THE DETERMINANTS OF ACTUAL MIGRATION AND THE ROLE OF WAGES AND UNEMPLOYMENT IN ALBANIA: AN EMPIRICAL ANALYSIS

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1 Luc Papers n. 196, Sere Economa e Impresa, 50, novembre 2006 THE DETERMINANTS OF ACTUAL MIGRATION AND THE ROLE OF WAGES AND UNEMPLOYMENT IN ALBANIA: AN EMPIRICAL ANALYSIS Crstna Cattaneo 1. Introducton Albana s one of the economcally least developed countres n Europe: after the collapse of the communst regme a substantal growth was acheved but the poverty at the household level s stll very hgh. Accordng to a study conducted to measure and montor poverty n Albana (World Bank, 2003) n 2002 a quarter of the populaton, whch corresponds to 780,000 ndvduals, fell below the poverty lne of 4,891 Lecks per capta per month and nearly fve percent of the populaton lved n extreme poverty, defned as a stuaton where the basc food requrements are not met. Poverty has a geographcal dmenson, beng more wdespread n the rural areas than n the urban areas and n north than n the south: the report from the World Bank states that n rural areas the poverty head count s 50 percent hgher than n urban areas, and the average consumpton n the mountan area s around percent lower than n the rest of the country. A strong lnk exsts between poverty and unemployment, beng the lack of employment one of the man determnants of poverty: t s reported that more than half of the famles wth an unemployed household head are poor and the stuaton s partcularly dffcult n the rural dstrcts. The regstered unemployment rate was 14.5 percent for the 2001, whch rses to 15.3 percent, extendng the standard defnton of unemployed to seasonal workers and dscouraged workers (World Bank, 2003). The hgh rates of unemployment and the severe poverty experenced by the household may have nduced strong pressure toward mgraton. Albanans, among other transtonal countres populatons, are the most nclned to leave ther country. Accordng to a study conducted by the Internatonal Organzaton for Mgraton (Stacher and Doberng, 1997), n 1993 over half of 1

2 Luc Papers n. 196, novembre 2006 Albanans were wllng to move and more strkng, a ffth of them permanently. Statstcs are poor, partly due to the rregular nature of much of mgraton, but most rough estmates of mgraton suggest that at least 15% of the populaton lves abroad and 40 percent of the people have some relatves settled outsde the border of the country (UN, 2002). External mgraton s not the only pattern n Albana, as there s a hgh rate of nternal mgraton as well. The most common form of nternal mgraton s urbanzaton: the urban populaton has rsen from 31.8% n 1970 to 42.0% n 2000 (UN, 2002); however, mgraton occurs also from the nternal areas toward the coastal regons and from the north to the south, because economc condtons are less severe n the southern than n northern areas. The lack of relevant household data, however, has constraned any attempt to analyse the process governng mgraton behavour n Albana, ts determnants and any potental relatonshp wth the poverty faced by the households. Ths research ams to fll the current gap n knowledge, provdng a detaled analyss of wage and unemployment equatons at ndvdual mcro level as well as examnng the nternal mgraton pattern. The nnovatve feature of ths work come from the fact the no structured household surveys were avalable pror the LSMS 2002, whch s the data source for ths research: ths lmtaton prevented any worthwhle analyss on the Albanan experence. The ultmate objectve s to study nternal mgraton at aggregate dstrct level, adoptng a neoclasscal approach: an nternal mgraton functon s estmated usng aggregate wage and unemployment rate dfferentals, whch have been endogenously calculated from a frst stage wage and employment equatons. Indvdual-level wage and unemployment equatons are estmated, emphaszng the dfference between mgrants and non-mgrants. Further nsghts are provded by these equatons, nterpretng the coeffcents of the mgrants and non-mgrants varables and assessng the exstence of economc gans from mgraton. The remander of the paper s organzed as follows. Secton II presents the theoretcal studes. Secton III detals the data set used and provdes a prelmnary descrpton of the dfferences between mgrants and non-mgrants. Secton IV outlnes the methodology adopted. Secton V presents the econometrc analyss and documents the emprcal support on the neoclasscal mgraton approach. Secton VI offers an analyss of the ndvdual reasons to mgrate. Secton VII provdes summary and conclusons. 2. Theoretcal Approach to the Mgraton Decson The frst attempt to analyse the determnants of mgraton can be tracked back to Smth (1776) and Ravensten (1889) 1, who modelled mgraton as a result of an ndvdual utlty 2

3 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: maxmzaton subject to a budget constrant. Indvduals seek to maxmze ther ncomes movng to places where the wages are hgher: therefore, the man engnes of the decson are wages dfferentals, whch result from geographcal dfferences n demand and supply n regonal labour markets. Regons are charactersed by dstnctve labour and captal endowments and the scarcty of one nput relatve to the other determnes the equlbrum level of the factors prces. The exstence of wage dfferentals drves a mgraton flow from low wage to hgh wage regons and ths reallocaton of resources causes a shft n the supply of labour n the regons, leadng to new factor prce equlbra. The process stops when the wages dfferentals reflect only the costs of the movement, pecunary and psychologcal. Wthn ths theory, whch has been labelled as the neoclasscal approach, an mportant extenson s presented by Todaro (1969) and Harrs-Todaro (1970), who relax the assumpton of full employment n the labour markets and ntroduce the probablty of employment n the utlty functon of movers: mgraton s expressed as a functon of expected rather than actual earnng dfferentals and therefore mgrants chose destnatons whch maxmze ther earnngs weghted by the probablty to fnd a job n the destnaton area. The macro-economc model develops n a context of nternal mgraton and has the man advantage to explan the large flows of rural to urban mgraton, despte the hgh unemployment rates n the urban areas. The Todaro model have been tested emprcally usng aggregate nformaton and augmentng the equatons wth country level characterstcs. Todaro (1980) presents a survey of early contrbutons: varables such as ncome, unemployment, urbanzaton n both destnaton and orgn countres as well as dstance act as major determnants of out-mgraton. Borjas (1987), n an analyss of nternatonal mgraton, estmates emgraton rates to Unted States as a functon of economc condtons n the dfferent countres of orgn. It should be noted that the label modfed gravty type models has been ntroduced, n the sense that the varables of the orgnal gravty models receve behavoural content. Karemera et al. (2000), and Clark et al. (2002) regress the mgraton rates to US or Canada on a varety of poltcal, economc and demographc factors of both orgn and destnaton countres. Mayda (2005) extends the analyss estmatng the emgraton rates to a multtude of destnaton natons, rather than a sngle destnaton. Dynamc specfcatons are also estmated, usng tme seres data for a sngle country: some examples are Erksson, (1988) and Pssardes and McMaster (1990); n partcular the latter ntroduced n the equaton dfferences n regonal wage growth rather than levels of relatve wage. Fnally, Fan and Venturn (1994) estmate emgraton rates from some selected countres as a functon of supply determnants of mgraton as well as destnaton country demand factors. Moreover, among the classcal varables whch nfluence the supply of mgrants 3

