Migration, savings and uncertainty

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EUI Working Paper ECO No. 92/84

Migration, Savings and Uncertainty

Ch r is t ia n Du s t m a n n

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As from January 1990 the EUI Working Paper Series is

divided into six sub-series, each sub-series is numbered

individually (e.g. EUI Working Paper L A W No. 90/1).

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EUROPEAN UNIVERSITY INSTITUTE, FLO REN CE

ECONOMICS DEPARTMENT

EUI Working Paper ECO No. 92/84

M igration, Savings and Uncertainty

CHRISTIAN DUSTMANN

BADIA FIESO LANA, SAN DOM ENICO (FI)

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A ll rights reserved.

No part o f this paper may be reproduced in any form

without permission o f the author.

© Christian Dustmann

Printed in Italy in June 1992

European University Institute

Badia Fiesolana

1-50016 San Dom enico (FI)

Italy

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Migration, Savings and Uncertainty*

Christian Dustmann

Department of Economics

European University Institute, Badia Fiesolana

50016 San Domenico di Fiesole (FI)

Italy

June 1992

Abstract

This paper analyzes savings behavior and migration decisions o f temporary migrants. Special attention is given to the impact o f a stochastic environment on the migrant’s choice. The paper emphasizes two aspects which are likely to explain to some extend the relatively high savings o f migrant workers: savings due to life cycle motives, and savings due to precautionary motives. Furthermore, the im pact o f uncertainty about future income on the migration decision as such and on the time the migrant wishes to stay in the host country is analyzed. The results show that the effect o f uncertainty on the time the migrant intends to stay abroad is ambiguous. It depends not only in sign, but also in size on the utility structure o f the migrant worker as well as on characteristics o f the economies o f host- and home country.

*1 would like to thank Peter Hammond, Dorothea Herreiner, John Micklewright and Oded Stark for helpful comments on earlier drafts of this paper. The usual disclaimer applies.

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1

Introduction

A m a jo r form o f in tra-E u rop ean m igration and m igration into E u rop e, but also o f intra- A sian m igra tion and m igration betw een A sia and countries o f th e M idd le East, is ’’ guest w orker” , or, m ore generally, return m igration. T h e im p a ct o f this form o f m igration on th e econ om ies o f b o th the la b o r-e x p o rtin g cou n try and the la b or-im p ortin g cou n try difFers in m any asp ects from that o f p erm anent m igration. In contrast to perm anent m igran ts, tem p ora ry m igrants invest a large p rop ortion o f their earnings eith er into savings in th e host coun try, or th ey transfer it to their h om e cou n try, w h ere it is

then saved or used to su p p ort fam ily m em bers. B oth the am oun ts o f m on ey that

are transferred ba ck h om e and that are saved in th e host cou n try have im portant im p lication s for th e econ om ies considered. For th e em igration coun try, transferred m o n e y is a m a jo r ba lan ce o f paym en t su p p o r t.1 For the im m igration cou n try, transfers

con trib u te largely t o the ba lan ce o f paym en ts d eficit.2 On the oth er side, savings

o f m igrants in th e host cou n try p rovid e a substantial part o f the d o m e stic savings o f im m igration countries and con trib u te to their capital form ation (M acm illa n , 1982, p .2 5 1 )3.

D esp ite th e im p orta n ce o f m igran t’s con su m p tion - and savings beh av ior, there

has been surprisingly little th eoretical research on this to p ic. O n e difficu lty when

dealing w ith this su b je c t is that earnings not used for con su m p tion in the host cou n try are n ot necessarily saved; th ey are partly used to su pp ort fam ily m em bers in th e hom e countries. O n the oth er side, earnings that are transferred to the hom e coun tries are

Bn 1973, transfers from Turkish and Yugoslav workers in Germany amounted to over twice the total exchange obtained through exports of goods from these countries to Germany (Hiemcnz and Schatz, 1979, p .l). Over the period from 1960 to 1984, transfers of Greek workers from Germany to Greece amounted to 16% of Greece’s capital goods exports over that period (Glytsos, 1988, p.525).

