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WORKING PAPER 08-23

Gabriel J. Felbermayr, Sanne Hiller and Davide Sala

Does Immigration Boost Per Capita Income?

Department of Economics

ISBN 9788778823878 (print) ISBN 9788778823885 (online)

Does Immigration Boost Per Capita Income?∗
Gabriel J. Felbermayr† Sanne Hiller‡ and Davide Sala§ , , October, 2008

Abstract Using a cross-section of countries, we adapt Frankel and Romer’s (1999) IV strategy to international labor mobility. Controlling for institutional quality, trade, and financial openness, we establish a robust and non-negative causal effect of immigration on real percapita income. Keywords: Gravity model, international trade, international migration, cross-country in-

come regression. JEL-Codes: F22, F12

We thank Wilhelm Kohler and the participants at the Workshop “Migration and Labor Market Integration” at T¨bingen University for comments. The project was supported by grant no. 10.06.1.111 of the Thyssen u Foundation. The Development Research Centre on Migration, Globalization and Poverty, at University of Sussex has kindly provided us with the data. All remaining errors are ours. A replication archive is available on www.asb.dk/staff/dsala
† gabriel.felbermayr@uni-hohenheim.de; Department of Economics, University of Stuttgart-Hohenheim, 70593 Stuttgart, Germany.

sanh@asb.dk; Department of Economics, Aarhus School of Business, University of Aarhus, Hermodsvej 22, 8230 Aabyhøj, Denmark Corresponding author: dsala@asb.dk; Department of Economics, Aarhus School of Business, University of Aarhus, Hermodsvej 22, 8230 Aabyhøj, Denmark.
§

1

Motivation

Advocates of liberal policies argue that immigration raises the income of native factor owners (Borjas, 1994). For this immigration surplus to materialize, the aggregate production function must display complementarity between inputs and the factor-content of the immigrant inflow must have a different composition than the pre-existing stock of natives.1 In contrast, per capita income- including immigrants- does not necessarily go up. If immigrants are on average poorer than natives, it trivially falls.2 Besides being of intrinsic interest, the per capita income effect determines whether the winners of immigration can potentially compensate the losers without excluding the immigrants from the redistribution scheme. In the long-run, if immigrants assimilate perfectly (i.e. become indistinguishable from natives) and the capital stock adjusts, per capita income reverts to the initial level. However, even in the long-run, migrants may have different propensities to accumulate financial and human capital than natives, which affects per capita income. Moreover, Ottaviano and Peri (2006) argue that the diversity-enhancing effect of immigration increases the value of aggregate output. Still, there may be an opposite effect, if immigration exacerbates ethnic tensions. These ambiguities call for an empirical assessment, the first one - to our best knowledge - on a broad number of countries.3 We deal with the endogeneity of immigration to per capita income constructing the geographical component of migration from cross-country data on bilateral migrant stocks and using it as an instrument - akin to Frankel and Romer’s (1999, henceforth F&R) for trade openness. Based on non-weak instruments, our analysis establishes a robust, non-negative effect of immigration on per capita income.
1 2 3

Other conditions, such as the absence of distortions must hold too. Total GDP always increases if immigrants find productive employment. Buch and Toubal (2008) account for labor market openness in their study of German states.

2

2

Empirical strategy
Following a well established literature, we estimate the following cross-

Income regression.

country income regression:

ln yi = α + β M ln Mi + β T Ti + β F Fi + γ Γi + ιIi + ui ,

(1)

where i is the country index, yi is per capita GDP (constant dollar PPP, in 2000) and Mi the stock of immigrants. The vector Γi contains population, land surface, a continuous measure of landlockedness - to capture domestic market size - and the malaria index - to control for geography (Rodrik et al., 2004).4 Ii proxies institutional quality (Glaeser et. al., 2004). Our focus is on β M . Since we include population (native and foreign-born), β M does not measure the pure size effect of immigration but rather its compositional effect, namely the one of an increase in the immigrant share. A country’s attitude towards migration is likely shaped by its history and culture. Unable to use fixed effects in a cross-section, we account for unobserved heterogeneity by inclusion of Ti - the ratio of exports and imports over GDP - and Fi - an indicator of financial market integration. We presume that a liberal attitude towards labour flows comes along with a high degree of integration on goods and financial markets.