4 Luc Papers n. 196, novembre 2006 labour, the authors ntroduce the squared wage level n the orgn country, to test for nonlnearty between development and mgraton. Followng the man assumptons of the neoclasscal approach, whch consders mgraton as an ndvdual decson of ratonal agents, who seek to maxmze ther earnngs, the human captal model n mgraton s frst ntroduced by Sjaasstad (1962). In ths model, the key feature s consderng mgraton as an nvestment decson, or as an nvestment ncreasng the productvty of human resources (Sjaasstad, 1962), whch gves returns but bears also costs. In ths framework, whch s known as the human captal theory, an ndvdual computes a costbeneft analyss n order to evaluate the mgraton decson: dependng on the skll levels, agents are calculatng the present dscounted value of expected returns n every regon, ncludng the home locaton (Bauer and Zmmermann, 1999). Analytcally, the present value of earnngs stream accrung from the move from the orgn j to the destnaton s: T B PVB j = ( jt t= B r ) t t where r s the nternal rate of dscount, t s the ndvdual s workng lfe, assumed to be known wth certanty and B are the earnngs. The present value of net costs assocate wth movng s: T C PVC j = ( jt t= C r ) t t where C are the costs nvolved n movng. A ratonal agent wll compare all possble par wse combnatons n order to fnd the destnaton that maxmzes the Net Present Value of mgraton: NPV j =PVB j - PVC j [3] Mgraton occurs when NPV j >0: f more than one possble destnaton nvolves postve net beneft, the locaton whch provdes the hghest net beneft s chosen. The money returns to mgraton are expressed n terms of postve ncrement of the ndvduals earnngs stream and varables lke occupaton, age, sex, educaton, experence and tranng affect earnngs and nfluence the returns to mgraton. The costs of mgraton can be dvded nto money and non-money costs: the frst embodes the ncrease of expendture for journeys, food, lodgng, whle non-money consderatons nvolve opportunty costs such as the earnngs forgone for travellng, searchng for jobs and learnng. The nnovatve contrbuton of ths model s summarsed n the crucal role that the heterogenety of ndvduals assumes n a mgraton decson: ndvduals, gven the same average wages dfferentals, can dsplay dfferent propensty to mgrate, because of the dfferent [1] [2] 4

5 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: remuneraton the human captal characterstcs have at destnaton and orgn. Therefore, a person mght move from locaton j to locaton, even though the average ncome n locaton s lower than n locaton j, because hs personal sklls provde a lfetme ncome ncrease. An analyss of mgraton, should encounter not only aggregate labour market condtons but also socoeconomc and ndvdual characterstcs: therefore, mcro economc estmatons are more sutable n capturng the essental contrbutons of the human captal approach. Emprcally, many macro-studes exst, whereas few attempts provde estmates of the mcrolevel relatonshp, mpled by the human captal theory, because of the dffculty of dealng wth unobserved varables. Two aspects are emboded n the human captal theory: one s the effect of personal earnngs on the probablty of mgratng, whle the second one s the mpact of personal characterstcs on earnngs; therefore, smultaneous equatons are ntroduced n studyng mgraton: on the one hand, an expected-ncome functon s determned from ndvduals and household characterstcs and on the other hand, a mgraton functon s modelled on expected-ncome dfferentals. From ths follows that the estmated relatonshp resultng from an aggregate regresson can represent the structural framework mpled by the human captal theory only f the populaton s homogeneous. Only under ths condton, n fact, the average economc measures represent what an ndvdual would face n the dfferent areas. There s a major constrant, however, whch lmted a mcro-level analyss of mgraton: n fact, economc nformaton on both destnaton and orgn s requred for the estmaton, but for those who move, the wages they would gan and the unemployment probablty they would face at orgn are not provded and for the non-movers the economc measures at destnaton are not avalable. To overcome ths problem, wage and unemployment equatons can be estmated to predct potental economc nformaton n alternatve locatons, ntroducng ndvdual personal characterstcs. Nakosteen and Zmmer (1980), Robnson and Tomes (1982), among others, appled ths framework, estmatng two ncome equatons, one for mgrants and one for nonmgrants, as well as an equaton descrbng a dchotomous mgraton decson at a mcro-level. Obtanng the estmates of the earnng equatons, the ftted values are used to draw a mgraton functon. Lucas (1985) adopts an analogous methodology to estmate n the frst stage both wage and unemployment functons. It s wdely recognsed however, that estmates of mgrants earnng and unemployment functons can be based because of the exstence of self-selecton n mgraton. The problem arses because mgrants may not represent a random sample of the populaton, but they happen to be selected n a systematc way. Therefore to estmate correctly and consstently an earnng and unemployment functon, the process governng the mgraton decson should be 5

