Income per natural: Measuring development as if people mattered more than places

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1 Income per natural: Measurng development as f people mattered more than places Mchael A. Clemens Center for Global Development Lant Prtchett Kennedy School of Government Harvard Unversty, and Center for Global Development February 5, 2008 Abstract: It s easy to learn the average ncome of a resdent of El Salvador or Albana. But there s no systematc source of nformaton on the average ncome of a Salvadoran or Albanan. We create a frst estmate a new statstc: ncome per natural the mean annual ncome of persons born n a gven country, regardless of where that person now resdes. If ncome per capta has any nterpretaton as a welfare measure, exclusve focus on the natonally resdent populaton can lead to substantal errors of the ncome of the natural populaton for countres where emgraton s an mportant path to greater welfare. The estmates dffer substantally from tradtonal measures of GDP or GNI per resdent, and not just for a handful of tny countres. Almost 43 mllon people lve n a group of countres whose ncome per natural collectvely s 50% hgher than GDP per resdent. For 1.1 bllon people the dfference exceeds 10%. We also show that poverty estmates are very dfferent for natonal resdents and naturals; for example, 26 percent of Hatan naturals who are not poor by the two-dollar-a-day standard lve n the Unted States. These estmates are smply descrptve statstcs and do not depend on any assumptons about how much of observed ncome dfferences across naturals s selecton and how much s a pure locaton effect. Our conservatve, f rough, estmate s that three quarters of ths dfference represents the effect of nternatonal mgraton on ncome per natural. Ths means that departng one s country of brth s today one of the most mportant sources of poverty reducton for a large porton of the developng world. If economc development s defned as rsng human well beng, then a resdence-neutral measure of well-beng emphaszes that crossng nternatonal borders s not an alternatve to economc development, t s economc development. JEL codes F22, O15. We gratefully acknowledge support from the John D. and Catherne T. MacArthur Foundaton and from AusAID, and we thank Sam Bazz for excellent research assstance. We receved helpful comments from Nancy Brdsall, Sanjay Jan, Todd Moss, Maurce Schff, Jeffrey Wllamson, and Dean Yang, as well as partcpants n the Northeast Unverstes Development Consortum Conference All mstakes and shortcomngs are our responsblty. Ths paper represents our vews and not necessarly those of the Center for Global Development, Harvard Unversty, or ther governng bodes and funders.

2 1 INTRODUCTION Most of humanty was born n a low-ncome or lower mddle-ncome country (World Bank 2007). How much money do those people earn each year? No one knows. Armes of statstcans have spent decades carefully estmatng how much people n poor countres earn or produce. It s a smple matter to learn the ncome or output of a person who resdes n El Salvador or Albana. But no one has made systematc estmates of the ncome of a typcal Salvadoran or Albanan. If we nterpret ncome per capta to ndcate materal welfare, ths s unsatsfactory. Whle producton has a place, people, not patches of earth, have well-beng. The focus on ncome per resdent has rested more on the spread and use of natonal accounts data and on statstcal cost and convenence than on conceptual or welfare-theoretc foundatons. But f ncome per resdent s used as the measure of Salvadorans welfare t leads to untenable conclusons: f a Salvadoran moves from the countrysde to San Salvador to get a factory job that rases her ncome 30%, ths wll be recorded as a welfare mprovement for Salvadorans on average, but a 500% ncrease n ncome from a factory job n Texas does not (wth, at best, only the porton remtted to resdents counted). Here we suggest and estmate a new statstc: ncome per natural, 1 the mean per person ncome of those born n a gven country, regardless of where they now resde. Income per natural dffers substantally from ncome per resdent. Ths s obvously true of small countres wth large emgraton Guyana, Jamaca, Lbera but t s not lmted to a handful of tny natons mllon people lve n countres whose ncome per natural s 50% hgher than ts ncome per resdent; 235 mllon people lve n a group of countres where the dfference s 20% or more, and for 1.1 bllon people the dfference s 10%. The estmates of dfferences n ncome per natural are consstent wth estmates of the 1 The Oxford Englsh Dctonary defnes a natural, n ths sense, as a person of or from a desgnated regon. It notes that ths usage s rare n modern tmes, but we resurrect t here because no other word fts. We prefer ncome per natural to ncome per natonal, snce natonal s often a synonym of ctzen, and we prefer t to ncome per natve, whch connotes those who are not foregn-born rather than those who are natve to a gven foregn country. 1