Transfers from Thai workers in the Middle East in 1981 were equivalent to about

6

% of the total value

of exports from Thailand in that year (Pitayanon, 1986, p.273). Remittances of Pakistanis from the

Middle East finance some

86

% of Pakistan’s trade deficit (Robinson (1986)).

2For instance, transfers of migrant workers from Germany to their home countries amounted to 40% o f the total deficit of the German account of services and transfers with foreign countries (Monats- berichte der deutschen Bundesbank, 1974, p.22).

3Jones and Smith (1970) report that the local savings rate (earnings that are invested into savings in the host country) of migrant workers in Great Britain in 1965 was about 2% above UK average. For France, the average local savings of foreign workers in 1970 was 50% higher than those of a French person with the same income (Granier and Marciano, 1975).

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n ot entirely con su m ed , but to a large part invested into savings. T h ere is a confusing use o f con cep ts in th e literature: W h ile official d ata usually refer to all foreign exchange

o f m igrants to the h om e countries as remittances, it w ould b e w rong to con clu d e that

all such transfers are com p letely consu m ed b y fam ily m em bers. A large part o f these transfers are saved in the h om e coun tries.4 On the oth er side, it w ould b e sim ilarly w rong t o interpret all earnings that are not consu m ed as savings, since a part o f it

is used for th e su p p ort o f fam ily m em bers. F ollow ing P aine (1 9 7 4 ), remittances will

here b e used in th e m ore narrow sense o f earnings that are used to su pp ort fam ily m em bers. Savings are then all earnings that are saved at hom e and ab roa d 5. T h e strict d ifferentiation o f in com e that is not consu m ed in the host cou n try in to savings and rem ittances is im p orta n t for analytical purposes. W h ile rem ittances are best analyzed in a fa m ily con tex t (see, e.g ., Lucas and Stark (1 9 8 5 )), for the analysis o f savings b eh a v ior an individu al ap p roa ch seem s m ore a p p rop riate.6

O n e aim o f this stu d y is to explain w hy m igrant workers have a different savings beh av ior than native workers. T h e analysis isolates tw o m otives which are likely to expla in to som e degree differences in the savings rates o f m igrants and natives: life cy cle m otiv es and p recau tion ary m otives. T h e exten t to which life c y c le m otives accou n t for th e excess savings o f m igran ts, relative to com p arab le native workers, is shown to d epen d on the w age differential and the relative price level betw een host- and hom e country, the m ig ra n t’s p reference for con su m p tion at h om e, and the desired length o f m igration . T h e analysis further reveals that th e exten t to which p recau tion ary savings o f m igrants are higher than those o f com p arab le natives depen ds on the m igran t’s utility stru ctu re, th e p erceived degree o f risk o f the la b or m arkets o f host- and hom e cou n try and the correlation betw een the effects o f som e events on the econ om ies considered.

A further focu s o f the analysis is the im pact o f u n certain ty a b ou t future incom e stream s in b o th , host- and h om e country, on the desired length o f m igration and, in the lim it, on th e m igration decision itself. T h e results show that no general conclusion s are possible. C on trasted w ith a certain environm ent, un certainty influences the m igran t’s

4Monatsberichte der deutschen Bundesbank, 1974, p. 275

5According to Paine (1974, p. 103), only survey data allow for such a differentiation. For Turkish workers abroad, Paine calculates for 1971 an average saving rate of 36% of total income. A further 11% was used to support family members. These numbers indicate that savings net of remittances are still surprisingly high.

6For an empirical analysis of both savings and remittances of migrant workers, see Merkle and Zimmermann (1992).

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ch oice. H ow ever, it ’s effect d epen ds not on ly in size, bu t also in sign on th e m igran t’s u tility stru ctu re, on the riskiness o f the host cou n try la b or m arket, relative to that o f th e h om e coun try, and on interdependencies betw een the effects o f extern al shocks on b o th econ om ies.