6 Luc Papers n. 196, novembre 2006 ncorporated n the equaton of nterest. Heckman (1976) offers a soluton to correct for selectvty bas n a context of truncated sample. 3. Descrpton of the Data The data employed for ths study are extracted from the Lvng Standard Measurement Survey (LSMS) conducted n Albana between Aprl and September The survey was undertaken by the natonal Insttute of Statstcs and the World Bank jontly. Detals of how they conducted the survey are reported below. The country was broken up nto four regons (Coastal Area, Central Area, and Mountan Area and Trana) whle the ctes and the vllages were dvded nto Enumeraton Areas (EAs). 125 EAs were selected respectvely n the Coastal, Central and Mountan Area, whle 75 EAs n the Trana area, for a total of 450 Prmary Samplng Unts. Fnally 8 Households for each unt, for a total of 3600 households, were extracted. The LSMS questonnare contans general nformaton on the households and on ndvduals, as well as mgraton detals of the famly members, whch comprse ther orgn and destnaton muncpalty, the reasons for movng and the date of movng: mgrants are those ndvduals who move from the dstrct of brth to a dfferent dstrct n Albana, durng a spell of 10 years. For the purpose of the analyss, only persons aged between 15 and 64 were consdered, as they represent the labour force n Albana. The ndvdual observatons desgned for the estmatons have been organzed nto two dfferent samples after a data cleanng process: the frst sample, labelled A n Table A1, ncludes observatons of only the actve labour force, whereas the second sample (B) dstngushes between employed and unemployed ndvduals. Sample A comprses 2133 people and t gves nformaton on ndvdual characterstcs, personal earnngs, occupaton, ndustry and experence, plus nformaton on regonal characterstcs. Sample B merges 5960 people and t provdes the employment status of the ndvduals, personal demographc nformaton and geographcal resdence, but t does not offer occupatonal detals of the full employed group. Both samples dentfy the mgrant populaton, dstngushng those who moved from the regon of brth from those of never mgrated. 3.1 Prelmnary Analyss of the Data Table A1 presents a comparson of mgrants versus non-mgrants: columns two and three provde the proporton of people belongng to the dfferent categores n the two sub-groups (p M and p N ), whle an analyss of the statstcal dfference of the two s provded n the last column. The ndvdual detals are taken from sample B (whch s more complete as t embodes the 6

7 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: other one), whle the occupatonal detals are extracted from sample A. The purpose of the analyss s to draw out any dstncton between mgrants and non-mgrants and to put emphass on the characterstcs the two groups are endowed wth. It s common to beleve that the mgrant populaton s not randomly selected from the sample, whch means that there are dyosncratc elements that are markng the group (Greenwood, 1997). Non-parametrc t-tests confrm ths hypothess snce, among the personal detals, most of the categores show a dstnct pattern between mgrants and non-mgrants. The most nterestng results are that mgrants are younger than non-mgrants: 35% of the movers compared to only 24% of non-movers are concentrated n the age group. On the contrary, 56% of local natves are older than 37 years old, whle the proporton among mgrants reaches 46%. Accordng to the human captal theory, mgraton occurs to maxmze the expected earnngs of ndvduals: gven a longer lfe horzon, the present value of any gven stream of ncome dfferences s greater for the young, offerng an entcement to move whch dmnshes wth age (Lucas, 1997). On the contrary, as long as young people have a hgher dscount rate than older people, an opposte result may be nduced. Ths second asserton s contradcted by the man emprcal results, obtaned applyng data from a varety of countres (see Bauer and Zmmermann, 1999). There are other reasons affectng ths common pattern: job securty and famly tes, to the extent that represent elements that are more mportant for older persons than for young, may dscourage older person from mgratng (Greenwood, 1975). The educatonal attanments put another wedge between the two groups; the summary statstcs show that mgrants are more educated than non-mgrants: nearly 20% of movers are graduates or above, whle among non-movers only 9% obtaned these qualfcatons. In both sub-samples, the majorty of people went to prmary school, but there s 10 percentage pont dfference between the two groups. The hgher educatonal attanment of mgrants s consstent wth the theory, whch predcts that better educated ndvduals are more lkely to mgrate, as they face lower rsk and lower uncertanty n mgraton. Moreover, educaton decreases the deterrng effects of dstance, whch s another mportant element hnderng mgraton (Greenwood, 1975). Regardng the occupaton characterstcs of the two groups, t s not surprsng that mgrants are a less experenced category than non-mgrants: 48% of movers compared to 29% of nonmovers have less than 2 years experence. On the contrary, 33% of non-mgrants compared to 11% of mgrants have more than 10 years experence. Accordng to Mncer and Jovanovc (1981), the ntally steep and later deceleratng declnes of labour moblty wth workng age are n large part due to the smlar but more steeply declnng relaton between moblty and length of job tenure. The theoretcal justfcaton for ths behavour s lnked to the ncreasng 7

