2.6 Summary
3.3.1 Model
Our model begins with an emigration equation similar to Borjas (1987):
Mt =µ0+µ1W1t+µ2W0t+µ3Kt+"t (3.1) where the emigration rate, M, depends positively on the average wage in the des- tination country, W1 (µ1 > 0), and negatively on the average wage in the origin country, W0 (µ2 <0), and the cost of migration, K (µ3 <0). A larger wage di↵er- ential will motivate greater migration to the higher-wage country. In other words, migration increases with greater destination income holding origin income fixed, or with lower origin income controlling for destination income. Thus, even with equi- librium in the labor market in the origin country, the wage di↵erential motivates migration but constraints render the status quo. Migration also depends on the cost
of migration and related factors / proxies such as the previous stock of migrants or remittances. The previous stock of migrants would reduce information costs while remittances would cover transportation and settlement costs.
Since the decision to migrate depends not only on the wage di↵erential but also on the probability of getting a job (Todaro,1969;Harris and Todaro,1970), the model can be modified by including employment rates in the origin and destination countries:
Mt =µ0+µ1E1t+µ2W1t+µ3E0t+µ4W0t+µ3Kt+"t (3.2) Emigration would be positively related to employment in the destination (µ1 >0) and negatively related to employment at home (µ3 < 0). However, wages and employment are endogenously determined in the respective labor markets in both countries.
Ls0t =↵0+↵1W0t+↵2LF0t+"2t (3.3)
Ld0t= 0 + 1W0t+ 2Y0t+"3t (3.4)
Ls1t = 0+ 1W1t+ 2LF1t+"4t (3.5)
Ld1t= 0+ 1W1t+ 2Y1t+"5t (3.6)
where Ls and Ld are labor supply and demand, respectively, and the subscripts 0 and 1 refer to the origin and destination countries, respectively. Labor supply depends on wages, W, and the size of the labor force, LF. The higher the wages, the more people are willing to work (↵1 > 0, 1 > 0). The larger the labor force, the bigger the labor supply (↵2 >0, 2 >0). The demand for labor depends on the wage rate and on the economy’s output, Y. The higher the wage, the less workers firms are willing to employ ( 1 <0, 1 <0). The higher the output, the greater the demand for labor ( 2 >0, 2 >0).
These yield the reduced form equations:
L0t=⇡10+⇡11LF0t+⇡12Y0t+ 1t (3.7)
W0t =⇡20+⇡21LF0t+⇡22Y0t+ 2t (3.8)
L1t=⇡30+⇡31LF1t+⇡32Y1t+ 3t (3.9)
W1t =⇡40+⇡41LF1t+⇡42Y1t+ 4t (3.10) where wages and employment in the origin destination countries depend on their
respective labor force and output.7 High population growth and a large labor supply
relative to demand will keep wages low (⇡21 <0) (Malthus, 1798; Lewis, 1954). The endogeneity of wages and employment may lead to biased estimates in equations3.1 and3.2. To address this problem, migration can be related ultimately to the output and labor force underlying labor demand and supply, respectively, in these countries as in Williamson (1974). Substituting the wage equations into 3.1 yields:
Mt =⇡50+⇡51LF0t+⇡52Y0t+⇡53LF1t+⇡54Y1t+µ3Kt+ 5t8 (3.11) Based on the literature, there are two competing hypotheses on the e↵ect of income on migration. Correspondingly, does poverty in the Philippines drive migration (⇡52<0) (Lewis,1954;Harris and Todaro,1970) or does economic growth facilitate migration (⇡52 > 0) (Massey, 1988)? Is economic growth reducing transportation and communication costs, thereby promoting migration? How are the economic cycles of the Philippines and destination countries related? To what extent does the Philippines’ economic links with destination countries drive migration? To what extent does migration depend on economic conditions in destination countries? To what extent does the previous migrant stock a↵ect current migration? How do destination migration policies a↵ect migration? Do remittances promote inequality that motivate more migration or do they prevent more workers from having to work abroad?
Given the origin labor demand and supply, a higher destination wage would raise the quantity of labor supplied relative to the quantity of labor demanded. The resulting excess labor (unemployment) at corresponding destination wages would be the supply of migrants from the origin country. The supply of migrants is positively related to the destination wage, positively related to the origin labor supply, and negatively related to the origin labor demand.
M0st = 0+ 1W1t+ 2LF0t+ 3Y0t+"2t (3.12) Rigidities or distortions in the labor market also a↵ect migration. A higher than equilibrium origin wage creates domestic unemployment and a supply of migrants. Changes in labor demand and supply conditions in the origin country would shift
7where⇡ 11= (↵2 1)/(↵1 1),⇡12=↵1 2/(↵1 1),⇡21= ↵2/(↵1 1),⇡22= 2/(↵1 1),⇡31= 21/( 1 1),⇡32= 1 2/( 1 1),⇡41= 2/( 1 1),and⇡42= 2/( 1 1). 8where⇡ 51= (↵2µ2)/(↵1 1),⇡52 = ( 2µ2)/(↵1 1),⇡53= ( 2µ1)/( 1 1),and ⇡54= ( 2µ1)/( 1 1).
the supply of migrants. These include changes in output and in the labor force. The supply of migrants also depends on migration costs and related factors such as the stock of migrants and remittances. Migrant stock and remittances decrease migra- tion costs, e↵ectively raising domestic wages. Given the destination labor demand and supply, the lower wage in the origin raises the quantity of labor demanded rela- tive to the quantity of labor supplied. The resulting excess demand at corresponding origin wages is the demand for migrants in the destination country. The demand for migrants is negatively related to the origin wage, positively related to the destina- tion country labor demand, and negatively related to the destination country labor supply.
M1dt= 0+ 1W0t+ 2LF1t+ 3Y1t+"2t (3.13) Under free market conditions, the level of migration from origin to destination is the equilibrium level where the quantity of migrants supplied is equal to the quantity of migrants demanded. It depends on the origin and destination wages, labor supply and demand.
Mte=µ0+µ1W1t+µ2W0t+µ3LF0t+µ4Y0t+µ5LF1t+µ6Y1t+µ7Kt+ 5t (3.14) Migration may not be in equilibrium if there are market distortions. The quantity demanded of migrants may be subject to barriers such as quotas and qualification restrictions.