T h e n ex t section w ill first in trod u ce the th eoretical fram ew ork. It will then b e show n h ow th e wage differences in h om e- and host coun try, preferen ces for con su m p ­ tion at h o m e as well as u n certain ty w ith respect to fu tu re earnings m ay influence the m igra n t’s savings beh avior. A s a p oin t o f reference, m igran t’s savings beh a v ior w ill b e com p a red w ith that o f native workers. T h e second part o f th e analysis con cern s the im p a ct o f un certain ty o n th e m ig ra n t’s d ecision to m igrate and on th e length o f his stay ab roa d. R esults are then illustrated w ith a num erical exam ple.

2

Saving and Migration Decisions

L et the m igran t worker be con fron ted w ith th e follow in g decision p rob lem : At som e p oin t in tim e, he has t o d ecid e w h eth er he wants t o m igrate to a p oten tial host cou n try and for h ow long. He fu rther has t o d ecid e about his fu tu re path o f con su m p tion . A n im p orta n t m otiv e for m igration w ou ld b e a higher rental rate on a unit o f hum an cap ital stock in the p oten tial im m igration country. T h e worker w ou ld then m igrate w hen th e e c o n o m ic advantages o f d oin g so outw eigh the cost o f m igration, or, follow in g Sjaastad (1 9 6 2 ), when th e present value o f the m igration decision is p ositiv e. T h is is also th e classical expla n ation for lab or m ob ility : As Hicks (1932, p.76) p oin ted ou t, ’’ ...differen ces in e co n o m ic advantages, chiefly differences in wages, are th e m ain causes o f m ig ra tion .” H ow ever, it im plies that th e w orker’s o b je ctiv e is on ly to m ax im ize lifetim e in com e: his decision w ou ld solely b e influenced b y m on etary asp ects. Should this b e the case, and on ce h avin g d ecid ed to m igrate, is there any reason for the worker t o return t o his h om e co u n try ? In oth er w ords, is such a sim ple m od el ca p a b le to expla in tem p orary m igration ? O b v iou sly n ot, or on ly under certain assum ptions on the p rocess o f hum an cap ital accu m u lation , and the evaluation o f hum an ca p ita l, in b o th cou n tries.7

A sim ple exten sion o f the m od el w ou ld be to let th e p oten tial m igrant m ax im ize lifetim e u tility from con su m p tion , given a lifetim e bu dg et constraint that d epen ds on

7This is outlined in Appendix 2.

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the m igration decision . W h en the m igrant prefers to con su m e at hom e than abroad (b eca u se o f other argum ents that are com p lem en ta ry to con su m p tion , like being to ­ geth er w ith his fam ily and friends, living in a used environm ent, en joy in g th e clim ate

e t c .), his op tim a l d ecision m ay now be to m igrate on ly temporarily, although the value

o f the stock o f his hum an capital is higher ab roa d .8 T h e reason for this is that, since his lifetim e is fin ite, each unit o f tim e spent abroad increases his lifetim e u tility b y raising his tota l con su m p tion possibilities, bu t it decreases lifetim e utility b y reducing the tim e available for con su m p tion at hom e.

2.1

The Basic Model

Let th e lifetim e horizon o f the m igrant be equal to T = 1 and assum e, for sim plicity,

that th e worker is p ro d u ctiv e over his entire life cycle. T h e m igrant will have to ch oose

the tim e t he wants to stay in th e host coun try, thereby determ in ing th e tim e (1 — t)

he will afterw ards stay in his h om e country. T h e m igran t’s o b je c t iv e is to m axim ize u tility from con su m p tion . Let his lifetim e u tility fu n ction be ad d itiv ely separable w ith resp ect to h om e- and host cou n try con su m p tion , w ith th e su butility fu nction s bein g increasing in con su m p tion , strictly con cav e and continuou sly differentiable. Assum e that th e rate o f tim e preference an d th e interest rate are b o th equal to zero. T his does n ot change any qu alitative results o f the analysis that follow s, bu t it im plies that the flow s o f con su m p tion in host- and h om e cou n try are b o th constan t. T h e m igran t’s lifetim e u tility m ay b e expressed in th e follow in g sim ple form :

V {c ‘ ,c E) = t u , (cI ) + { l - t ) u E(cE) (1 )

where u1 and uE are the su butility fu n ction s in the im m igration - and the em igration

cou n try 9, and c l and c E are th e resp ective constan t flows o f con su m p tion . A higher

p reference for con su m p tion at h om e corresp ond s to a higher m arginal utility from

consu m in g an equal con su m p tion flow k in the h om e cou n try: u,E(k) > u,J( k ) .10

8The trade off between higher wages in the host country on the one side, and a higher preference for consumption at home on the other side was firstly formalized by Djajic and Milboune (1988).

immigration- and emigration country will be alternatively referred to as host- and home county.