8 Luc Papers n. 196, novembre 2006 frm-specfc sklls an ndvdual gans, workng for long tme n a frm: as far as these components of human captal are not easly transferable, they create a sort of attachment to the frm, reducng the ncentve for mgratng. 4. Methodology Ths paper provdes a test of the neoclasscal approach at aggregate dstrct level, estmatng a mgraton equaton, where the dependent varable s a dchotomous outcome, whch captures the exstence of nternal mgraton flows wthn Albana. The country comprsed 36 dfferent dstrcts and all par-wse flows from one regon to the other have been encountered. Pr ob( M j = 1) = f ( w ~ w~ ; u~ u~ ) =1,.., 36 j=1,.., 36 [4] j j The dstrct level wages and unemployment, ncluded n the mgraton equaton, are retreved from a frst stage wage and unemployment equatons, estmated controllng for personal characterstcs. In order to test the predctons of the human captal model of mgraton, the earnng functon and the unemployment functon are estmated emphaszng the dfference between mgrants and non-mgrants. If the human captal model s correct, the realzaton of economc gans from mgraton must appear n the wage and unemployment equatons. The frst mcro level regresson adopts a Mnceran wage equaton, augmented wth ndvdual characterstcs (X) and 36 dstrct dummes (D), where the latter capture the areas where the sample respondents lved at the tme of the survey. lnw = f ( X,D ) =1,.., n [5] Wthout mposng a common ntercept effect among the observatons, each dstrct dummy s free to mpact dfferently on the dependent varable and unobservable dstrct fxed effects are controlled for. The estmated coeffcents of the dstrct dummes represent the ceters parbus wage rates for each regon ( w ~ ). The second regresson s an unemployment probt functon, where the probablty of beng unemployed s a functon of personal characterstcs (X) and dstrct dummy varables (D). Pr ob ( u = 1) = f ( X, D ) =1,.., n [6] The ceters parbus dstrct unemployment rates (u ~ ) are computed as Φ ( γ ), where γ s the estmated coeffcent of the th dstrct dummy varable and Φ s the Cumulatve Densty Functon of a Standard Normal Dstrbuton. 8

9 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: 5. Emprcal Work 5.1 The Wage Determnaton Process The wage functon s specfed to nclude personal characterstcs such as gender (G), age (A), educaton (E), experence (T), emboded n the tenure varables, martal status (M), and other relevant nformaton such as occupaton (O) and ndustres varables (I). p= 1 p ξ CV p, 2 lnw = αa + βa y= 1 f = 1 y 5 δ E f ϑ MIG y, f, z= 1 2 h= 1 φ T ζ D z h h, z, + ϕg + ε + 13 j= 1 γ I j j, + 8 k= 1 λ O k k, + 2 l= 1 ψ M l l, + [7] In agreement wth the lterature followng Mncer (1974), the standard sem-log functon s used and the dependent varable s expressed as the natural logarthm of monthly wages. For a defnton of the varables see Table A2. Accordng to Mncer (1978), the ncluson of age, age squared, educaton and experence n the earnngs equaton s assumed to capture the human captal measures: the human captal theory suggests for example that demand for educaton reflects the decson to undertake an nvestment n order to maxmze the lfetme earnngs. The equaton s augmented usng a gender dummy to control for unequal treatment across gender groups; ndustry dummes to control for compensatng dfferentals, monopolstc market power or dfferent nput ntensty across ndustres; occupaton varables for skll level effects and martal status varables to proxy for famly background consderatons. Controls are also ncluded for prvate enterprses, urban resdence and the number of hours worked per month (CV). In order to capture the effect of the mgraton status on ncome realzaton, dummy varables for mgrants are ntroduced (MIG) 2 : the ntercept dummy captures the locaton specfc human captal, whereas the nteracton dummes allow dfferent returns to ndvdual characterstcs between movers and non-movers 3. Fnally, dstrct dummy varables (D) are specfed n the regresson to capture unobservable dstrct fxed effects Results The ordnary least squares estmates are reported n Table A3 and robust standard errors are reproduced, usng the varance-covarance matrx attrbutable to Whte (1980). Table 1 presents the rate of returns to the exogenous varables on monthly wages: as stated, the mgraton nteracton terms capture the dfferences n potental earnngs between movers and non-movers. Males enjoy hgher wages than females: n fact a man, regardless of beng mgrant or a nonmgrant, earns 19% more than a woman per month, on average and ceters parbus, perhaps 9

10 Luc Papers n. 196, novembre 2006 confrmng the exstence of some form of labour market dscrmnaton. The martal status varables don t reveal a well defned effect on wages: from ths analyss t appears that marred people earn 0.3% more than sngle persons, whle the dvorced earn 0.6% less than sngles, but the coeffcents are hghly nsgnfcant. Two results should be emphaszed concernng the schoolng varables: frst of all, hgher educatonal attanments have a strong mpact on ndvdual earnngs, as proven by the statstcally sgnfcant effect of the educatonal varables, and secondly mgrants overall show hgher returns to educaton than non-mgrants, as suggested by the statstcal effect of some of the ntercaton terms. For example, mgrants who complete secondary schoolng, on average and ceters parbus, earn nearly 6% more than those who have only prmary educaton or no educaton, whereas for non-mgrants the rate of return to secondary educaton s 1 and ths effect s not statstcally sgnfcant. Moreover, a unversty postgraduate earns 10% more than a person wth no educaton or prmary educaton f he/she s a mgrant and only 3% more f he/ she s a non-mgrant. The sze of the estmated returns to a unversty qualfcaton for mgrants s qute n lne wth the results obtaned for other transtonal economes (see for example Newell and Relly, 1999), whereas t seems that non-mgrants returns to unversty qualfcaton s qute low, placng Albana among those countres that have the lowest rewards. Table 1: Rate of Returns for the Wage Equaton - Mgrants, Non-mgrants (%) Margnal Return Varables Mgrants Non-Mgrants Male Martal Status Marred Dvorced Schoolng 5 Secondary Vocatonal I Vocatonal II Unversty Postgraduate Urban Work Experence Tenure Tenure Occupaton Professonals Techncans Clerks Servce workers