3 dfferences n other ndcators calculated on resdence or natural bass such as poverty or chld mortalty. 2 METHOD As we are the frst to estmate ncome per natural we have to rely on the nformaton currently avalable and a reasonable set of methods to create what we regard as a plausble frst cut, not a polshed damond. If, as we hope, people recognze the value of emprcal measurement of the concept of ncome per natural, then more and better data can be collected and fner, more sophstcated methods used. But anyone famlar wth the realtes of natonal accounts estmaton (partcularly n ts early phases and n current practce n poorer countres) or the constructon of estmates of purchasng power party wll be aware of the necessary lmtatons of our results. Our method s smple. Frst we estmate household ncome per person by country of brth for the foregn-born n the US usng the long form of the 2000 US census, whch asked respondents to provde ther annual household ncome. Second we use ths nformaton to construct regresson-based estmates of household ncome per person for the foregn-born by country of brth n the rest of the hgh-ncome OECD countres. Thrd, we use estmates of populatons n the OECD by country of brth to estmate the average ncome of naturals resdng n the OECD. Fnally, we combne these data wth GDP per resdent at purchasng power party to acheve estmates of ncome per natural for almost all countres on earth. We begn wth the Unted States because data on the ncomes of the foregn-born by country of brth n the US are readly avalable n Census format. 2 As the US s the top destnaton country for the world s mgrants to the OECD, ths means that most mgrantsendng countres n the world are represented. The US census 5% Publc Use Mcrodata Sample (PUMS) from the year 2000 provdes specfc country of brth, household 2 No such queston exsts n the last censuses of the Unted Kngdom and France, the next two most mportant destnaton countres n the OECD. Smaller surveys n other mportant destnaton countres collect ncome nformaton alongsde country of brth, such as the Luxembourg Income Study (LIS) surveys n France and Germany, but the comparatvely small samples cover very few countres of orgn. Most LIS surveys contan no data on country of brth. 2

4 ncome, and household sze for 1,256,341 foregn-born ndvduals between the ages of 18 and 64 (nclusve), from 147 countres. Each country of orgn s represented by a mnmum of 315 unweghted respondents (Kosovo), a maxmum of 364,936 (Mexco), and a medan of 1,887. We calculate household ncome per person (rather than ndvdual wages or ncome) n order to capture the welfare of those who do not earn ncome such as spouses who work n the home and dependents. These averages by country of orgn are weghted by the census person-weght. We use self-reported ncome; Bound and Krueger (1991) use ndvdually-matched ncome data from the US census and Internal Revenue Servce to establsh that census self-reported ncome dffers on average from actual ncome by only around 1%. 2.1 Correlates of foregn-born ncome per capta n the US Most OECD countres have demographc nformaton on the foregn born but not ncome. We therefore estmate a smple reduced-form regresson of the household ncome per person for the foregn-born n the US as a functon of varables specfc to mgrantsendng countres or mgrant-destnaton pars that are reported for all sendng countres and other OECD destnaton countres. We then use the resultng coeffcents to estmate household ncome per person by country of brth n all OECD destnaton countres. For nstance, to estmate the ncome of Albanans n France, we use the average ncome n France adjusted for the predcted rato of Albanan to French average usng characterstcs of Albana (e.g. resdent ncome per capta, dstance to France), the Albanans n France (e.g. fracton wth tertary educaton), and the Albanans worldwde (e.g. fracton of all Albanans not n Albana who resde n France). Table 1 presents OLS regressons wth the natural logarthm of mean foregn-born household ncome per person as the dependent varable, where each observaton s one country of orgn. The frst column shows that 33% of the cross-country (of brth) varance s explaned by GDP per capta n the country of orgn. The explaned varance rses to 54% n the second column wth the ncluson of regonal dummy varables. 3

5 The thrd column ncludes the fracton of the foregn-born n the US that have completed tertary educaton, and the fracton that have completed only prmary educaton or less. The fracton of the daspora that has completed tertary educaton s strongly and statstcally sgnfcantly correlated wth foregn-born household ncome per capta. 3 The fourth column ncludes a mx of sendng-country, sendng country n US, and world daspora (country-of-brth n all destnatons) characterstcs: Orgn-country gross tertary enrollment, ntended as a rough measure of the strength of educaton systems n the mgrants countres of brth, whch s postvely correlated wth ncome n the US. We use the data from Parsons et al. (2007) on all blateral stocks of sendng and host country populatons to estmate the fracton of the foregn-born from that country lvng anywhere on earth who lve n the US and the fracton of the foregn-born from that country lvng n the OECD who lve n the US. The estmates suggest ncome n the US s postvely correlated wth the worldwde daspora fracton n the US but negatvely correlated wth the OECD-wde fracton. 4 Mgrants from larger countres earn more n the US, all else equal, possbly as sze (land area) n the country of orgn s a proxy for the avalablty of domestc mgraton opportuntes whch exerts selecton on the composton of nternatonal mgrants. The absolute sze of the daspora n the US s negatvely correlated wth ncome, agan, consstent wth a large daspora lowerng rsk and nformatonal barrers to lower-earnng mmgrants. The fracton of the daspora n the US comprsng refugees s negatvely correlated wth ncome, as several studes have documented (e.g. Husted et al. 2000). 3 For ths varable we happen to use the estmates of Dumont and Lemaître (2005), whch cover the 2000 census round. A closely related but more ample database, coverng two census rounds, has been compled by Docquer and Marfouk (2005). For our purposes, whch focus on the 2000 census round, the choce between the two was arbtrary. 4 Ether of these mght be postvely or negatvely correlated wth destnaton-country ncome: a larger daspora mght provde better nformaton to other mgrants about job opportuntes n the destnaton, but t mght also lower the barrer to mgraton for those wth less earnng potental. A large daspora also allows formaton of orgn-specfc agglomeratons n destnaton countres, wth potental postve and negatve effects on earnngs (e.g. Cutler, Glaeser, and Vgdor 2007). 4

