of moving to a different region. In their paper published in the peer-reviewed journal ‘The Review of Economic Studies’, the authors study the earnings of a certain population that moved from the Westman Islands, located off the coast of Iceland. In January of 1973, a long dormant volcano in the island erupted and the houses of about a third of the residents were destroyed. Those whose houses remained intact after the volcanic eruption had more reason to stay back on the island while the people who lost their homes to the volcano were more likely to move out of the island and start a new life elsewhere. As a result, they were also more likely to get fresh employment in more productive sectors than the island’s traditional fishing sector.

Various earlier studies have already proven the economic benefits of migration, the researchers note. For instance, the children in Chicago who were forced to relocate after their houses were demolished were found to earn higher as adults compared to a similar population. But the volcanic incident at Westman islands offered these researchers an interesting natural experiment to test for the likely economic benefits of migration. They found that well over 80% of those who were under 25 years old and were forced to move out of the island by the volcanic eruption earned higher than their peers on the island. This group of young people also got four ditional years of education when compared to their peers. The researchers estimate that an 18-year-old who moved out of the island would have earned almost half a million dollars more over a lifetime when compared to his peers. Those who were over 25 years old, who are likely to be parents of children, however, witnessed a slight decrease in their earnings. This could be due to the fact that older people are inflexible when compared to younger people, thus affecting their employability. The loss in earnings of older people, however, was more than compensated by the higher earnings of their children.

The researchers conclude that young people who are born in the w where their skills may not be best suited for various reasons, may be the most likely to benefit from migration. Yet migration is not as widespread as it should be given the significant benefits that it offers . One reason could be the significant costs of migration itself. Not many people are financially capable to take on such a risk. Another reason for this could be barriers to the free movement of people raised by various governments.