11 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: Sklled agrcultural Trades workers Plant and machne operators Elementary occupatons Industry Transport and communcaton Publc admnstraton Electrcty. gas and water Wholesale trade Health Hotels and restaurant Mnng Fnancal Intermedaton Real estate Agrculture Educaton Socal and communty servces Prvate Source: The rate of returns are computed from Table A3 A common fndngs of the emprcal lterature s that ndvdual heterogenety plays a strong role n ncome realzaton: n fact, emboded n the human captal varables such as educaton and experence, there can be other elements, such as ablty, motvaton and the so-called D- factor (drve, dynamsm, doggedness and determnaton) that postvely affect earnngs, but that cannot be observed and measured. Moreover, there mght be dfferences that arse from the soco-economc background that cannot be captured. If the drecton of the correlaton between the unobserved varables and earnngs s postve, the coeffcents of the human captal varables are based upward. The economc theory, moreover, suggests that there are mportant dfferences between mgrants and non-mgrants due to a self-selecton mechansm: ths concept refers to a process, whch trggers people wth some specfc characterstcs rather than others to mgrate: f, for example, greater labour market ablty and motvaton rase earnngs relatvely more than they rase the costs of mgraton, the more able and the more motvated ndvduals wll show a hgher propensty to mgrate (Chswck,1978). From ths follows that mgrants mght be endowed wth dfferent features than non-mgrants and therfore they mght not represent a random sample of the populaton; f the selecton process s not taken nto consderaton, the estmated coeffcents of an earnng functon can turn based. Heckman (1976) offers a soluton to correct for selectvty bas n a context of truncated sample. Emprcally, there are some examples, whch prove the exstence of a self-selecton mechansm: Robnson and Thomes (1982) fnd that both mgrants and stayers are a self-selected chategory, although t s not possble to defne a clear drecton of the selecton, wether postve or negatve. Nakosteen and Zmmer (1980) fnd that mgrants are not self-selected, whereas non-mgrants result negatvely 11

12 Luc Papers n. 196, novembre 2006 self-selected. The same methodology has been followed n Appendx 2 but the exstence of selfselecton was rejected by the data: ths gves some confdence upon the unbasness of the estmated coeffcents reported n Table A3. The result s n agreement wth other emprcal examples, whch faled to fnd self-selecton: among others Hunt and Kau (1985), Axelsson and Westerlund (1998), Barham and Boucher (1998), Chquar and Hanson (2005). Lvng n an urban area has a strong mpact on earnngs: on average and ceters parbus those who lve n ctes earn 12% more than people resdent n the rural areas. One possble explanaton s the exstence of compensatng dfferentals for lower lvng costs and more pleasant envronment enjoyed n the rural area. Among mgrants, less experenced ndvduals show hgher earnngs than more experenced persons: a mgrant wth less than two years tenure and a mgrant wth ntermedate years of tenure n fact, enjoys respectvely 32% and 22% hgher earnngs than a mgrant wth more than 10 years tenure. On the contrary n the non-mgrant category, experence seems to exert a fral mpact on earnngs, as proven by the no statstcally sgnfcant coeffcents of the tenure dummes. The emprcal lterature suggests that the mpact of experence on earnngs s postve and ntally strong but the effect of addtonal years declnes wth the passage of tme (Mncer, 1974). The explanaton for ths U-shaped pattern s that ncreased earnngs are a reward for worker s nvestment n mplct and explct contracts (Ehrenberg and Smth 1991) but n the long run physcal deteroraton or the so called vntage effect can preval on the former. The fact that mgrants show an opposte tenure-wage pattern s not strkng: as long as mgraton s captured wthn the last 10 years, mgrants do not have long attachments to ther current job and ddn t develop strong frm specfc experence. Mgrants show hgher returns to every tenure classes than non-mgrants: a possble explanaton for these results can be due to the specfc knd of tranng developed by movers; n fact they may have favoured a wde varety of jobs to a more frm specfc attachment and accordng to Mncer (1974) experence-earnng profles are steeper the smaller the proporton that s frm specfc. Wthn non-mgrants, the pattern of returns of dfferent occupatons are qute n lne wth what t would be expected: managers are those who earn the most, whle the less favoured group s the sklled agrcultural, who earn 54% less than the former category. For mgrants the estmates would suggest a dfferent story, wth clerks the lowest-payed group together wth sklled agrcultural. However, ths result may be the consequence of small-cell bas, gven the lmted number of people belongng to the clerk category. The classfcaton of the occupaton category, however, s qute poor, as t hardly captures the skll dfferentals emboded n the avalable occupatons. 12

13 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: The ndustry dummes were ntroduced to capture some wage varatons whch cannot be explaned by standard compettve theory. The lterature has found results showng the exstence of ndustry wage dfferentals and strong regulartes n the pattern of ndustral premum (Krueger and Summers 1988) were hghlghted. The estmated results (Table A3) confrm the hypothess, as the coeffcents are hghly sgnfcant n many cases; the most advantaged category s the fnancal ntermedaton, as one would expect; compared to the base manufacturng group only health and hotels cataegory show lower returns. It s surprsng that the agrcultural sector provdes hgher returns than the manufacturng one: an average employee n the agrcultural sector earns wages that are 40 per cent hgher than employees n the manufacturng ndustry. An explanaton for the poor manufacturng performance may be lnked to the lberalzaton of the economy, whch negatvely affected those sectors that lack compettveness. Studyng the ndustry wage dfferentals n U.S., Krueger and Summers (1988) report that the ndustry spreads ranged from a hgh of 37 per cent above the mean to a low 37 per cent below the mean. Even though the results of the U.S. study and those from Albana are not drectly comparable, snce n the former they normalze the estmated dfferentals as devaton from the weghted mean dfferental, a rough evaluaton suggests that n Albana the spread s hgher: the dfferentals vary from a 124 per cent above the base category to a 4 per cent below the base category. However, the spread mght be overestmated, snce t does not control for the weght each ndustry has on the total dstrbuton. Moreover, because of the central plannng legacy, t s qute surprcng to dscover a wder spread n Albana than n U.S. Workng as a prvate enterprse provdes wages that are 40 per cent hgher than workng for a publc owned nsttuton, on average and ceters parbus. The coeffcent appears to be qute hgh for a transtonal economy, event though the exstence of a large and postve prvate premum was detected by the lterature (for example, Relly (2003) analysng the Serban prvate sector, dscovered an average wage premum of about 31% n 2000). The age effect can be calculated from Table A3: the estmated age coeffcent for mgrants s 0.054, whle the estmated age-squared coeffcent s For non-mgrants the coeffcents are respectvely 0.02 and The sgns of these estmates suggest that wages ncrease wth age, but at a decreasng rate, mplyng an nverted U-shape dynamc: ths result s consstent wth the human captal theory. The effect peaks after 39 years for mgrants and after 45 years for non-mgrants 6, on average and ceters parbus. The margnal effect of age (A) can be computed at average values and t results n for mgrants and for nonmgrants: a + 2*β A_sq* A) 7 ln wage = (β A 13