6 Dstance to the US and contguty wth the US are not statstcally sgnfcantly correlated wth ncome. Orgn n an Englsh-speakng country s postvely correlated wth ncome but not to a statstcally sgnfcant degree. Fnally, a dummy varable for hgh-ncome Mddle East petroleum exporters s ncluded (Bahran, Kuwat, Qatar, Saud Araba, and Unted Arab Emrates) to account for the extreme concentraton of natonal ncome n the hands of a few ndvduals. Wthout ths dummy the model overestmates ncome for the Saudborn and Kuwat-born by about 40%. The reduced form regresson predcts 89% of the cross-country varance n foregn naturals ncome per person n the Unted States for the 118 countres for whch all data are avalable. 5 Usng the estmated coeffcents from Table 1 to predct n-sample values of ncome per natural n the US gves an average error for any gven country of orgn of 0.65%, wth a standard devaton across countres of 11.52% and a maxmum absolute value of 28.7% (Cameroon). Fgure 1 scatters predcted ncome per person of foregn natonals by country of brth as a fracton of US-average ncome per person aganst the observed average values from the census data. The correlaton between the two s The dashed lnes show estmaton errors of ±20%. Postve errors are of specal nterest snce they wll lead to overestmates of ncome per natural. The fgure suggests that the model does not overestmate ncome per capta of the foregn-born by more than a thrd. We llustrate the estmates wth a closer look at two countres whose naturals have smlar average household ncomes per person n the US: Mexco ($9,991) and Somala ($9,472). Whle GDP per capta n Mexco at PPP ($9,197) greatly exceeds that n Somala ($600), whch would correlate wth hgher ncomes among those resdent n the US, the fracton 5 Because the regressand comes from an average based on samples of dfferent szes notably a much larger number of Mexcan-born than other countres naturals we mght be concerned about neffcency of OLS relatve to weghted least-squares. Worse, f the model s substantally msspecfed, alternate weghtngs mght meanngfully alter the coeffcent estmates. When the regressons n Table 1 are repeated wth each country weghted by the nverse of the log of ts naturals sample sze n the US census mcrodata, however, the coeffcent estmates barely change, and then only n the second decmal place by one or two ponts. 5

7 of Somalan-born US resdents wth tertary educaton (0.147) s almost trple that of the Mexcan-born (0.053), whch tends n the other drecton. Of secondary mportance are the greater fracton of Somalan-born n the US who are refugees, and the much greater sze of the Mexcan-born daspora n the US. The net result dsplayed n detal n Appendx 2 s that the regresson coeffcents estmate well the smlar values of ncome per person for Mexco-born n the US (predcted $10,014, or of the US average) and Somalan-born n the US (predcted $8,879, or of the US average). 2.2 Estmatng foregn-born ncome per capta n other OECD countres The overall obstacle of estmatng the ncome of Cambodan naturals s the lack of estmates of ncome of Cambodans outsde of Camboda. Here we make the heroc assumpton that values of foregn-born ncome n the US as a fracton of destnatoncountry GDP per capta predcted by ths regresson hold roughly true for all other hghncome OECD destnaton countres. For example, the observed average household ncome of a Cambodan-born person n the US n 2000 was $12,952. The model predcts $13,159, whch s 38% of US ncome per capta n 2000 ($34,599). We estmate the ncome of Cambodans n France by usng the estmated coeffcents wth Cambodan data for the Camboda specfc varables (e.g. tertary enrollment) and Camboda-Francespecfc data for the blateral rght-hand sde varables (e.g. fractons of Camboda n France wth tertary degree, dstance Camboda to France). That s, we estmate y, j, the ncome per capta of those born n orgn country lvng n Xβˆ destnaton country j, by ˆ, j ( y j / yusa )( e ) y =, where y j s GDP per capta at PPP n j, βˆ s the vector of coeffcent estmates n column 4 of Table 1, and X s a vector of sendngrecevng country characterstcs x, j. The model predcts that average household ncome per person of the Cambodan-born lvng n France was 37% of French ncome per capta ($25,944 at purchasng power party) thus $9,593. 6