Instrumental Variables.

Mi , Ti , are potentially endogenous. Following F&R, we exploit ge-

ographical variation to instrument Ti . We extend this strategy to Mi , using a 226x226 matrix of international bilateral migrant stocks for the year 2000. Migrants are defined as “foreign-born”, so that our measure is unaffected by national naturalization policies. Let Mij denote the number of individuals born in country j and residing in i. Then, Mi = stock.
j∈J

Mij is the total immigrant

Let E(Xij |Gij , ADJij ) = exp[Gij γ X + ADJij λX + (Gij ADJij )δ X ]
4

(2)

The index of landlockedness is the share of land borders in total border length. Compare Sachs (2003).

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with X ∈ {M, T } . Gij is a vector containing geographical variables (landlockedness, ln population in 1960, ln area for each i and j and ln bilateral distance) and ADJij an adjacency dummy.5 We use Poisson Pseudo Maximum Likelihood (PPML) to estimate (2) for the year ˆ 2000 (see Santos and Tenyreyro (2006)). Our instruments are computed as Xi = ˆ ˆ Xij = Gij γ X + ADJij λX + (Gij ADJij )ˆX is the in-sample linear prediction.6 ˆ δ
j

ˆ Xij ,

Three remarks are in order. First, PPML estimation yields stronger instruments compared to OLS, since it accounts for cases with Xij = 0, representing a non-negligable share of countrypairs (6(3)% of Mij (Tij ) in the respective sample). ˆ Second, Xi is a generated measure of multilateral remoteness determined exclusively by geography. Hence, no concerns about consistency of (2) as a gravity equation arise. ˆ ˆ Third, Mi and Ti prove to be collinear in our regression analysis, leading to weak-instruments when used simultaneously. On the presumption a country’s remoteness affects economic and ˜ psychological cost of migration, we shall use Mi =
1 N −1 w

Dwi as an alternative instrument for

Mi (N is the number of countries and Dwi is bilateral distance). Fi and Ii may well be endogenous, but simultaneous instrumentation of many endogenous regressors exacerbates the concern for weak instruments. Since good bilateral data for financial flows are rare, we abstain from instrumenting Fi like Xi , but rather proxy Fi by the (ln) distance to the closest major financial center (Rose and Spiegel, 2008). Ii is constitutional review (La Porta et. al., 2004). Compared to alternative common measures (e.g. expropriation risk or government effectiveness), it reflects permanent constraints on the executive authority, rather than election outcomes or temporary policies (Glaeser et al., 2004). By definition, endogeneity concerns are attenuated.
The specification is borrowed from F&R. Lewer and van den Berg (2008) show that bilateral migration flows are accurately predicted by geographical variables (along with income and population).
6 5

Using only in-sample predictions increases precision, compare Noguer (2005).

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3

Results

The elasticity of y with respect to the migrant stock is (significantly) positive throughout all specification in Table 1. Most importantly, weakness of instruments is of no concern (see the minimum eigenvalue statistics - Stock and Motohiro (2002)).

ˆ ˜ Effect of Immigration. (2) and (3) provide IV estimates based on M and M , respectively. ˆ The different performance in (2) relative to (3) is ascribed to the correlation of 0.52 between M ˜ and T (and, therefore with the residual), whereas M is free of this problem. Overall, OLS underestimates β M . Several factors weigh upon this discrepancy. On the one hand, measurement error in the migrant stock causes attenuation bias in OLS. On the other hand, unobserved heterogeneity (T, F ), would cause overestimation of OLS. Finally, the direction of the simultaneity bias(reverse causality of M and y) is ambiguous. ˜ Interestingly, throughout first stage regressions, M is negatively correlated with immigration, but positively associated with trade openness.