14 Luc Papers n. 196, novembre 2006 Ths means that an addtonal year rases wages by 0.26 per cent for mgrants and 0.24 per cent for non-mgrants on average and ceters parbus. The equalty of the effects cannot be rejected by the data only margnally 8. The results slghtly confrm the fndngs of some studes on ths lterature: as Borjas (1987) wrote the age-earnngs profle of mmgrants s steeper than the age-earnngs profle of the natve populaton wth the same measured sklls. Fnally, the dstrct wage rates were obtaned ntroducng dstrct dummy varables n the regresson. Before calculatng the values of the wage rate for each dstrct, a Wald test was conducted n order to nfer whether the data support dstrct level effects on earnngs: the hypothess of one unque ntercept among the 36 dstrcts was rejected by the data 9. Summarzng, two conclusons can be hghlghted: the postve effect of nternal mgraton on ncome, detected usng the Albanan sample, gves support to the human captal theory; ths theory n fact predcts that mgraton s an nvestment decson, or an nvestment ncreasng the productvty of human resources (Sjaasstad, 1962); the money returns to mgraton are expressed n terms of postve ncrement of the ndvduals earnngs stream. The second concluson s that mgrants may have lower locaton specfc sklls compared to non-mgrant, whch s suggested by the negatve sgn of the ntercept dummy varable 10. Ths may be due to ntally low knowledge of the local market and ts opportuntes, and/or lack of famly networks and contacts whch would help to fnd the best jobs avalable n the localty. 5.2 The Unemployment Equaton The second step of the work requres the estmaton of ceters parbus dstrct unemployment rates, retreved from a mcro level unemployment equaton, whch controls for ndvdual characterstcs. A probt model s used and the dependent varable represents the probablty of beng unemployed (Table A2 presents a defnton of the varable). The adopton of the probt model to study unemployment has been exstesvely used n the lterature (Nckell, 1979, 1980; Pssardes and Wadsworth, 1989, 1990; Brown and Sesson, 1996). The defnton of unemployment follows the Internatonal Labour Organzaton (ILO) classfcaton: unemployed are those who have no job but are actvely lookng for one. The employed group combnes employees and the self-employed. The covarates ncluded n the equatons are: age (A), educaton (E), gender (G), martal status (M) and urban resdence (U). Pr ob( u = 1) = αa + 4 f = 1 β E f f, + δg + 2 g= 1 φ M g g, + ϕu + 5 h= 1 γ MIG h h, + 36 n= 1 ξ D n n, + υ [8] 14

15 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: To test the predctons of the human captal model n mgraton, the lnk between mgraton and unemployment status receves a dstnctve attenton: n partcular, the key ssue s whether beng a mgrant has a dstnctve effect on the probablty of beng unemployed. A frst glance at the sample statstc (Table A1) would suggest that the nfluence of the mgrant attrbute s qute weak: n fact among non-mgrants the proporton of unemployed s 12%, whle among mgrants, the proporton rses to 14%, but the dfference s not statstcally dfferent at conventonal level. Nevertheless, there mght be some varables whch dstngush mgrants and non-mgrants and whch express an ndependent mpact on the probablty of beng unemployed, requrng some nteractve dummes (MIG) 11. Fnally, fxed regonal effects are controlled for, through dstrct dummy varables (D). A bref comment s requred: the problem of hdden employment s qute marked n transtonal economes, whch may suggest that the offcal estmates of the unemployment rate are ms-representng the real stuaton. In partcular, among non-movers, the true unemployment rate may be lower than the one reported, whch means that the data avalable are not able to capture potental dfferences n the unemployment lkelhood between non-movers and movers Results Maxmum lkelhood estmates are reported n Table A4, whereas Table 2 presents the estmated margnal and mpact effects of the ndependent varables. A ceters parbus analyss shows that a non-mgrant male wth average characterstcs s about one percentage pont more lkely to be unemployed than a female, whle wthn mgrants, a male s 4 percentage ponts less lkely to be unemployed than a female; however the coeffcent of the male dummy s hghly nsgnfcant, whle the coeffcent of the nteracton male dummy s slghtly not sgnfcant at the 5% level. Ths result suggests that at least among non-movers there s not a marked gender dvson n the unemployment effect. Ths result confrms the fndngs n the general lterature that gender dfferences n unemployment rates n most countres are small (Layard, Nckell and Jackman, 1991). The age coeffcent shows that wthn both groups, young people are more lkely to be unemployed, and the effect s more pronounced for mgrants than non-mgrants. In fact, n the frst group an addtonal year decreases the probablty of beng unemployed by 0.6 of a percentage pont, whle for the second group the effect decreases to 0.3 of a percentage pont. The theoretcal explanatons of ths age-unemployment pattern are many: frst young workers are less able to acqure sgnfcant stocks of frm specfc human captal by the tme of downturn n demand (Brown and Sessons, 1996); second they lack senorty and hence they are more vulnerable to job- dsmssals and thrd, as the search theory would explan, they are more nclned to wat tll they fnd the most sutable job, as they face lower forgone wages and long 15