10

iA(c^) and uE(cE) could likewise be expressed as tt(c* , G) and u(cE, F), where G and F are indices,

representing environmental factors like family, friends etc. When G and F are complementary to c1

and cE, respectively, (in the sense of Pareto and Edgeworth, see Hicks (1979), p.44), and if additionally

F > G, then u'E(k, G) > ulT(k, F). For simplicity, the indices G and F are suppressed here.

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T ota l fu tu re earnings in host- and hom e cou n try are given b y t/ 7( /, x ) and y E( t, z ),

where x and z are ran d om variables w ith known jo in t density fu n ction f ( x , z ) . T h ese

ran d om variables cou ld be interpreted as indices w hich reflect the im pact o f u n certain ty

on fu tu re in com es in host- and h om e cou n try.11 T h e variances o f x and z will b e

d en oted b y and <7^, respectively, and the covariance betw een b oth by a xz. T h e

follow in g assum ptions seem to b e natural:

y { > 0; y f < 0; y'x > 0; y f > 0 (2) T h is sim p ly im plies that total earnings accum ulated in either cou n try are th e higher

the lon g er the m igrant w ill stay.12 If interpreting x and y as indices o f la b o r m arket

con d ition s, th e signs o f the last tw o term s are self expla in in g: the m ore fa vorab le the

state o f th e w orld, the higher will b e total earnings, keeping t constan t.

T h e m ig ra n t’s b u d g et constraint is then given b y th e follow in g expression :

t p c 1 + [1 - t ] c E + r) = y '( t ,x ) + y E( t ,z ) (3 )

w h ere p is the p rice level in the host country, relative to that in th e hom e coun try, and

77

are fixed costs o f m igration. R ew ritin g (3 ) yields:

cE = Y Z -t [yI ( t , x ) + yB( t , z ) - r i - t p c 1} (4 ) Inserting (4 ) in to (1 ) and ad op tin g the von Neum ann - M orgen stern hyp oth esis o f e x p e c te d u tility m ax im ization , the individu al will solve th e follow in g p rob lem :

<t>(c\t) = m a x E ( V ( c ',c E)) (5 )

t,c‘

A ccord in g ly , th e m igran t w ill ch oose the level o f con su m p tion a b ro a d , c 7, and the tim e

t t o stay in the host cou n try so as to m ax im ize ex p ected lifetim e utility.

Since an y u n certain ty w ill n ot be resolved before t and c 7 are ch osen , the follow in g

restriction has t o b e im p osed on the m igran t’s total con su m p tion in the host cou n try :

11

For instance, when risk affects income in a multiplicative form, then y1 = y1 (t)x and yE = yE(t) z,

where y1 and yE are total incomes in home- and host country as functions of t.

12Because lifetime is finite and t signifies the time being in the host country, an increase in t will

increase yr(.), but it will decrease yE(.), since less time is available for the accumulation of earnings

at home.

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t p c 1 < [y'(t,s) + yE(t,z) -

7/] (6)

where x and z are the m inim u m levels o f x and z. R elation (6 ) sim ply states that total

con su m p tion in the host cou n try has to be lower than total lifetim e earnings when the m ost u n favorab le states o f the w orld should realize.

T h e first order con d ition s for an interior m axim u m are given by:

<t>, = E lu '(c ') - uE(cE)\ + E =

0

(7-a)

<j>c t = £ [ u ' V ) - p u E(cE)\ = 0 (7 -b ) R elation (7 -a ) im p licitly determ ines the op tim al length o f stay in the im m igration

country. T h e op tim a l t will be chosen so as to equ alize the ex p ected m arginal loss in

overall u tility o f staying on e unit o f tim e longer in the host cou n try w ith the ex p ected m arginal gain o f staying on e unit longer abroad, b o th m easured in units o f utility.