ˆ Trade Openness. In (5), we add trade openess. To avoid the multicollinearity between T ˆ ˜ ˆ and M when jointly used, we instrument M with M and T with T .7 The absence of such multicollinearity is essential to disentangle the effect of labour from goods market integration.

Financial Openness.

(6) and (7) additionally control for financial openness. This undoes the

statistical significance of the immigration effect, but preserves its positive sign. A similar effect is produced by the direct inclusion among the regressors of the great circle distance, strongly correlated with Rose and Spiegel’s indicator (ρ = 0.6059). Interestingly, the positive effect of trade openness remains.

Geography and Institutions.

(1) to (7) draw on the largest possible sample, while (8) to

(11) use a smaller sample for which institutional quality data is available. These 63 countries
7 ˆ ˆ An F-test on the first stage (regressing T on T and M ), reveals both instruments are jointly but not individually significant. In this case, weakness of instruments cannot be rejected. Multicollinearity persists even if (2) is not identically specified for Mij and Tij .

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tend to be richer, and presumably, have better data quality. Specifications (8) and (9) control for a direct effect of geography - see Sachs (2003) - extending (6) and (7) with the inclusion of a malaria index. Adding institutional controls (coefficients not displayed) in (10) and (11) leaves the coefficients on immigration, trade and financial integration fairly unchanged. The IV and OLS estimates are considerably close. Finally, the inclusion of ethnic fragmentation (Alesina et al., 2003) leaves estimates qualitatively unchanged (not reported).

4

Summary

Using geography-based instruments and controlling for the sheer population size effect, we find robust evidence for immigration to be non-negatively causally related to per capita income. Hence, immigration gives rise to a gain that can – in principle – be used to make the native population better off without excluding the immigrants from the redistribution scheme. Our preferred specification – columns (10) and (11) in Table 1 – imply that a 10% increase in the migrant stock leads to a per capita income gain of 2.2%. We also find that trade and financial integration positively affect per capita income.

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A

Data Sources
- Population, GDP per capita (2000 PPP USD)(yi ): World Development Indicators 2007. - Bilateral migration stocks (Mij ): World Bank, Development Research Centre on Migration, Globalisation and Poverty. 8 - Bilateral trade data (Tij = (Xij + Xji ) /Yi ): Direction of Trade Statistics, IMF, Sept. 2006 CD-ROM. - Trade openness (Ti ): Penn World Tables 6.2. - Adjacency (ADJij ), Area, bilateral distance: CEPII, Paris.9 - Financial Openness (Fi ) proxy: negative of Rose (2008). - Constitutional Review (Ii ) : La Porta et al. (2004). - Landlockedness: CIA World Factbook 2008. - Malaria Index: Rodrick et al. (2004).

References
[1] Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S. and Wacziarg, R. (2003). Fractionalization. Journal of Economic Growth 8(2): 155-194. [2] Borjas, G.J. (1994). The Economics of Immigration. Journal of Economic Literature 32(4): 1667-1717. [3] Buch, C.M., Toubal, F. (2008). Openness and Growth: The Long Shadow of the Berlin Wall. Journal of Macroeconomics, doi: 10.1016/j.jmacro.2008.07.004. [4] Frankel, J.A., and Romer, D. (1999). Does Trade Cause Growth? American Economic Review 89(3): 379-399. [5] Glaeser, E. L., La Porta, R. F. L., and Shleifer, A. (2004). Do Institutions Cause Growth?. Journal of Economic Growth 9(4): 271-303. [6] La Porta , Rafael F. L., Lopez-de-Silanes, F., Pop-Eleches, C., Shleifer, A. (2004). Judicial Checks and Balances. Journal of Political Economy, 112(2): 445 - 470. [7] Lewer, J.J., and Van den Berg, H. (2008). A gravity model of immigration. Economics Letters 99(1): 164-167. [8] Noguer, M.,Siscart, M. (2005). Trade raises income: a precise and robust result. Journal of International Economics vol. 65(2): 447-460. [9] Ottaviano, G. and G. Peri (2006). Rethinking the Effects of Immigration on Wages. NBER Working Paper (12496).
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http : //www.migrationdrc.org/research/typesof migration/global migrant origin database.html www.cepii.fr/anglaisgraph/bdd/distances.htm