8 We wll show below that the applcaton of US coeffcents to all other countres, though obvously a strong assumpton, s a plausble procedure and moreover, almost certanly does not lead to tremendous overestmates of the gap between ncome per natural and GDP per capta. We do not assert that the regresson model s an dentfed structural model that estmates behavoral or deep parameters, or that we have any reason to beleve that the estmated coeffcents can be extrapolated to other contexts. That sad, we have no reason to beleve that they cannot be extrapolated to other contexts. We wsh to estmate the wages of Cambodans n France and we assume the partal correlaton between tertary educaton of Cambodans n France and the ncome of Cambodans n France s exactly that estmated for the US. The alternatve s to assume that all of the regresson coeffcents (except the constant) are zero and predct exactly the same rato of ncome for all countres of brth n France as observed n the US. Whle, as a methodologcal assumpton for framng hypothess testng n classcal statstcs the assumpton coeffcents were zero s defensble we know that the assumpton that all parameters are zero (whch obvously produces an R-squared of zero) s emphatcally rejected for the US. So, whle we would prefer to have country-specfc data (whch would mean that we would not need coeffcents) or country-specfc parameters (whch would mprove the qualty of the predcton for each country), or draw on reduced form parameters from a large number of countres, t seems more plausble to use coeffcents from the US than to assert zeros. In any case, below we report estmates usng all zero coeffcents as a robustness check. After completng the frst draft of ths paper the data from the 2001 Australan census have become avalable to us, and ths census does ask questons about both household ncome and country of brth. Ths allows us an extraordnarly clean test of the out of sample predctve power of the US coeffcents. There are 108 countres of brth for whch the Australan Bureau of Statstcs can estmate household ncome per capta by 7

9 country of brth based on a sample of 1,000 ndvduals or more, of whch the regresson model n Table 1 predcts a value for 99 countres. 6 There are three ponts. Frst, Fgure 2 compares the true ratos of household ncome per capta among the foregn born to the natonal average, by country of brth, and the model s estmates. The correlaton between predcted and actual household ncome per capta of the foregn-born as a fracton of the natonal average s The use of the US coeffcents n predctng country of brth specfc wages vastly outperforms assumng coeffcents of zero. Second, the model works n explanng the varaton n Australa because the model works, not because the country-of-brth predctons are the same for the US and Australa. Take agan the example of Somala and Mexco, whose naturals ncomes were predcted to be much lower than those of average US resdents. In Australa, Somalan naturals are predcted to have a low ncome and Mexcan naturals an ncome more than twce as hgh. The correlaton between the US predcted and the Australa actual wage ratos s only 0.594, whch means that the specfcs of the Australan-country of brth data are addng to the predctve power. Thrd, our procedures do not center the results and t turns out the model tends to underestmate wages of foregn-born n Australa. The model overestmates n only fve cases, wth a maxmum overestmate of 6.6% (Tawan), and underestmates n 94 cases. Thus the US-based model does not produce large systematc overestmates of ncome per capta among the foregn born n a major non-us destnaton country. We llustrate the out-of-sample estmaton by consderng ts predctons for ncome-perperson among the foregn-born n Australa, returnng to the cases of Mexco and Somala. True average annual household ncome per person n Australa n 2000 was A$19,292, whle among the Mexcan-born t was A$22,360 (1.16 of natonal average) and among the Somalan-born t was A$7,748 (or of natonal average). The 6 We made a smlar request to Span s Insttuto Naconal de Estadístca, but the small survey on whch they based ther estmates of household ncome per capta by country of brth only allowed them to produce such estmates for sx foregn countres (four outsde of Europe). 8

10 regresson estmates from Table 1 suggest that f the Mexcan-born daspora n the US had the same rght-hand sde characterstcs of the Mexcan-born daspora n Australa, ther ncome per person would be estmated as of the US average; f the Somalanborn n the US had the same trats as the Somalan-born n Australa, ther ncome per person would be estmated as of the US average. The regresson coeffcents obtaned from US data alone thus successfully predct that ncomes among the Mexcanborn n Australa are more than double those among the Somalan-born, even though ncomes n these two groups are smlar n the US. The prmary reason for ths dsplayed n Appendx 2 s that the fracton of Mexcanborn n Australa wth tertary educaton (0.561) s tremendously hgher than for Mexcan-born n the US (0.053). Also mportant s the scarcty of the Mexcan born n Australa (home to just 0.01% of the OECD-resdent Mexcan daspora) compared to the US (98.4% of the OECD-resdent Mexcan daspora). The example ponts out a key feature of the estmaton technque: ts results are not drven only by dfferences between the US and Australa (n whch case the predcted rato of Mexcan-born ncomes to Somalan-born ncomes would be dentcal n the two destnatons), but rather rest to an mportant degree on varance n sendng-country characterstcs. 2.3 Global estmates of ncome per natural Let y be ncome per resdent n the orgn country at purchasng power party, y, j be ncome per capta of those born n orgn country lvng n destnaton country j, N be the populaton of orgn country, and N, j be the stock of people born n lvng n j. Income per natural s smply y y N + ( y, j )( N, j ) N + N, j ~. Lettng y j j represent populaton-weghted average ncome per capta of those born n orgn country lvng n an OECD country, N represent the number of people from lvng abroad, and abbrevatng θ = N ( N + N ) and = N ( N + N ) / percent dfference between y~ and y smplfes to ~ θ and the θ /, then y = yθ + y 9

