Modeling migration flows: explanations and policy implications (the case of Luxembourg)

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Modeling migration flows explanations and policy
implications (the case of Luxembourg)
CMTEA 2008 The future of Europe in a world of
uncertainties Romania, Iasi, September 25-27,
2008

• ferdy.adam_at_statec.etat.lu

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Luxembourg in Europe
Paris
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The context (1)

• Migration
• migration change of place of residence and
  workplace (? residential move)
• functional labour market areas (flma) ?
  administrative areas
• crossing borders internal vs international
• Cross-border commuting
• travel daily or weekly from residence to
  workplace, not necessarily, but generally within
  flma
• Luxembourg commuters ? cross-border workers (CBW)

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The context (2)

• Importance of migrations and commuting for
  Luxembourg
• average population growth 0.9
• net migration flows explain 60 of demographic
  growth
• today, 40 of the 0.5 million inhabitants are
  foreigners
• average employment growth 2.6
• commuters take 2/3 of net newly created jobs and
  make up 40 of total employment
• As a result, 60 of employed workers are
  foreigners
• Another illustration pop. aged 15-64 322 000
• total
  employment 319 000

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The context (3)

• This research takes place in the context of the
  overall modelling of the Luxembourg economy
• estimated standard macro-model
• endogenize labour supply through modelling of
  migrations and commuters
• Stylized facts
• net earnings and unemployment differentials with
  neighbouring countries
• net earnings are higher, about 40
• unemployment is lower, some 5 percentage points
• housing prices are higher in (and around) Lux.
  (gt100)
• other living costs (food, cothing) are less
  different

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The context (4)

• Why this research might be interesting (for
  others)?
• not so many time series studies in the migration
  context (factors influencing migrations)
• few time series studies that apply cointegration
  testing and error correction techniques
• not many studies that compare factors affecting
  simultaneously migrations and commuting
• this work could easily be extended to other
  regions/countries, experiencing high in/out-flows
  of labour
• NB it is ongoing work, paper not finalised

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Literature review (1)

• Causes of migration
• gravity models
• human capital
• income / leisure
• job search matching
• equilibrium / disequilibrium
• Consequences of migration
• wages
• productivity
• demographic trends

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Literature review (2)

• Gravity models
• based on the Newtonian law of gravitation
• not derived from theoretical modelling of
  economic behaviour
• but widely used, with good results, can be
  estimated
• Mij G Pi?0 Pj ?1 Dij ?2
• Mij migration from i to j
• G constant term
• Pi population of origin (weight)
• Pj population in destination area
• Dij distance between both destinations

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Literature review (3)

• Modified gravity models
• include variables linked to economic behaviour
• no formal derivation but taken from other
  theories
• Mij G Pi?0 Pj ?1 Dij ?2 Xi ?3 Xj ?4
• Xi, Xj economic and other variables related to
  regions i and j
• Job opportunities, earnings, unemployment,
  housing prices, risk, geographic characteristics
  (amenities), political situation, etc...

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The model (1)

• Data 1980-2006, yearly
• Test / impose restrictions on model coefficients
• taking ratios of independent variables (Xi/ Xj)
• ? reduction of the number of parameters to be
  estimated
• Other simplifications
• drop Pi (foreign population) and Dij (distance)
• foreign population varies much less
• two countries Luxembourg and the rest of the
  world (ROW, to be defined) ? aggregate flows

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The model (2)

• ln(Mk/P) ?0k ?1k ln(L/P) ?2k ln(Yj/Yi)
  ?3k ln(Uj/Ui) ?4k ln(HPj/HPi) ?k
• j Lux i ROW
• k in, out, com
• in in-migration (flow)
• out out-migration (flow)
• com commuters (stock)
• L tot. labour demand in Lux. ?1in, com gt 0
  ?1out 0
• Y relative earnings ?2in, com gt0 ?2outlt0
• U rel. unempl. rates ?3in, com lt 0 ?3out gt 0
• HP rel. house prices ?4in lt 0 ?4out, com gt 0

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The model (3)

• Some precisions on the variables
• Migrations (Min, out, com)
• in, out total (gross) flow
• com(muters) stock of foreign workers travelling
  daily or weekly from B, F, D to L
• Labour demand (L) total domestic employment in
  Lux.
• Per capita earnings (Y)
• B, F, D (country wise) source OECD (Taxing
  wages) ? after taxes and social transfers
• Unemployment rate (U)
• neighbouring regions (from B, F, D), Nuts3
  source Eurostat
• House prices (HP)
• neighbouring regions (from B, F, D), different
  sources

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Estimation results (1)