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[10] Rodrik, D., Subramanian A., and Trebbi F. (2004). Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of Economic Growth 9(2): 271-293. [11] Rose, A. K., and Spiegel, M. M. (2008). International Financial Remotness and Macroeconomic Volatility. Mimeo, University of California Berkeley. [12] Sachs, J. D. (2003) Institutions don’t Rule: Direct Effects of Geography on per capita Income, NBER WP 9490. [13] Santos Silva, J.M.C. and Tenreyro, S. (2006). The log of gravity. Review of Economics and Statistics 88 (4): 641-658. [14] Stock, J., Motohiro, Y. (2002). Testing for Weak Instruments in Linear IV Regression. NBER Technical WP 0284.

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Table 1. Per capita income and immigration (A) Second-stage regressions Large sample (N=162) (1) OLS Migration (M) Trade (T) Finance (F) Market Size Geography Institution Adj R2 / Wald Chi MES yes yes yes yes yes 0.261*** (0.0462) (2) IV 0.810*** (0.153) (3) IV 0.535*** (0.138) (4) OLS 0.240*** (0.0434) 0.00565*** (0.00191) (5) IV 0.484** (0.228) 0.0191*** (0.00724) (6) OLS 0.210*** (0.0426) 0.00358*** (0.00125) 0.723*** (0.0965) yes (7) IV 0.0998 (0.133) 0.0151** (0.00656) 0.582*** (0.159) yes (8) OLS 0.231*** (0.0539) 0.00109 (0.00125) 0.426*** (0.0948) yes yes 0.774 (9) IV 0.226** (0.0897) 0.00457 (0.00301) 0.415*** (0.0981) yes yes 475.7 7,066 Small sample (N=63) (10) OLS 0.232*** (0.0531) 0.00104 (0.00126) 0.431*** (0.1000) yes yes yes 0.773 (11) IV 0.221** (0.0875) 0.00456 (0.00295) 0.420*** (0.101) yes yes yes 488.2 6,921

0.343

66.20 27.86

79.10 18.03

0.387

68.09 5,506

0.542

161.7 6,351

(B) First-stage regressions Variable instrumented:
ˆ M

M for (2) 1.500*** (0.279)

M for (3) -2.881*** (0.710)

M for (5) -1.763** (0.861) 0.0254*** (0.00855)

T for (5) 55.62 (39.61) 1.441** (0.584)

M for (7) -2.242** (0.921) 0.0416*** (0.0145) -0.609** (0.243) 0.565 12.73

T for (7) 57.75* (32.90) 1.369* (0.811) 2,708 (11.83) 0.372 1,658

M (for 9) -2.923** (1.302) 0.0429** (0.0200) -0.947*** (0.287) 0.311 8,882

T for (9) 131.6*** (48.61) 2.559** (1.136) -13.39 (16.73) 0.521 3,687

M for (11) T for (11) -2.937** (1.334) 0.0431** (0.0205) -0.957*** (0.291) 0.300 8,345 132.0*** (49.43) 2.553** (1.147) -13.11 (17.17) 0.512 3,596

ˆ T
Finance (F)

Adj R2 F-stat. on Excl. Instruments

0.556 28.82

0.531 16.49

0.549 15.94

0.375 3,996

Robust standard errors in brackets. ***, **, * denote significance at the 1,5,10% levels, respectively. All regressions include a constant (not shown). Critical values for Minimum Eigenvalue Statistic (MES) are 7.03 (5), 4.58 (10), 3.95 (20), 3.63 (30). Market Size Controls: ln Area, ln Population 1960, Landlockedness. Geography Controls: Malaria Index. Institutional Controls: Constitutional Review. All first stage regressions include all exogeneous regressors (not shown).

