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Chapter 2. Do student mobility grants lead to “more and better jobs”?

2.2 Student mobility: theoretical background and empirical evidence

2.2.1 Migration theories

Traditionally, neo-classical economics has explained migration as resulting from wage differentials between regions. Based on this principle, individuals would tend to migrate from where wages are low to where they are high (Hicks, 1963). However, this theory has been criticised for being unable to provide a credible representation of the real

62 world and for relying on unrealistic assumptions (see Mosneaga and Winther, 2012). For instance, it assumes full employment and flexible wages which change according to supply and demand. These assumptions have been considered a potential source of bias which can be corrected by taking into account the probability of finding employment in the destination country (Harris and Todaro, 1970, Isserman et al., 1987). Another weakness in the theory is the omission of migration costs (Armstrong and Taylor, 2000). In this regard, important progress has been made through the application of Human Capital Theory. Larry Sjaastad (1962) was the first to apply Human Capital Theory to migration studies. According to him migration is an investment decision, where the potential migrant chooses a destination whose discounted benefits exceed the discounted costs2 of migrating there.

Human Capital Theory relies on a disequilibrium model, since the very possibility of achieving higher levels of utility through migration rests on the assumption that different locations are endowed with different opportunities of utility3. This assumption contrasts with the equilibrium models which are reviewed later.

One of the main critiques made to Human Capital Theory concerns the assumption that potential migrants have perfect information on the characteristics of alternative labour markets – a situation made especially improbable by the fact that economic opportunities evolve over time. To address this weakness we turn to Job Search Theory (Lippman and McCall, 1976), which extended the economic theory of migration specifically regarding the role of information (see the work by Miron, 1978, p. 520). In short, Job Search Theory claims that a job-seeker receives multiple job offers over time; for each offer, the seeker chooses between accepting and continuing the search. According to the theory, the decision depends on information cost. Therefore, job offers get accepted when the wage offered is higher than the “reservation wage” – i.e., when the marginal cost of additional search exceeds the expected incremental utility (Mortensen, 1986). Based on Job Search Theory, we can infer that a higher reservation wage implies, on the one hand, a higher real wage for individuals who find employment; on the other, a lower probability of finding employment.

2

The costs to which Sjaastad refers are not only pecuniary but also psychic.

3

However, though migration is triggered by geographical disequilibria, the mobility of factors in the long- run should lead to equilibrium, since wages and unemployment rates should both tend to converge.

63 In contrast to the disequilibrium models reviewed earlier, according to which migration results from the economic differentials between locations, equilibrium models acknowledge that non-economic location characteristics can also be very relevant in influencing migration behaviour (Graves, 1980, Graves and Linneman, 1979, Knapp and Graves, 1989). In short, besides economic characteristics of a location, equilibrium migration models consider amenities, which are “anything that shifts the household willingness to locate in a particular location” (Partridge, 2010, p. 518). Non-economic amenities can in turn be distinguished between natural amenities, like weather and landscape, and manmade amenities, like healthcare, infrastructure, public safety and so on (Cushing and Poot, 2003).

Therefore, equilibrium models maintain that individuals do not migrate to maximise income, as claimed by disequilibrium models, but to pursue quality of life. Since quality of life depends on number of factors, both economic and non-economic, in their view focusing only on the economic ones would be inadequate. Though providing a detailed description of equilibrium models is beyond the scope of this work, their basis is that an individual’s choice of location depends on personal preferences for the different mixes of amenities offered by each possible destination. The equilibrium is contingent on the fact that different mixes of location characteristics can be equivalent for different individuals in search of quality of life, depending on their personal preferences.

It must be noted that recent studies have explicitly attempted to reconciliate economic factors and amenities, equilibrium and disequilibrium models into single frameworks. For instance, Faggian and Royuela (2010) take into account quality of life along with more traditional economic variables, such as employment opportunities, income and wage levels. On a similar vein, Biagi et al. (2011) find that in Italy long distance migration is well explained by a disequilibrium model, whereas short distance migration largely reflects an equilibrium model of migration. Finally, both equilibrium and disequilibrium models agree that the perception of the attractiveness or repulsiveness of different location characteristics (economic or non-economic) changes depending on individual characteristics.

The literature has focused on an array of different individual characteristics, but probably the most studied of which is human capital. In this regard, both Human Capital Theory and Job Search Theory agree that migrants tend to be endowed with

64 higher levels of human capital than non-migrants, though they achieve this conclusion through different reasoning4.

However, besides human capital, also the effect of other individual characteristics on migration behaviour has been scrutinised by the literature: gender (Faggian et al., 2007b, Markham and Pleck, 1986), unemployment (DaVanzo, 1978), age (Becker, 1964), family status (Mincer, 1977) and so on. However, for the purpose of this work, one of these factors is particularly relevant: previous migration experience. In fact, individuals with previous migration experience (e.g., like formerly mobile students) have more information about the labour markets in their former locations, which makes their subsequent migration to these very locations more likely (DaVanzo, 1981, Haug, 2008, Herzog and Schlottmann, 1981).

In addition to information availability, there are other reasons why previous migration experience increases the odds of future migration. For instance, individuals who have already been mobile have lower psychological costs to migrate again. (Farber, 1978, Herzog and Schlottmann, 1981). Furthermore, they own “place-specific capital”, namely factors that "tie" a person to a particular place (e.g., homeownership, job- related assets such as an existing clientele, knowledge of an area, friendships, etc.), which could act as an attractor for future migration (DaVanzo, 1981, p. 47).