11 ~ y y y 1 = θ. (1) y y Table 1 gves y~ and y, wth the percent dfference (1) for 211 countres. We delberately choose GDP per capta rather than GNI per capta as y to avod double-countng workers remttances. 7 Note that GDP per resdent for Guyana s smlar to that of Guatemala and Paraguay, but ncome per natural s smlar to that of Brazl and Malaysa. Fgure 3 plots these percent dfferences aganst orgn-country populaton. Predctably, ncome per natural departs most substantally from GDP per resdent for small natons. Less predctably, the dfference s notable n several countres that are qute large, such as the Phlppnes, Vetnam, and Morocco. In 12 countres ncome per natural dffers from GDP per resdent by more than 30%, n 20 countres by more than 20%, n 39 countres by more than 10%, and n 62 countres by more than 5%. Fgure 4 consders the dfference between collectve ncome per natural and collectve GDP per resdent for groups of countres. The countres are ordered left-to-rght by descendng country-level dfference between ncome per natural and GDP per resdent. The leftmost pont n the graph shows Guyana, the country wth the hghest percent dfference (104%). The second-hghest country-level percent dfference belongs to Samoa, so the next pont to the rght shows the dfference between ncome per natural and GDP per resdent n Guyana and Samoa collectvely, as f they were a sngle country. The ponts proceed rghtward addng one country at a tme to the group. The lne connectng these ponts crosses the 50% mark at a collectve populaton of above 42.8 mllon. Ths means that 42.8 mllon people n the year 2000 lved n a group of countres whose collectve ncome per natural dffered from ther collectve GDP per 7 Income per natural s fundamentally dfferent from Gross Natonal Income per capta. The former ncludes ncome to all people lvng outsde ther country of brth regardless of how long, whle the latter ncludes only ncome to natonals of a country who resde temporarly abroad for less than one year. Accordng to the OECD (2007), GNI s defned as GDP plus net recepts from abroad of wages and salares and of property ncome. Wages and salares from abroad are those that are earned by resdents, that s, by persons who essentally lve and consume nsde the economc terrtory but work abroad (ths happens n border areas on a regular bass) or for persons that lve and work abroad for only short perods (seasonal workers) and whose centre of economc nterest thus remans n ther home country. Guest-workers and other mgrant workers who lve abroad for twelve months or more are consdered to be resdent n the country where they are workng. Such persons may send part of ther earnngs to relatves at home, but these remttances are treated as transfers between resdent and non-resdent households and do not enter nto net recepts from abroad of wages and salares. 10

12 resdent by more than 50%. Further to the rght, we see that 235 mllon people lved n a group of countres where the dfference was 20%, and for 1.1 bllon people the dfference was 10%. Clearly, ncome per natural departs substantally from GDP per resdent for a large fracton of the world s populaton, not solely for a handful of tny states. How much of the cross-country varance n ncome per natural s due to ncome gaps y y between sendng and recevng countres, and how much s due to varance n y daspora sze across countres of orgn ( θ )? For example, ncome per Pakstan natural goes up wth the gap between ncomes of those lvng n Pakstan those lvng n the UK, and also goes up wth the number of Pakstans lvng n the UK. Fgure 5 plots the percent dfference n natural populaton and orgn-country resdent populaton on the horzontal axs, and the percent dfference n naturals ncome per capta n OECD destnaton countres and orgn-country GDP per resdent on the vertcal axs. The dashes mark the 45 lne y y θ =. Note that the percent dfferences are so large y n some cases that both axes are on a log 10 scale. The overwhelmng determnant of the varance n ncome per natural s the ncome gaps. The vast majorty of countres le far to the upper left of the 45 lne. Even countres wth a very hgh proporton of naturals abroad have ncome gaps much, much hgher: for y Jamaca θ = and y = Below the lne are tradtonally sendng y countres whose domestc economy has mproved such as Ireland. Interestngly, Mexco les drectly on the lne: Household ncome per capta for Mexcan-born n the US n 2000 was $9,991, and Mexcan GDP per resdent at purchasng power party s $9,197. So Mexcan ncome per natural would go up by roughly the same percentage due to a gven percentage ncrease n the ncome gap or the same percentage ncrease n the number of Mexcans lvng n the US. 11

13 2.4 Robustness There are several reasons to beleve that these estmates of ncome per natural are conservatve and are lkely to understate, rather than overstate, the true gaps between ncome per natural and GDP per capta. Frst, due to lack of data, we omt consderaton of non-oecd mddle- to hgh-ncome destnaton countres, such as Saud Araba, Sngapore, and South Afrca. Snce a substantal fracton of Asan mgraton goes to Sngapore (e.g. Indonesan workers) or the Gulf (e.g. Nepal and Bangladesh) ncome per natural for these countres wll be partcularly understated. Second, we omt consderaton of emgrants chldren born n the destnaton country, as we consder only that porton of each household wth foregn-born members that was n fact born n the orgn-country. Thrd, the census data on daspora stocks we use are lkely to omt large numbers of undocumented mgrants who, although they mght be makng lower wages than documented and recorded workers n the destnaton country, are makng more n the destnaton country than they would at home. Fourth, comparson of the model s predctons to true foregn-born household ncome per capta n Australa the most mportant non-us destnaton country where data permt the comparson suggests that f anythng the model substantally underestmates those ncomes. It s nonetheless hypothetcally possble that for an mportant destnaton country the outof-sample predctve power of the model s very poor, and that estmates of ncome per natural n major orgn countres for that destnaton country are correspondngly based n some cases possbly based upwards. We check ths by repeatng the entre exercse omttng the predctve model entrely, essentally just assumng that all of the coeffcents are zero, wth a hghly smplfyng and conservatve assumpton: that the ncome per capta of all foregn-born persons lvng n hgh-ncome OECD countres s 35% of the destnaton country s GDP per capta. Ths restrcton underpredcts true ncome per capta of foregn-born n the US for 121 out of 130 countres of orgn; among those countres where ncome per capta s 12