16 Luc Papers n. 196, novembre 2006 potental ncome streams to successful matches. Some authors (Brown and Sessons, 1996; Hughes and Hutchnson, 1988) were predctng a U-shape pattern between age and unemployment: the probablty of beng unemployed decreases untl a certan age and t ncreases afterwards; snce productvty s supposed to declne wth age, older workers are more subjected to lay off. However, the sample data rejected ths hypothess, as an age-squared effect was poorly determned 12. Table 2: Margnal and Impact Effects for the Probt Unemployment Functon- Mgrants, Non-mgrants Margnal and Impact Effects Varables Mgrants Non-Mgrants Male Age Martal Status Marred Dvorced Urban Schoolng Secondary Vocatonal I Vocatonal II Unversty and Postgraduate Mgrate Notes: The margnal effects are computed from Table A4 It s worth notng that the famly background varables show an opposte mpact on unemployment between mgrants and non-mgrants; wthn mgrants, sngle people are the category less affected by unemplyment: n fact, beng marred ncreases the probablty by 3 percentage ponts and beng dvorced ncreases the probablty by 9 percentage ponts. On the contrary, for non-mgrants marred or dvorced ndvduals are less lkely to be wthout a job. However only marred people have a statstcally dfferent effect on unemployment compared to sngle persons. The theory s more n agreement wth the non-movers results, predctng marred ndvduals to be assocated wth the lowest rsk of unemployment (Layard, Nckell and Jackman, 1991). The urban varable presents a strong and well defned mpact on the dependent varable; the effect s analogous for both groups: those lvng n the urban area compared to those resdent n the rural area are 20 percentage ponts more lkely to be unemployed. Ths result nforms that n Albana unemployment s more an urban than a rural phenomenon. The educaton estmates need a lttle dscusson: t s surprcng that a negatve relatonshp between ncreasng educatonal attanment and unemplyment s not well defned. In fact, 16

17 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: compared to people wth prmary educaton or no educaton, those wth two years of vocatonal educaton (Vocatonal I) are more nclned to be unemployed, even f the effect s not statstcally dfferent from zero. Fve years of vocatonal educaton reduces the chance to be unemployed but agan the effect s not well determed. On the contrary, secondary educaton reduces the the probablty of unemployment by 2 percentage ponts. Ths result suggests that professonal schoolng n Albana s not rewarded as much as secondary general schoolng. Unversty and postgraduate educaton exert a sgnfcant and strong mpact on unemployment: a unversty degree or postgraduate studes ensure a 13 percentage ponts reducton n the probablty of beng unemployed. Nckell (1979) found a trade-off between the level of educaton and the probablty of unemployment, confrmng the assumpton of the human captal model that educaton leads to the accumulaton of human captal: the hgher s the stock of human captal owned by a worker, the less frms are nduced to lay hm off. A lttle dssmlar are the fndngs of Brown and Sessons (1996): they dscovered an nverse relatonshp between educaton and unemployment, but also some dmnshng returns to educaton wth the largest reducton n rsk occurrng as we move from those responents wth non qualfcatons to those wth mnmal qualfcatons. They also argue that n ther study what probably matters s the achevement of a certan qualfcaton threshold rather than a specfc level of educaton. It s worth calculatng the ceters parbus effect of beng mgrant, computed at average age 13 : a mgrant at 35 years old s 5.6 percentage ponts less lkely to be unemployed than a nonmgrant. Fnally, the estmated coeffcents of the dstrct varables are used to compute the ceters parbus dstrct level rates relevant to study the mgraton functon. It should be noted that a Log-Lkelhood Rato test was computed to test whether the data support a dstrct level effects on unemployment: the data reject the hpothess of one common ntercept 14. Concludng, the data reveal that mgrants cannot be consdered a dstnct or less favoured category from non-movers: the coeffcent of the mgrant dummy s postve but not statstcally sgnfcant (Table A4); four varables requred nteracton dummes, but a clear and easly nterpretable justfcaton for these ntercatons s not evdent; the tme spent n the host regon resulted n a non sgnfcant effect on the probablty of unemployment, suggestng that a longer tme n the destnaton dstrct does not provde any postve mpact on the unemployment lkelhood. Fnally, the Heckman two step procedure has been appled (see Appendx 2) and the result suggests that nether mgrants nor stayers are self-selected. In concluson t emerges that the dstncton between mgrants and non-mgrants s qute fral, whch confrms the fndngs of the descrptve data analyss (Table A1). However t s worth notng that the functon adopted to model the lkelhood of unemployment s qute 17

18 Luc Papers n. 196, novembre 2006 austere: more expanatory varables would be necessary to gve a more precse specfcaton, but the lmted avalablty of detaled personal and other nformaton restrcted the analyss. 5.3 The Mgraton Functon In the followng secton, the neoclasscal mgraton approach s tested: ths theory treats dfferentals n economc opportunty, such as earnngs, as the prmary drvng forces of reallocaton. Moreover, n agreement wth the model of Todaro (1969) and Harrs-Todaro (1970), the hypothess that agents respond to expected rather than real wages s tested. The contrbuton of the human captal model n mgraton s as well taken nto consderaton: the human captal model emphasses the role of heterogenety n economc realzaton and suggests that aggregate mgraton regressons are unable to capture the jont effect of human captal characterstcs on earnngs and mgraton decson. Only f the populaton s homogeneous, n fact, the estmated relatonshp resultng from a macro-level regresson can represent the structural framework mpled by the human captal model. Therefore, n order to control for ndvdual heterogenety, the wages and unemployment dfferentals, ncluded n the aggregate mgraton equaton, are retreved from a frst stage wage and unemployment equatons, and represent the ceters parbus dstrct level rates. The prevous analyss, n fact, led to the defnton of 36 wage ( w ~ ) and unemployment (u ~ ) rates, one for each Albanan dstrct, computed controllng for personal and demographc factors. The specfcaton s a Probt functon, where the dependent varable s a bnary choce proxyng for the propensty to mgrate from regon to regon j: n partcular, M=1 f there was a mgraton flow at any tme after 1992 from dstrct to dstrct j, and 0 otherwse; u ~ j and w ~ j are the destnaton rates, whereas u ~ and Pr ob( M w ~ are the orgn rates. { + β ( u ~ u ~ ) + ( w ~ w ~ )} 1) = Φ β β =1,.., 36 j=1,.., 36 [9] j = 1 2 j 3 In the specfcaton t s assumed that the orgn and destnaton varables exert a symmetrc but opposte effect on mgraton, n agreement wth other studes n the emprcal lterature (see for example Schultz, 1982). The methodology adopted, however, s based on a strong assumpton: n ths model, as far as the mgraton flow s drawn along a temporal dmenson, whch captures 10 years, the wage and unemployment dfferentals need to be assumed constant throughout the tme. Ths assumpton, however, can be reasonably plausble, as confrmed by the emprcal lterature, whch analyses the speed of adjustment of economc varables toward the equlbrum. As stated n Greenwood (1997) and Zmmermann (1995), the process of convergence can be qute slow and t depends j 18