To understand how the interaction between location characteristics and individuals traits works, the so called push-pull framework can be of great help (De Haas, 2010). It is an individual choice equilibrium model, quite similar to neo-classical economics micro models. It relies on the work of Everett S. Lee (1966) who, almost 50 years ago, made the point that the migration decision depends on the characteristics of both the areas of origin and destination. Some location features repel individuals away from a region while others attract them, giving them the names push and pull factors, respectively. In this framework, the migration decision depends on the relative influence and strength of these counteracting forces.

4

According to Human Capital Theory, the returns of migration are positively associated with individual levels of human capital since, on average, the highly skilled are more productive. As a consequence, people who are more skilled are also more likely to migrate (Greenwood, 1975). On the other hand, according to job search theory individuals with a higher skill level are better able to process information about geographically scattered job offers, thus resulting in higher probabilities of finding (good) jobs (Herzog et al., 1993).

65 Lee posits that migration is selective since, depending on their individual traits, people tend to respond differently to the same push and pull factors. An important case of this interaction appears between skill levels and economic location factors. For instance, in his seminal work George J. Borjas (1988) shows that the earnings of the immigrant population to the US depend on the interplay between their education and the economic characteristics of their new destination. In a paper published in 1992 he and his co-authors note that highly skilled individuals tend to migrate to labour markets characterised by a high skill premium, whereas lowly skilled individuals are attracted by places characterized by low skill premium (Borjas et al., 1992). This migration tendency is, of course, reflected in the observed earning levels. Other authors have focused on the importance of agglomeration forces. For instance Giannetti (2001, 2003) states that highly skilled individuals tend to locate close to their peers in order to benefit from agglomeration externalities. Indeed, this geographical proximity allows them to exploit the complementarities among their respective skills.

Yet other studies, particularly relevant to this research as they focus on graduate students, have stressed the role of innovation and universities. According to them, innovative firms, universities and highly skilled individuals tend to locate in the same places. For example, Faggian and McCann (2006), while focussing on Great Britain, show that the primary role of universities in triggering innovation at the regional level is not to generate knowledge flows toward the surrounding economic fabric, but to attract high quality human capital, which in turn is a key asset for innovation and regional development. In addition, by focusing on Scottish and Welsh students, Faggian et al. (2007a) confirm that the location of higher education and employment are correlated. Moreover, they also detect the effects of institutional factors as they show that the propensity to migrate of Welsh-domiciled students is higher than that of Scottish- domiciled students due to differences between their respective national education systems, as well as to broader institutional and cultural differences.

In another study linked to education, Dotti et al. (2013) use a gravity model while focussing on Italy to show that universities can act as an attractor to generate inward flows of highly skilled individuals, who often stay after graduation. Incidentally, an important implication of this finding is that, since good universities are usually placed in economically strong regions, brain drain student migration could lead to further regional polarization. Similarly, Venhorst (2013), while focusing on the Netherlands, finds evidence that upon graduation students tend to locate close to their universities,

66 especially when the latter are placed in regions endowed with vibrant labour markets. On the other hand, when the universities are located in more peripheral regions students tend to return to their sending regions attracted by what he calls “regional familiarity”, which is an attachment to everything familiar (parents, relatives, knowledge of the language, labour market, cultural and so on)5.

Another influential migration theory is the Dual Labour Market Theory. This theory relies on institutional factors and has been proposed and developed by number of authors (for a review see Arango, 2000, Leontaridi, 1998, Massey et al., 1993). An influential version has been presented by Michael J Piore (2011) – see also Doeringer and Piore (1971) on this subject – according to whom labour markets of advanced industrial societies are divided into two sectors (or segments): a capital-intensive primary sector and a labour intensive, low-productivity, secondary sector. The former is characterised by good jobs (high wages, high status, stability etc.), while the latter by bad jobs (low wages, low status, instability, etc.). Given this segmentation of the labour market, migration is stimulated as locals shun bad jobs and employers have to rely on migrants to those vacancies. Migrants are willing to accept bad jobs as they still offer better standards of living than in their home country. In other words, Dual Labour Market Theory maintains that migration depends on labour demand rather than on labour supply and that migrants accept bad jobs due to huge inequalities between the economic conditions of receiving and sending countries. Dual Labour Market Theory denies that wage differentials could explain migration, since labour conditions are not determined by market forces but by institutional/social forces: industrial organisation, product market and technological conditions, systems of labour market regulation and so on.

By relying on a structural theory of migration, Saskia Sassen (1990, 2001) also comes to similar conclusions. She developed the concept of the global city, which is a theoretical framework where the growth of cities is explained by the clustering of corporate headquarters, financial centres and so on. Moreover, structural forces push cities to cluster in the global market, while they become more and more disconnected from their surroundings. Similarly to Piore’s argument, the labour market described by

5

It must be noted that this is a very similar idea to DaVanzo’s concept of “location specific capital” reviewed earlier.

67 Sassen is characterised by a proper polarisation between high income and low income workers. In this framework, migration results from the exploitation of certain countries over others and benefits the receiving country which needs cheap labour to fill out the vacancies in the bottom of the labour market’s hierarchy (cleaners, waiters etc.). It occurs from the periphery to the core (i.e., to the global cities) and is more likely between places with prior colonial relationships, shared language, presence of communication, transport links and so on (Massey et al., 1993, Sassen, 1990, Sassen, 2001). Naturally, since this theoretical framework depicts migration as a type of exploitation of labour by capital, it is not consistent with rationales predicting positive returns to migration.