14 underpredcted, the average error s 30.0 percentage ponts. For Australa ths underpredcts for all countres n the sample, wth an average error of 60.5 percentage ponts. 8 Even under ths hyper-conservatve assumpton about mgrant earnngs, there are 10 (rather than 12) countres n whch ncome per natonal dffers from GDP per resdent by more than 30%, 18 (rather than 20) where t dffers by more than 20%, 36 (rather than 39) by more than 10%, and 51 (rather than 62) by more than 5%. And under ths conservatve assumpton, there are 41 mllon (rather than 42.8 mllon) people lvng n a group of countres whose collectve ncome per natural dffers from ther collectve GDP per resdent by more than 50%; 139 mllon (rather than 235 mllon) n a group of countres where the dfference exceeds 20%, and 0.9 bllon (rather than 1.1 bllon) n a group for whch t exceeds 10%. Ths suggests that the pror estmates cannot be based upwards to a very large degree by unobserved defcences n the US regresson equaton s out-of-sample predctve power. 2.5 Poverty headcounts and ncome per natural Untl now we have consdered only mean ncome per natural, wthout regard for ts dstrbuton. Table 3 explores how poverty headcount estmates mght change f ncome per natural were the standard rather than ncome per resdent, usng only a sngle destnaton country. Snce for poverty calculatons we need estmates of the dstrbuton of ncome we consder only those people from each country of brth Hat, Inda, and Mexco who lve ether n ther home country or lve abroad n the Unted States, and for whch suffcent observatons exst n the US data, omttng consderaton of those who resde abroad n other destnaton countres and other source countres. The table uses three dfferent standard of poverty the $1/day 9 (desttuton) and $2/day (low 8 The lowest s Somala, whose naturals average household ncome per capta n Australa s 40.2% of the Australan average. Two countres have lower values n the Australan census data but are dropped from the sample due to very small samples: Federated States of Mcronesa (30.0%, N = 3) and São Tomé & Príncpe (30.5%, N = 12). Fgure 2 retans only countres whose estmates arse from samples of 1,000 ndvduals or more. 9 We use the accepted nomenclature of dollar a day even though wth nflaton these are all about 50 percent hgher n current PPP versus the 1993 base. 13

15 poverty) standards commonly used by the World Bank, and the $10/day standard of global poverty advocated by Prtchett (2006). 10 By the $2/day standard, the number of non-poor people ncreases about 36% for Hat, 17% for Mexco, and about 1% for Inda f we consder the populaton resdng n both the country of orgn and the US together rather than the country of orgn alone. At the $2/day standard for poverty, around a quarter of non-poor Hatans lve n the US and about one seventh of non-poor Mexcans. At the $10/day standard of global poverty the number of non-poor ncreases 457% for Hat, 74% for Mexco, and 37% for Inda when naturals are consdered rather than just resdents. At a global poverty standard 82% of the non-poor Hatan-born resde n the US; 43% of non-poor Mexcans, and 27% of non-poor Indans. About half of all Mexcans who have acheved even a standard of lvng unthnkably low to most readers of ths paper have done so whle lvng n the US. Four out of fve Hatans who have escaped poverty by ths global standard have done so n the US. These dfferences are substantal, and all underestmate the dfferences n poverty rates that would arse f all destnaton countres were ncluded. For many mportant developng countres, then, nternatonal mgraton s not an alternatve to poverty reducton; t s today among the prncpal sources of poverty reducton THE EFFECT OF MIGRATION ON INCOME PER NATURAL The smple gap between GDP per resdent and ncome per natural does not ndcate average welfare gans caused by the opportunty to emgrate. Put dfferently, t does not 10 The 10$/day s an upper bound for poverty as t corresponds to the lower bound of OECD country poverty on the prncple that a global poverty lne should not be dscrmnatory by natonalty and what OECD countres consder poor for ther own ctzens ought to be appled at the global level (Prtchett 2006). 11 Beegle et al. (2008, Table 4) gve remarkable evdence that the same may be true wthn very poor developng countres. They track 4,432 people surveyed whle lvng n the rural Kagera regon of Tanzana between 1991 and 1994, and then recontacted n Over ths perod, real consumpton per capta ncreased among those who had left Kagera by an amount over nne tmes greater than that by whch t ncreased among those who had stayed n ther vllages. Although real consumpton per capta n the early 1990s of those who would later leave Kagera was very smlar to that of those who dd not, by 2004 real consumpton per capta among the leavers was about 2.5 tmes that of those who had stayed n ther vllages. Whle selecton could explan a small porton of these dfferences, t s dffcult to magne what even the most able ndvduals could have done to rase consumpton growth by 800% f oblged to stay n ther remote vllages. Beegle et al. also employ nstrumental varables based on ranfall and famly structure to address selecton bas and arrve at substantally dentcal results. 14