E xpression (7 -b ) sim ply states that the ex p ected m arginal rate o f su bstitu tion betw een con su m p tion at h om e and abroad has to equal the relative p rice level.

Type 1

and

Type 2

Uncertainty

In com e un certain ty that affects th e m igran t’ s decision p rob lem m ay b e due to un fore­ seeable fu tu re events that influence la b or m arkets, and th erefore earnings, o f host- and sou rce coun try. It m a y also b e due t o im perfect k n ow ledge a b ou t the lab or m arket con d ition s in th e host country. B o th types o f un certainty have different characteristics and m a y have different consequences for the m igran t’ s decision s. T h e first kind o f un­

certainty w ill fu rther b e referred t o as type 1 uncertainty. T h e latter typ e is den oted as

type 2 uncertainty. T h e analysis b elow relates solely to type 1 uncertainty. Im plications o f type 2 un certainty will b e p oin ted ou t later.

S om e ex am ples for type 1 uncertainty w ou ld be unforeseeable changes in raw

m aterial p rices, like an oil crisis, wars, w orldw id e e c o n o m ic dow nturns, p olitical unrest etc. For this ty p e o f uncertainty, it seem s ap p rop riate to assum e that, the longer the m igrant intends to stay in either country, the stron ger will be th e im p a ct o f som e sh ock on his tota l in com e to b e accum ulated in that country. Form ally, this can b e expressed

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b y assum ing that y'tx > 0 and yf2 < O.13 In other w ords, m arginal total in com e at h om e

and ab roa d , w h ich are earnings p er unit o f tim e, increase in x and z resp ectiv ely.14 T his

is w hat L evhari and W eiss (1 974) call increasing risk and im plies that the variability

o f to ta l in com e, accu m u lated in either country, increases with the tim e bein g in that country. Increasing risk w ou ld corresp on d t o a m u ltip licative sp ecifica tion o f the effect o f un certain ty on earnings, as it is usually assum ed in the literature on u n certainty and investm ent in to hum an cap ital (see, for exam ple, E aton and R osen (1 9 8 0 ), K o d d e (1 9 8 6 )).

The Deterministic Case

R econ sid er th e m igra n t’s op tim iza tion p rob lem in a d eterm in istic w orld. A ssu m e,

therefore, that x and z are know n t o b e equal to their ex p e cte d values: x = /?(.;•) = x

and z = E (z ) = z. It then follow s for (7 -a ) and (7 -b ):

[uE(c E) - u 7( c ') ] =

u '7(c 7) = p u 'E(cE)

f

l‘ - ‘ l

(

8

- a)

(8 -b )

T h e system (8 -a ), (8 -b ) determ ines th e op tim al tim e to b e spent ab roa d , t°, and the

op tim a l level o f con su m p tion in th e host country, c10. For an equal p rice level in b o th

coun tries (p = 1), and expressing a higher preference for con su m p tion at h om e b y

a higher m argin al u tility o f a constan t flow o f con su m p tion k in the h om e coun try,

u'E(k ) > u '^ k ), it follow s from (8 -b ) that the optim al level o f con su m p tion at hom e

is higher than th e op tim al level o f con su m p tion abroad: c £0 > c ,a. T h rou g h ou t the

analysis, it w ill b e assum ed that the m igrant has a higher p referen ce for con su m p tion at h om e, w h ich ensures an interior solu tion for the tim e spent abroad (corres p on d in g t o tem p ora ry m igra tion ). It follow s then from (8-a) that he will d ecid e to m igrate w h en th e increase in lifetim e u tility from stayin g one unit longer abroad is at least as high as th e decrease in lifetim e u tility b y bein g deprived o f the p ossib ility to con su m e during this unit o f tim e at hom e.

For com pleten ess, consider the case w h ere the m igrant is indifferent betw een

con su m p tion at h om e and abroad. T h is w ou ld corresp on d to u '^ k ) bein g equ al to

13Note again that an increase in t decreases the time being in the home country, so that yt < 0.

14This includes the possibility of unemployment. Marginal total income would then correspond to eventual unemployment benefits.