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WP 06-8

WP 06-9 Valérie Smeets: Job Mobility and Wage Dynamics. ISBN 87-7882-167-3 (print); ISBN 87-7882-168-1 (online). WP 06-10 Valérie Smeets and Frédéric Warzynski: Testing Models of Hierarchy: Span of Control, Compensation and Career Dynamics. ISBN 87-7882-187-8 (print); ISBN 87-7882-188-6 (online). WP 06-11 Sebastian Buhai and Marco van der Leij: A Social Network Analysis of Occupational Segregation. ISBN 87-7882-189-4 (print); ISBN 87-7882-190-8 (online). 2007: WP 07-1 Christina Bjerg, Christian Bjørnskov and Anne Holm: Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries. ISBN 87-7882-191-6 (print); ISBN 87-7882-192-4 (online). WP 07-2 Jeremy T. Fox and Valérie Smeets: Do Input Quality and Structural Productivity Estimates Drive Measured Differences in Firm Productivity? ISBN 87-7882-193-2 (print); ISBN 87-7882-194-0 (online). WP 07-3 Elisabetta Trevisan: Job Security and New Restrictive Permanent Contracts. Are Spanish Workers More Worried of Losing Their Job? ISBN 87-7882-195-9 (print); ISBN 87-7882-196-7 (online). WP 07-4 Tor Eriksson and Jaime Ortega: Performance Pay and the “Time Squeeze”. ISBN 9788778822079 (print); ISBN 9788778822086 (online).

WP 07-5 Johan Moritz Kuhn: My Pay is Too Bad (I Quit). Your Pay is Too Good (You’re Fired). ISBN 9788778822093 (print); ISBN 9788778822109 (online). WP 07-6 Christian Bjørnskov: Social trust and the growth of schooling. ISBN 9788778822116 (print); ISBN 9788778822123 (online). WP 07-7 Jan Bentzen and Valdemar Smith: Explaining champagne prices in Scandinavia – what is the best predictor? ISBN 9788778822130 (print); ISBN 9788778822147 (online). WP 07-8 Sandra Cavaco, Jean-Michel Etienne and Ali Skalli: Identifying causal paths between health and socio-economic status: Evidence from European older workforce surveys ISBN 9788778822154 (print); ISBN 9788778822161 (online). WP 07-9 Søren Harck: Long-run properties of some Danish macroeconometric models: an analytical approach. ISBN 9788778822390 (print); ISBN 9788778822406 (online).

WP 07-10 Takao Kato and Hideo Owan: Market Characteristics, Intra-Firm Coordination, and the Choice of Human Resource Management Systems: Evidence from New Japanese Data. ISBN 9788778822413 (print); ISBN 9788778822420 (online). WP 07-11 Astrid Würtz: The Long-Term Effect on Children of Increasing the Length of Parents’ Birth-Related Leave. ISBN 9788778822437 (print); ISBN 9788778822444 (online). WP 07-12 Tor Eriksson and Marie-Claire Villeval: Performance Pay, Sorting and Social Motivation. ISBN 9788778822451 (print); ISBN 9788778822468 (online). WP 07-13 Jane Greve: Obesity and Labor Market Outcomes: New Danish Evidence. ISBN 9788778822475 (print); ISBN 9788778822482 (online).

2008: WP 08-1 Sebastian Buhai, Miguel Portela, Coen Teulings and Aico van Vuuren: Returns to Tenure or Seniority ISBN 9788778822826 (print); ISBN 9788778822833 (online).

WP 08-2

Flora Bellone, Patrick Musso, Lionel Nesta et Frédéric Warzynski: L’effet pro-concurrentiel de l’intégration européenne : une analyse de l’évolution des taux de marge dans les industries manufacturières françaises ISBN 9788778822857 (print); ISBN 9788778822864 (online). Erdal Yalcin: The Proximity-Concentration Trade-Off under Goods Price and Exchange Rate Uncertainty ISBN 9788778822871 (print); ISBN 9788778822888 (online) Elke J. Jahn and Herbert Brücker: Migration and the Wage Curve: A Structural Approach to Measure the Wage and Employment Effects of Migration ISBN 9788778822895 (print); ISBN 9788778822901 (online) Søren Harck: A Phillips curve interpretation of error-correction models of the wage and price dynamics ISBN 9788778822918 (print); ISBN 9788778822925 (online)