• Order of integration
• all variables (ratios) entering the equations are
  I(1)
• Estimation of level equations (1st step of
  Engle-Granger two step procedure)
• OLS, stationarity of residuals ? cointegration?
• Results fail to confirm cointegrating
  relationship (McKinnon critical values) but
  residuals optically stationary

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Estimation results (2)

• Error correction models
• Dynamic ECM only works for CBW cointegration
  clearly confirmed by t-test on error-correction
  parameter (Banerjee 1998)
• Others retain static LR parameters ?
  Engle-Granger two-step (or Zivot 2000)
• Endogeneity bias
• to what extent the immigration rate does it cause
  (some of) the independent variables (for example
  house prices)?
• ? to be studied
• other non-tackled issues small sample bias,
  outliers

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Estimation results (3)
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Estimation results (4)

• Final long-run specifications
• log(Min) log(L) 0.66log(Yj/Yi)
  0.25log(Uj/Ui)
• log(Mout) log(P) 0.05log(Uj/Ui)
  0.12log(HPj/HPi)
• log(Mcom) log(L) 1.75log(Yj/Yi)
  1.33log(Uj/Ui)
• 1.67log(HPj/HPi)

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Simulations (1)

• Set up a model linking the labour market with
  population dynamics
• 3 migration equations
• population dynamics (linked to migrations)
• unemployment
• 2 simultanous feedback variables population
  unemployment
• But partial model
• no feedback from unemployment to prices/wages
• total domestic employment (L) exogenous

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Simulations (2)
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Simulations (3)

• Integrate the new migration equations into a
  complete macro-model
• wage equation (WS-PS), depending i.a. on UE
• wage-price spiral
• price-competitiveness
• employment is endogenous
• capacity constraints
• etc
• Simulate the same shocks in both set-ups (partial
  and complete)

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Simulations (4)

• Simulations generate shocks to main RHS
  variables
• domestic labour demand and unemployment
• foreign unemployment, house prices and labour
  earnings
• Rationality of the shocks
• test impact of national policies acting on the
  labour market higher employment, lower
  unemployment
• reproduce stylized facts higher unemployment in
  bordering regions, lower net wages and house
  prices

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Simulations (5)

• 10 increase in labour demand (in Lux.)
• increases resident employment and commuters (CBW)
• impact on CBW stronger (except for the two first
  years in partial model) for a transition period,
  but, in the LR, convergence towards increase of
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• part in newly created jobs 2/3 commuters 1/3
  resident
• resident unemployment only decreases initially
• decrease in resident unemployment attracts new
  foreign workers ? unsustainable
• Full model multiplier effects ? impact on total
  employment gt 10 ? decrease in resident UE a
  little stronger

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Complete model
Partial model
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Complete model
Partial model
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Complete model
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Simulations (6)

• 1 ppt decrease in domestic unemployment (UE)
• the initial decrease in domestic UE increases
  foreign labour supply
• which pushes up UE in L
• there is a 11 substitution between resident
  workers and CBW
• as a result, the decrease in UE is almost
  completely reversed
• only in the complete model is there a sligthly
  bigger decrease in resident UE, because
  migrations increase less
• due to lower net wages (overall negative demand
  shock)

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Complete model
Partial model
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Complete model
Partial model
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Simulations (7)

• Modifiy (foreign, exogenous) variables that act
  on foreign labour supply
• unemployment
• earnings
• house prices
• Modifiy these variables in a way to emphasize
  stylized facts
• higher UE, lower earnings and lower house prices
  in the neighbouring regions

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Simulations (8)

• Results
• in all cases, increased foreign labour supply
  depresses resident employment and increases res.
  UE
• the initial negative impact on GDP reverses after
  some periods, due to the favorable evolution of
  price competitiveness (fall in domestic prices)
• in case of a fall in foreign house prices, the
  negative demand shock lasts longer (although the
  amplitude of the results of the shocks on the
  national variables can generally not be compared)

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Conclusions (1)

• Econometric evidence confirms the importance of
  earnings, unemployment and house prices for
  explaining cross-border workers (commuters)
  movements
• Estimations of migration equations are less
  robust (econometrically), but the obtained
  coefficients are sensible

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Conclusions (2)

• A positive demand shock on the national economy,
  having an impact on employment and/or
  unemployment, increases foreign labour supply,
  possibly as much as to reverse, partially or
  totally, the positive initial impact of the
  favourable shock
• Increased foreign labour supply, due to
  unfavourable exogenous causes (negative shocks on
  foreign economies), is generally positive for the
  domestic economy, after some lags, with the
  exception of unemployment, that increases

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Thank you very much for your attentionQuestions?