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u,E(k), and, consequently, c /0 = cE0 and u \ c 10) = uE(cE0). T h e m igran t’s decision will now d epen d solely o n earnings p rosp ects at hom e and abroad - the classical ex planation

for m igration. For an equal p rice level in both countries (p = 1), and indifference

betw een con su m p tion at h om e and ab roa d, (8-a) reduces to

u'B(cE)[y\ + y f } = 0 (9) M igration m ay now b e perm an ent, tem p orary, or the m igrant m ay b e indifferent be­

tween m igratin g or n ot m igrating, depen din g on whether, for all f £ (0 ,1 ) , + y f ) > 0,

(vt + v f ) < 0) or (Vt + v f ) = 0, respectively. An interior solu tion evolves when there

exists a t°, t° £ [0 ,1], for w hich (y { + y f ) = 0. In A p p e n d ix 2 it is shown that this m ay

well b e the case w hen hum an cap ital, accum ulated in th e host country, is on ly earnings effective in the h om e country. In this special case, tem p ora ry m igration m a y evolve in a determ in istic environm ent, although the m igrant is indifferent betw een con su m p tion in either c ou n try and althou gh he bases his decision on purely m on etary criteria.

2.2

Savings of Migrants and Natives

T h ere are a variety o f explanations w h y individu als accu m u late savings. P eop le m ay save becau se life tim e profiles o f in com e and desired con su m p tion d o not coin cid e. Sav­ ings are thus a m eans to transfer con su m p tion over tim e. Savings o f this kind are said to b e due to life c y cle m otives. A fu rther reason to save are p recau tion ary m otives. P recau tion ary savings are in d u ced by un certainty a b ou t future in com e stream s. Indi­ viduals save t o have funds for fu tu re contingencies. Savings m ay also be due to bequest m otives. Savings w ou ld here b e a m eans to p rov id e cap ital for children or oth er heirs.

T h e follow in g analysis w ill con cen trate on the first tw o m otives. It will be shown that b o th , savings that are d u e to life c y cle m otives, and savings that are due to pre­ cau tion a ry m otiv es, m ay differ con sid erably betw een m igrant workers and com p arab le natives.

Life Cycle Motives

In sim ple intertem poral m od els, savings that are referred to as life c y c le savings o ccu r w hen th e in d iv id u a l’s rate o f tim e p reference differs from the interest rate. Individuals save or desave, d epen din g on w h eth er the rate o f tim e preference is sm aller or larger

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th an th e interest rate. In the present m od el fram ew ork, the interest rate and the rate o f tim e preferen ce are b o th assum ed t o b e equal to zero. A ccord in g ly , there is n o d ifference betw een b o t h rates w hich cou ld induce savings. Since the p u rpose is to com p are savings o f m igrants and natives, this restriction translates into the assum ption that savings in d u ced b y such a difference are equal betw een m igrants and natives. W h at rem ains are life c y cle savings that accru e becau se profiles o f lifetim e in com e differ from profiles o f lifetim e con su m p tion . It will b e shown that this m ay b e m a jo r reason why m igrants have a different savings beh av ior than native workers.

C on sid er a m igran t worker w h o ’ s d ecision p rob lem is characterized b y the ab ove op tim iza tion p rob lem . His earnings p rosp ects abroad are higher than those at hom e. H ow ever, he prefers t o con su m e at h om e rather than ab roa d. His savings in the host cou n try that are d u e to life c y cle m otives consist then o f tw o com p on en ts: first, holding th e flow o f con su m p tion constan t over the life cycle, he w ill save becau se earnings are higher ab roa d than at h om e. S econdly, h old in g the in com e stream constan t over the life cy cle, he will save becau se desired consu m p tion is higher at h om e than abroad.