16 show the average welfare loss that would have occurred f emgrants had not been able to emgrate. There are two reasons why counterfactual ncome per capta for the daspora, had they not been able to leave, mght dffer from orgn-country GDP per resdent: labor supply effects and selecton effects. The labor supply effect s that emgrants departure from the orgn country mght have affected GDP per capta there, ether postvely or negatvely, and ther arrval n the destnaton country mght have affected ncome per capta there, ether postvely or negatvely. The selecton effect s that emgrants mght be selected, ether by themselves or by mgraton regulators, to have more or less earnng potental than the average orgn-country resdent. We consder each of these n turn. Let y be counterfactual ncome per capta of those remanng behnd f those lvng abroad had not left, and y be weghted average counterfactual ncome per capta of those lvng abroad f they had not left. Rearrangng dentty (1) gves the decomposton ~ y y ( y y ) θ / 1 y y y 1 = / /. (2) y y { y y y y True effect of emgraton Labor supply Selecton The frst parenthetcal term n (2) s the percent change n ncome per natural caused by mgraton,.e. compared to the counterfactual of no mgraton. Ths term can dffer from (1), the strctly factual percent dfference between ncome per natural and ncome per resdent, for two reasons, captured by the followng two terms. The second term of (2) gves the degree to whch (1) departs from ths causal percent dfference due to labor supply effects, and the thrd term gves the dfference due to selecton effects. Intutvely, f y < y then emgraton may have pushed up the ncomes of those remanng behnd by decreasng the labor supply at home, whch makes the factual percent dfference (1) an underestmate of the causal dfference. On the selecton sde, f y / > 1, then emgrants y would have been makng much more than non-mgrants even f they had not left, so the factual dfference overestmates the causal mpact. 15

17 3.1 Labor supply To the extent that emgraton rases average ncomes n the sendng country, the labor supply term n equaton (2) s less than unty. For the mass of unsklled workers n developng countres, departure of a substantal fracton of the workforce mght be expected to exert upward pressure on wages. Anecdotes of ths phenomenon are abundant. O Rourke (1994) fnds that mass emgraton from Ireland n second half of the 19 th century roughly one thrd of the populaton caused per capta ncome there to ncrease by between 5 and 25 percent by 1908 compared to a no-emgraton counterfactual. Lucas (2005, p. 90) presents evdence that large-scale emgraton from Pakstan and the Phlppnes n the late 20 th century has rased sendng-country wages by roughly one thrd wthn specfc sectors such as constructon and manufacturng. Mshra (2007) fnds that massve mgraton from Mexco to the US n the decades leadng up to the year 2000 roughly 16% of workng age males caused an 8% rse n the natonal average wage of Mexcan workers n Mexco. Borjas (2008) fnds evdence that emgraton from Puerto Rco to the US, amountng to about 30% of the Puerto Rcan populaton by 2000, may have rased low-skll wages n Puerto Rco by roughly 10%. It s theoretcally possble, partcularly n the case of sklled workers, that large-scale departures could alter the productvty of those remanng behnd and materally decrease average ncomes there. No relable emprcal evdence of ths phenomenon exsts. On the contrary, there are three reasons to presume the opposte tendency n many countres. Frst, a substantal lterature documents nstances n whch sklled emgraton has contrbuted drectly to the formaton of mportant growth ndustres n the sendng country, such as n Tawan and Inda (Saxenan 2002). Second, emgraton tself can encourage the formaton of domestc human captal stocks: Although 24% of Cape Verde-born unversty graduates lve abroad, Batsta et al. (2007) gve suggestve survey evdence that the stock of unversty graduates n Cape Verde would be lower n the counterfactual of no emgraton opportuntes abroad appear to encourage study for a substantal fracton of those who do not end up leavng. Lkewse, although the Phlppnes s by far the number one orgn country of nurses workng abroad, the World 16

