Answer to Question #98155 in Macroeconomics for annie

Question

Recently government of Turkey is willing to increase the demand for labor in the country. Write a
policy the government can use for this aim. Explain how according to neoclassical labor market
model, this policy will increase the demand. (Or alternatively, explain in which way neoclassical
model fail to capture the effect of the policy you mention.)

Answer 1

Here we recap the main arguments of neoclassical economics theory (at both a macro and micro level) and the new economics of migration.

Neoclassical Economics: the macro level

This was the earliest theoretical framework developed to explain labour migration. It sees migration as the result of geographical differences between labour supply and labour demand. These differences can exist at the international level or at the internal (or national) level.

International migration is caused by the differences in wage levelsbetween countries and labour markets. If wage differences were eliminated, labour migration would stop according to this theory.

This theory suggests that the bulk of labour migration moves from capital-poor/labour force-rich countries to capital-rich/labour force-poor countries, while by contrast capital moves in the opposite direction, expecting a higher return on investment made in capital-poor countries.

This theory also suggests that high-skilled workers move from capital-rich to capital-poor countries to reap higher returns on their skills.

Labour markets are the main mechanisms that influence international migration. Other markets have little role. Thus, governments can regulate migration through labour market policies (e.g. through wage increases in sending countries).

Neoclassical Economics: the micro level

This variety of neoclassical economics theory refines the arguments at the macro level by suggesting that international labour migration is caused by differences in wage and employment rates and that migrants EXPECT their wages to be higher in the destination country.

This theory argues that potential migrants estimate the costs and benefits of moving to alternative locations. In theory, they migrate where they expect greatest returns over a specific period of time. The human capital of each migrant may increase her/his probability of employment in the destination country as well as her/his expected earnings, and therefore affects the probability of each individual to move.

So, this theory not only includes wage differentials in the analysis but also individual features that determine employment and wages, as well as general social conditions and technologies that lower the cost of migration. All these elements can raise the probability of a person migrating.

Migration is anticipated to continue to occur until expected earnings (wages plus probability of employment) have been equalised internationally.

In short, migration decisions according to this theory are taken by the individual and stem from differences in labour markets. Costs of migration include also social and emotional costs. Governments can influence immigration primarily through policies that affect expected earnings in origin and destination countries.

New Economics of Migration

The new economics of migration theory has a different point of departure compared to neoclassical economics and challenges both the micro and the macro approaches outlined above.

According to this theory the decision to migrate is not made by isolated individual actors: it is the result of a collective decision to maximise income and employment opportunities and to minimise risks.

Developed countries minimise risks through welfare state and insurance systems. So, for example, if a crop fails, there are crop insurance markets. There is also access to futures markets to obtain guaranteed prices for selling agricultural products. If someone is injured or loses their job, there are unemployment benefits. If someone seeks to improve their business, there are credit institutions and capital markets that provide loans.

In developing countries all these risks have to be faced by the household. Hence, migration is a strategy to diversify risks. The main incentive to migrate is not only to raise income but also to diversify risks. International migration may occur alongside increases in local employment and production. It does not have to stop when wage differentials disappear.

This theory also introduces the notion of relative deprivation: migration can alter income distribution within a community and therefore lead to more people deciding to migrate.

Governments can influence migration not only through labour market policies but also through policies on the other markets identified above (insurance, credit, etc.). Moreover, government policies in sending countries that raise the mean income of the population but leave behind the poorer households may increase the probability of migration.