Principal investigator: Bruno Benevit
Original title: The Aggregate Productivity Effects of Internal Migration: Evidence from Indonesia
Authors: Gharad Bryan and Melanie Morten
Location of the Intervention: United States
Sample Size: 2.481.000 men
Sector: Jobs
Primary Variable of Interest: Salary
Type of Intervention: Migration cost
Methodology: OLS, PPML
In developing countries, recent evidence indicates that greater ease of internal migration has the potential to increase productivity. The objective of this study was to verify how the reduction of internal migration costs in Indonesia impacts aggregate productivity in Indonesia, as well as to verify how the presence or absence of amenities affects the average wage of the population at the destination. Presenting a general equilibrium model and using various econometric methodologies, the authors identified that the elimination of barriers increases productivity and that the absence of amenities at the destination is compensated for by higher wages.
- Policy Problem
Several economists seek to identify how internal migration can affect labor market decisions. In developing countries, specifically, recent studies suggest that greater ease of internal migration has the potential to increase productivity. Although there is evidence of positive effects of seasonal migration on consumption (Bryan, Chowdhury, and Mobarak, 2014), the aggregate impact of internal migration costs on wages involves a distinct decision-making process (Bryan and Morten, 2019).
According to the authors, when considering migration from one location to another, individuals compare not only the income prospects between their original location and the destination, but also the costs of migration and the amenities offered by both locations. In this sense, individuals choose to migrate only if their earnings increase sufficiently to offset the costs of that migration. Reducing this type of barrier has the potential to improve the willingness of workers to move between different regions according to their skills (Bryan and Morten, 2019).
- Policy Implementation Context
Migration in Indonesia is predominantly characterized by a single episode of permanent migration in adulthood. Among Indonesian male heads of household who move outside their birth province, 69% make only one migration, 26% make two, and only 5% make three or more moves. Only 8% of migrations involve people under 16 years of age, and half of the second migrations are made by people returning home. These patterns are comparable to those observed in the United States, where the average number of location changes for male migrants is 1,98 and 50,2% of them return to their hometown.
The authors presented five stylized facts to understand how aggregate wages are associated with worker location. The mechanisms elucidated by these motivational facts highlight the influence of distance on migration, its impact on productivity, and the relationship between wages and local amenities. Taken together, the five facts suggest that increasing labor force mobility can result in productivity gains.
- Evaluation Details
This study used microdata from Indonesia and the United States. The Indonesian data comes from the Intercensal Population Survey (SUPAS) and the National Socioeconomic Survey (SUSENAS) of 2011 and 2012. This dataset includes information on formal workers such as place of birth, current place of work, and monthly income. To verify the effects considering the presence of self-employed workers, the study supplemented the SUPAS/SUSENAS data with detailed information from... Indonesian Family Life Survey (IFLS), which covers a longer period and includes information on self-employed individuals. In the US, the data comes from the 1990 census and the 2010 American Community Survey. To obtain the amenity measures for locations in Indonesia, data from Village Potential Statistics (PODES). In order to observe how employment-motivated migrations are affected, the authors restricted the final samples to male heads of household between 15 and 65 years of age.
- Method
To explain how migration and amenity costs affect productivity, the authors formalized five stylized facts associated with the relationship between the origin and destination of migration. The first fact establishes that the proportion of people migrating to a given location decreases as the distance increases. The second fact stipulates that the average wage of people who migrated increases as the distance between the origin and destination increases. The third fact determines that the elasticity of average wages in relation to the share of the origin population is negative. The fourth fact states that migration costs reduce productivity by reducing worker selection. Finally, the fifth fact establishes the existence of compensatory wage differentials, where locations with greater amenities have lower aggregate wages.
Due to the census-based nature of the data used, the study's migration measure represents permanent migration based on a repeated cross-section. This assumption is corroborated by the analyzed IFLS data: migration in Indonesia can be characterized as a single episode of permanent migration. Mobility costs are defined as the straight-line distance between the place of origin (birth) and destination (for those who migrated to the current location). The variable identifying amenities is defined as a single measure using six different amenities criteria (positive and negative).
To identify the relationship between migration costs and aggregate productivity, the ordinary least squares (OLS) method was used to estimate the five stylized facts for Indonesia. For the United States, only the first four facts were estimated.
Finally, the study presents a static general equilibrium model of migration, adapted from Hsieh's labor ordering model. et al. (2019). The model formalizes that workers are born in a specific origin, acquire a skill for each destination, and make the selection between destinations based on wages, amenities, and migration costs. Migration costs are relative to the place of birth, and wages and amenities are endogenous and adjust to ensure equilibrium, so that locations have different sets of required skills. To estimate this model, a Poisson Pseudo Maximum Likelihood (PPML) model was used.
- Main results
The results of the stylized five-fact estimates revealed the significant influence of commuting costs and convenience differentials on migration and average wages in Indonesian locations. Regarding commuting costs, a 10% reduction in the distance between two locations resulted in a 7% increase in the proportion of migrants between those locations.
It was observed that people who live further from their birthplaces tend to have higher salaries, indicating that it is necessary to financially compensate people to encourage them to move away from their hometowns. When the distance between origin and destination doubles, a 3% increase in average salaries was observed. These results suggest that commuting costs play a key role in people's decisions to move and in determining salaries.
Furthermore, the analysis revealed the importance of selection effects, where the greater the proportion of people born in a given location who move to another, the lower the average wage of these migrants. The results for the United States showed similar behavior in terms of magnitude and significance. Regarding the differences in amenities between locations, it was found that Indonesian workers in locations with low amenities receive higher wages, reflecting the need to compensate those who choose to live in areas with a lower quality of life.
Calibration of the structural model parameters indicates that the United States has lower migration costs compared to Indonesia. The model estimates showed moderate gains in aggregate productivity, exhibiting significant heterogeneity. Eliminating all barriers to migration is projected to increase productivity by 22%, with even greater gains for some origin locations, reaching 104% – these gains are more significant in locations where average wages vary more between destinations. Considering movement costs at the United States level, counterfactual calculations indicate a 7,1% increase in average wages in Indonesia.
- Lessons in Public Policy
This article analyzed the impact of relocation costs and amenity differentials on migration and labor productivity. Using econometric methods, the authors estimated five stylized facts associated with the topic. Additionally, the authors also presented a general equilibrium model of migration, considering migration costs and differentials in required skills and amenities between locations. The study's evidence indicated that workers' migration costs are offset by higher wages. Similarly, the absence of amenities is also compensated for. The results also indicate that migrant selection plays an important role, where a higher proportion of people moving to a specific destination is associated with lower average wages.
These results have relevant implications for public policy formulation. Although migration that improves the static allocation of labor may not have as substantial an impact as some studies suggest, targeted policies can have significant effects on specific communities. Therefore, policies aimed at reducing commuting costs can contribute to increased productivity and improved living conditions in specific regions.
References
BRYAN, G.; CHOWDHURY, S.; MOBARAK, AM Underinvestment in a Profitable Technology: The Case of Seasonal Migration in Bangladesh. Econometrics, v. 82, no. 5, p. 1671–1748, 2014.
BRYAN, G.; MORTEN, M. The Aggregate Productivity Effects of Internal Migration: Evidence from Indonesia. Journal of Political Economy, v. 127, no. 5, p. 2229–2268, Oct. 2019.
HSIEH, C.-T. et al. The Allocation of Talent and US Economic Growth. Econometrics, v. 87, no. 5, p. 1439–1474, 2019.