19 Crstna Cattaneo, The determnants of actual mgraton and the role of wages and unemployment n Albana: on the rgdty of the economc varables, due to socal and nsttutonal barrers. Pehkonen and Tervo (1996) conducted an analyss on regonal unemployment dspartes n Fnland, adoptng an ARMA approach: they conclude that the dfferentals are rather persstent and that there mght be consderable dfferences n the steady-state unemployment rates across the dstrcts. The exstence of a slow convergence mechansm and of hgh rgdtes of the economc varables can be qute plausble n Albana, as a hertage of the former central plannng system Results Table 3 presents the maxmum-lkelhood estmates of the mgraton equaton and the margnal effects. The probt model appears to ft the data on nternal mgraton qute well: n fact, frst the Log-Lkelhood Rato test ndcates that the overall relaton s sgnfcant at the 5% level and second both the unemployment dfferental and the wage dfferental are able to explan the flow of mgraton. The estmated relatonshp s n the expected drecton: hgher earnng gaps boost mgraton, whereas hgher unemployment gaps deter emgraton. Table 3: Propensty to Mgrate Estmates- Probt Regresson Dependent varable: Prob(Mgraton) Varables Probt Coeffcent Margnal Effect Unemployment Dfferental (0.32) [0.27]* Wage Dfferental (0.21)** [0.24]** Constant (0.05)** [0.05]** N 1260 Log-lkelhood Lkelhood Rato Test ( χ (2)) Notes: The standard errors are gven n round brackets, and bootstrapped standard errors are gven n squared brackets. Dependent varable= bnary choce, takng the value of 1 f a mgraton flow s observed, 0 otherwse.** denotes statstcal sgnfcance at 1% level, *denotes statstcal sgnfcance at 5% level usng two taled tests. The wage coeffcent of the model suggests that, on average and ceters parbus, an nfntesmal change n the wage dfferental between destnaton and orgn rases the probablty of observng a mgraton flow by 11 percentage ponts. The unemployment coeffcent suggests that a margnal ncrease n the unemployment gap reduces the probablty of mgraton by 8 percentage ponts. It should be noted, that when generated varables appear n a regresson equaton, the OLS estmated varance s generally nconsstent, nvaldatng nferental analyss on the coeffcents 19

20 Luc Papers n. 196, novembre 2006 (Pagan, 1984). To correct the estmated standard errors, a nonparametrc bootstrap method was appled 15. In the emprcal lterature, many examples provde support to the postve lnk between earnng dfferentals and mgraton; on the contrary, the relatonshp between mgraton and unemployment rates s stll qute dubous. Among aggregate level analyss, Schultz (1982) fnds that wage dfferentals are mportant determnants of regonal mgraton n Venezuela. Todaro (1980) compares the fndngs of smlar macro-level studes and concludes that wage levels between two places turn up among the most mportant explanatory factors. In Fnland, Erksson (1988) reports a postve mpact of regonal wage dfferentals and a negatve mpact of regonal unemployment ratos on net mgraton rates. Falars, (1979) fnds that for Peru only earnngs at destnaton have a sgnfcant (postve) effect on mgraton, whereas employmentrate coeffcents at orgn and destnaton are not sgnfcant. Analyzng nternatonal mgraton, Karemera et al. (2000) report postve elastctes of emgraton flows to US wth respect to destnaton country ncome and negatve elastctes wth respect to orgn countres GDP; on the contrary, emgraton flows do not respond to unemployment rates. Mayda (2005), extendng the analyss to a multtude of orgn and destnaton natons, supports the fndngs that destnaton country GDP exerts a postve mpact on emgraton rates, whereas the effect s reversed wth respect to orgn country ncome. Fan and Venturn (1994) report that emgraton rates for south European countres are nfluenced by wage dfferentals, by unemployment rates n destnaton countres and only margnally by unemployment rates n orgn countres; however, the most nterestng result s that the level of ncome n orgn countres has a non-lnear effect on emgraton: n partcular growth boosts mgraton for poor countres, whereas t depresses emgraton n relatvely rcher natons. Some mcro-level studes can be quoted: Nakosteen and Zmmer (1980) and Robnson and Tomes (1982) fnd that earnng dfferentals postvely mpact on ndvdual probablty of mgratng. Lucas (1985) concludes that the propensty to mgrate ncreases wth hgher wages n destnaton urban areas and t decreases wth hgher home vllage wages; moreover, the lower (hgher) the chance to be unemployed at destnaton (orgn) the hgher the probablty of emgraton. Fnally Herzog et al. (1993), presentng a survey of the emprcal lterature based on US data, report that four out of eght studes fnd that both the unemployment rate and the wage rate are a sgnfcant determnant of out-mgraton. 20