People who relocate within Indonesia are typically more educated and more likely to be employed in higher-paid and secure jobs than those who stay put. Yet it is the more vulnerable segments of society who are most negatively affected by this internal migration and who see their wages go down significantly as a consequence.
These are the findings of research by Marieke Kleemans and Jeremy Magruder, published in the August 2018 issue of the Economic Journal. Their analysis indicates that these outcomes are a result of the nature of the Indonesian labour market. In particular, there is high competition for a limited number of formal sector jobs and fiercer wage competition for the more abundant informal sector jobs.
How does immigration affect the labour market? Public debate often expresses fear that immigrant take the jobs of natives and increase labour market competition, which causes wages to fall.
Previous research has mainly focused on the impacts of immigration to high-income countries, especially from Mexico to the United States. While consensus in this work remains elusive, we know even less about the labour market impacts of internal migration (migration within the border of one’s own country) in developing countries, even though these migration flows are multiple times larger than those from low- to high-income countries.
The new study focuses on Indonesia, the fourth largest country in the world, and uses a rich dataset that tracks the place of residence, occupation and income for more than 28,000 individuals over a 13-year time period. The researchers use weather shocks in the migrants’ origin areas to establish a causal relationship between immigration and labour market impacts in destination areas.
The results indicate that a 6% increase in the share of migrants in a destination area leads to a modest decrease in income of 0.97% and reduces employment by 0.24 percentage points. The overall impact on the economy, however, is expected to be more positive because migrants can contribute to the economy through the goods and services they purchase, the taxes they pay, the businesses they may start and the workers they may employ.
But who is most adversely affected by immigration, and why? Previous research on migration from Mexico to the United States finds that immigration disproportionately affects natives with low levels of education because they are most similar to Mexican immigrants and therefore directly compete for jobs – a phenomenon known as ‘substitutability’.
Internal migrants in developing countries, however, tend to have higher levels of education than their native counterparts, because the more affluent members of society tend to have sufficient wealth and opportunity to pack up and leave what is familiar to them.
Indeed, the new study finds that internal migrants in Indonesia have higher levels of education, are more likely to be employed and tend to have higher-paying and more secure formal sector jobs compared with natives.
In this case, substitutability implies that highly educated natives would be most adversely affected by immigration because of their similarity to incoming migrants. Yet this is not what the researchers find: it is still the more vulnerable segments of society with lower levels of education who are most negatively affected and who see their wages go down almost twice as much as those of the general population.
To explain this phenomenon, the researchers develop an economic model to show that this may be the result of the dual-sector nature of the Indonesian labour market, with high competition for a limited number of formal sector jobs, and fiercer wage competition for the more abundant informal sector jobs.
‘Labour Market Responses to Immigration: Evidence from Internal Migration Driven by Weather Shocks’ by Marieke Kleemans and Jeremy Magruder is published in the August 2018 issue of the Economic Journal.