18 Health Organzaton s Global Health Atlas shows that the Phlppnes despte ts poverty has more nurses per capta than Austra. Thrd, for the poorest countres, other forces unequvocally domnate as determnants of GDP per capta: It s ludcrous to suppose that ncomes n Lbera or Zmbabwe would be much hgher now f sklled workers had been trapped there for the past decade (Prtchett 2007). All of these suggest that the labor supply term n equaton (2) may be less than unty, often or even generally. There s no strong evdence to suggest that t s generally greater than unty. 3.2 Selecton Equaton (2) suggests that postve selecton of mgrants makes the factual dfference between ncome per natural and GDP per resdent tend to be larger than the strctly causal effect of mgraton on ncome per natural. It also shows, however, that ths dfference can be small when nternatonal wage gaps are large, even n the presence of very strong postve selecton. Here we use examples of estmated counterfactual wages from Mexco, Inda, and Tonga to show that ths dfference s typcally smaller than about 20%. Mexcan laborers n the US. Fernández-Huertas (2006) fnds that counterfactual wages for male Mexcans workng n the Unted States are n fact slghtly lower than nonemgrant wages, usng a natonally-representatve longtudnal dataset allowng for the constructon of counterfactuals based on both observed and unobserved mgrant characterstcs. Ths would suggest that for Mexcans n the US, the dfference between ncome per natural and ncome per resdent n Mexco slghtly underestmates the causal effect of mgraton on ncome per natural as there s negatve rather than postve selecton. Fernández-Huertas estmates dffer from those of Chquar and Hanson (2005), who fnd that mgrants counterfactual wages are slghtly hgher, usng less desrable cross-sectonal data and thus constructng ther counterfactual wages usng only observed mgrant trats such as educaton. They fnd that Mexcan male wage earners average hourly wage n the US s roughly $8.7, for Mexcan resdents t s roughly $1.2, and the 17

19 emgrants counterfactual wage s on the order of $ Under these condtons the selecton bas term n (2) s For Mexcans n the US, then, f selecton s n fact negatve, the dfference between the factual and causal estmates s less than one; even f the selecton s postve, the dfference due to selecton on observables s less than 9%. Indan software ndustry workers n the US. Commander et al. (2004) report the results of a frm survey on the wages of comparable workers n the US and Indan software ndustres. Table 4 shows ther wage fgures for 1999, the year closest to the 2000 census data used n the rest of ths paper, and the resultng estmates of the selecton term n equaton (2). For all workers except top management, the dfference term s on the order of 1.2. Ths s very lkely a substantal overestmate of the dfference term for all Indan workers n all ndustres, snce selecton among software engneers relatve to the whole Indan populaton s very lkely to be much larger than selecton among Indan emgrants n all ndustres relatve to the whole Indan populaton. It does, however, only capture selecton on observable trats. Tongan workers n New Zealand. McKenze, Gbson, and Stllman (2006) report careful measures of the ncome gans to Tongan mgrants to New Zealand, utlzng a vsa-lottery natural experment that allows selecton effects to be excsed from aggregate effects, ncludng selecton on unobservable mgrant trats. They fnd that lottery-wnnng mgrants earn NZ$424.5/week, lottery-losng non-mgrants earn NZ$104.1/week, and non-applcants earn NZ$41.4/week. The selecton term n equaton (2) s then They fnd that 52% of the dfference between lottery-applcants wages and nonapplcants wages can be explaned by observable age, educaton, gender, martal status, heght, and mgrant network. Thus the dfference term usng counterfactual wages constructed solely on observable trats would be Fgure 6 summarzes the above calculatons. The avalable studes suggest that the value of the selecton term n equaton (2), ncludng selecton on unobserved trats, s probably 12 Chquar and Hanson (2005) do not explctly calculate a counterfactual average wage. We take the factual wages from ther Table 2 (p. 249), and estmate the counterfactual wage by 1) notng that ther Fgure 4 (p. 266) suggests a the natural logarthm dfference between the modal counterfactual emgrant wage and resdent wage s on the order of 0.4, thus 2) the counterfactual average wage s roughly equal to 1.2+e (ln 1.2)+0.4 =

20 less than 1.33 n most poor developng countres. Put dfferently, n poor developng countres a conservatve estmate s that more than three quarters of the dfference between ncome per natural and ncome per resdent reflects the effect of mgraton on ncome per natural. 4 INFANT MORTALITY PER NATURAL A smlar exercse to the comparson of ncome per natural can be performed for any common development ndcator. We calculate nfant mortalty per natural smply as Where m~ = mb N + m, jb, j N, j b N + b, j N, j (3) j j m, j s nfant mortalty for parents born n country resdng n j, and b, j s the crude brth rate per person born n country resdng n j. Here we assume m =, j m j,.e. that the nfant mortalty rate of the foregn-born s that of ther country of destnaton. Regardng crude brth rates we present two cases: We gve alternate results assumng b =, j b j,.e. that foregn-born people have the same crude brth rate as the country of destnaton, or assumng b =, j b, that foregn-born people have the same crude brth rate as the country of orgn. The assumpton m =, j m j tends to underestmate the dfference between nfant mortalty per natural and per resdent for developng countres, snce nfant survval and other health outcomes are typcally better among the foregn-born than the natve-born n rch countres. Ths somewhat counterntutve phenomenon s known as the healthy mmgrant effect (Hyman 2001) or the epdemologc paradox (Markdes and Corel 1986). Mortalty among nfants born to Mexcan mmgrant women n the US s roughly 10% lower than that among nfants of non-hspanc, whte natve-born women (Hummer et al. 2007). Smlar results have been found for US mmgrants from other low-ncome countres besdes Mexco (Sngh 1996), for mmgrant women s pernatal health n Canada (Ray 2007), and for many other destnaton countres and health ndcators. Here 19

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