WP 08-3

WP 08-4

WP 08-5

WP 08-6 Elke J. Jahn and Thomas Wagner: Job Security as an Endogenous Job Characteristic ISBN 9788778823182 (print); ISBN 9788778823199 (online) WP 08-7 Jørgen Drud Hansen, Virmantas Kvedaras and Jørgen UlffMøller Nielsen: Monopolistic Competition, International Trade and Firm Heterogeneity - a Life Cycle Perspective ISBN 9788778823212 (print); ISBN 9788778823229 (online) WP 08-8 Dario Pozzoli: The Transition to Work for Italian University Graduates ISBN 9788778823236 (print); ISBN 9788778823243 (online) WP 08-9 Annalisa Cristini and Dario Pozzoli: New Workplace Practices and Firm Performance: a Comparative Study of Italy and Britain ISBN 9788778823250 (print); ISBN 9788778823267 (online) WP 08-10 Paolo Buonanno and Dario Pozzoli: Early Labour Market Returns to College Subjects ISBN 9788778823274 (print); ISBN 9788778823281 (online) WP 08-11 Iben Bolvig: Low wage after unemployment - the effect of changes in the UI system ISBN 9788778823441 (print); ISBN 9788778823458 (online)

WP 08-12 Nina Smith, Valdemar Smith and Mette Verner: Women in Top Management and Firm Performance ISBN 9788778823465 (print); ISBN 9788778823472 (online) WP 08-13 Sebastian Buhai, Elena Cottini and Niels Westergård-Nielsen: The impact of workplace conditions on firm performance ISBN 9788778823496 (print); ISBN 9788778823502 (online) WP 08-14 Michael Rosholm: Experimental Evidence on the Nature of the Danish Employment Miracle ISBN 9788778823526 (print); ISBN 9788778823533 (online) WP 08-15 Christian Bjørnskov and Peter Kurrild-Klitgaard: Economic Growth and Institutional Reform in Modern Monarchies and Republics: A Historical Cross-Country Perspective 1820-2000 ISBN 9788778823540 (print); ISBN 9788778823557 (online) WP 08-16 Nabanita Datta Gupta, Nicolai Kristensen and Dario Pozzoli: The Validity of Vignettes in Cross-Country Health Studies ISBN 9788778823694 (print); ISBN 9788778823700 (online) WP 08-17 Anna Piil Damm and Marie Louise Schultz-Nielsen: The Construction of Neighbourhoods and its Relevance for the Measurement of Social and Ethnic Segregation: Evidence from Denmark ISBN 9788778823717 (print); ISBN 9788778823724 (online) WP 08-18 Jørgen Drud Hansen and Jørgen Ulff-Møller Nielsen: Price as an Indicator for Quality in International Trade? ISBN 9788778823731 (print); ISBN 9788778823748 (online) WP 08-19 Elke J. Jahn and John Wegner: Do Targeted Hiring Subsidies and Profiling Techniques Reduce Unemployment? ISBN 9788778823755 (print); ISBN 9788778823762 (online) WP 08-20 Flora Bellone, Patrick Musso, Lionel Nesta and Frederic Warzynski: Endogenous Markups, Firm Productivity and International Trade: Testing Some Micro-Level Implications of the Melitz-Ottaviano Model ISBN 9788778823779 (print); ISBN 9788778823786 (online)

WP 08-21 Linda Bell, Nina Smith, Valdemar Smith and Mette Verner: Gender differences in promotion into top-management jobs ISBN 9788778823830 (print); ISBN 9788778823847(online) WP 08-22 Jan Bentzen and Valdemar Smith: An empirical analysis of the relationship between the consumption of alcohol and liver cirrhosis mortality ISBN 9788778823854 (print); ISBN 9788778823861(online) WP 08-23 Gabriel J. Felbermayr, Sanne Hiller and Davide Sala: Does Immigration Boost Per Capita Income? ISBN 9788778823878 (print); ISBN 9788778823885(online)