A high level of income inequality potentially makes a country a more attractive destination for high-skilled workers migrating from other countries, while increasing the chances that high-skilled natives will decide not to migrate abroad. But the income inequality needs to arise from high returns to general skills that are not lost when moving to another country, rather than factors that cannot be transported easily, such as family background, local knowledge, personal connections or union membership.
These are the central conclusions of a study by Eric Gould and Omer Moav, which is forthcoming in the Economic Journal. Testing their analysis on data from Israel, the researchers find that higher levels of education make Israelis more likely to emigrate to the United States to enjoy the higher returns to education there. They conclude:
''Our empirical findings support our prediction that the level of income inequality in a country – and its sources – determine how it competes for high-skilled immigrants from abroad. They also determine how well it prevents its own high-skilled natives from leaving for greener pastures elsewhere.''
The study notes that there is a heated public debate about the causes and consequences of the growing gaps between the rich and poor in many developed countries. Income inequality has increased the most in the United States and the UK, and while this is justifiably a cause of concern for many, there is potentially one positive aspect to this phenomenon: high inequality could prevent a brain drain, and may even produce a brain gain.
The reason for this is simple: high-skilled individuals are attracted to countries with higher levels of inequality, since they are typically earning in the upper range of the income distribution. So a more widely spread wage distribution tends to make high-skilled workers better off relative to workers at the lower end of the distribution.
As a result, high levels of inequality attract high-skilled immigrants from countries with lower inequality while, at the same time, deterring high-skilled natives from leaving since they cannot find another country that will make them better off.
But the researchers'' analysis shows that not all inequality is created equally. There are many factors that generate income inequality. Some of them are related to the returns to skills, whereby skilled workers enjoy higher wages as a return to their high levels of productivity.
For example, individuals with college and advanced degrees are rewarded with higher salaries. Having a college degree is also an example of a ''general skill'' that can be easily transported and rewarded accordingly in many countries. The researchers'' model shows that a high level of inequality will only attract highly productive workers if a country''s income distribution stems from high returns to general skills, such as IQ, aptitude, motivation, creativity and education.
In contrast, a country with high levels of inequality due to factors that are not easily transported to other countries will not attract immigrants with high levels of general skills and education. In a country where ''country-specific'' skills are the major determinant of income, the study shows that workers with relatively high general skills will want to leave that country.
Examples of country-specific skills include personal connections, local knowledge of market conditions and regulations, language-specific skills, licences that are country-specific, rents from political ties or labour market rigidities, firm-specific skills and certain instances of luck (being at the right place at the right time). Individuals who find themselves at the high end of the wage distribution due to factors that cannot be transported to other countries will not leave their home country.
But there are workers who have high enough general skills, such as education or intelligence, relative to their small country-specific skills that it is worthwhile for them to leave and enjoy a higher return on their general skills abroad. Interestingly, these workers, the analysis predicts, are at the middle of the wage distribution, as they have high general skills but low country-specific skills.
Thus, the model predicts an inverse U-shape relationship between wages and the propensity to emigrate. The reason for this pattern is based on the idea that overall wages are a mixture of general and country-specific skills.
The researchers test their model using a rare data set from Israel, which contains information on the wages and education levels of individuals before they decide whether to emigrate from Israel. Consistent with the model, the study finds that higher levels of education make Israelis more likely to emigrate to the United States to enjoy the higher returns to education in the United States.
The study also finds that the relationship between emigration and wage levels is an inverse U-shaped pattern. Consistent with the model, Israelis in the middle of the wage distribution are the ones most likely to leave for higher returns to general skills in the United States, since workers with high general versus country-specific skills are more likely to be found in the middle of the overall wage distribution.
The researchers provide further evidence in support of their model by exploiting the differences in the returns to skills across different sectors in Israel versus the United States. Overall, the study finds that the entire positive relationship between education and the likelihood of leaving Israel would be eliminated if the United States and Israel had the same returns to education.
''Does High Inequality Attract High Skilled Immigrants?'' by Eric D Gould and Omer Moav is forthcoming in the Economic Journal. Eric Gould is at the Hebrew University of Jerusalem. Omer Moav is at the University of Warwick and the Interdisciplinary Center, Herzliya.