B efore form alizin g these argum ents, a native reference g rou p has to be charac­

terized. D efine therefore a comparable native as on e w h o m axim izes lifetim e utility

over the sam e horizon T and w h o has th e sam e path o f hum an cap ital accum ulation

as the m igran t worker. Furtherm ore, since th e native lives in his h om e coun try, let his lifetim e u tility fu n ction be equal t o the su butility fu n ction o f th e m igrant worker in the em igration country. A ssu m e, for sim plicity, that b o th m igrant and n ative have

a con stan t stock o f hum an cap ital over th e horizon T. D en ote earnings per unit o f

tim e in the em igration - and the im m igration coun try by wE and w 1, resp ectively, w ith

wE < w1. A ccord in g ly , m igrant and native receive equal earnings in the im m igration

country. T h e total savings rate s is given by:

H ow w ou ld this savings rate differ betw een n ative and m igran t, when b oth were o b ­ served at th e sam e p oin t in tim e during th e m ig ra n t’s stay a b roa d ? T h e lifetim e bu dg et

constraint o f the n a tiv e worker corresp on d s to t w 1 + [1 — t] w ' = c ‘ . G iven his u tility

fu n ction V N = t u! (c r) + [1 — t ] u / (c / ), he will ch oose a con stan t c 1 over his life cy cle

that is equal to w1. C onsequen tly, his savings rate is equal to z e ro .15

15Remember that savings that are due to differences in interest rate and rate of time preference are

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T h e m igran t’s bu dget constraint is, accord in g to (3 ), given b y t w1 + [1 — /] wE = t c 1 + [1 — t) c E. N eglect any fixed costs o f m igration (rj = 0). T h e m igran t’ s savings

rate s M consists then o f tw o com p on en ts, savings that are due to discontinuities in his

life cy cle in com e stream ( s ^ ) and savings that are due to discontinuities in his stream o f desired con su m p tion (s£*):

s M = s f + s f = , _{■ [ ! - < ] +} -i — (

10

)

w' w ‘

T h e rate s ^ is p ositiv e w henever w 1 > w E: in this case, fu tu re earnings will decrease.

Life cy cle earnings o f th e m igrant are lower than those o f the com p arab le native, althou gh th ey b o th have equal earnings in the im m igration country. T h e p rosp ect o f

lower fu tu re earnings w ou ld then in d u ce the m igrant to accu m u late savin gs.16 17 T h e

share o f s™ in the tota l savings rate depen ds on the size o f the wage differential and

on the length o f th e desired m igration p eriod .

A d dition ally, m igrants m ay save because they have a preferen ce for con su m p tion

at h om e. T h e corresp on d in g savings rate is given b y . Savings are accu m u lated to

allow for an increase in th e flow o f con su m p tion u p on return. T h e share o f in the

tota l savings rate depends on the extent o f m igran t’ s preferen ce for con su m p tion at

h om e and, again, o n the length o f the tim e ab roa d. T h e size o f depen ds add ition a lly

on the p ric e level abroad. Should th e p rice level be higher in the im m igration cou n try than in the em igration cou n try (p > 1), it follow s from (8 -b ) that the m igrant w ou ld fu rther redu ce con su m p tion ab roa d, relative to con su m p tion at hom e. C onsequently,

a higher p rice level in th e im m igration cou n try w ou ld reinforce the size o f s;)1.

C onsequently, w hen m igration is intended to be tem p ora ry,1' life cy cle m otives m ay in d u ce m igrant workers t o have savings rates that are higher than those o f c o m ­ parable n ative workers. T h e tota l rate o f savings o f a m igrant w orker is the higher, the larger th e differential betw een wages at h om e and ab roa d, the stronger the p reference for con su m p tion at h om e and the higher the relative p rice level ab roa d . T h e savings rate decreases w ith th e length o f m igration.

excluded by assumption.

16This is essentially the motive for savings that is analyzed by Galor and Stark (1990). For wages being lower in the home country, Galor and Stark illustrate in a two-period model that migrants savings in the first period are the higher, the higher their return probability in the second period.

17The analysis would also include the case where migration is desired permanent (because a prefer­ ence for consumption abroad), but is restricted being temporary (because legal restrictions, like e.g.

in Switzerland). In this case, would be negative.

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Precautionary Motives

T h e secon d ex p la n ation for a different savings beh av ior betw een m igrants and natives are p recau tion ary m otives. In what follow s, the m igran t’ s op tim a l savings- and c o n ­ su m p tion d ecision in the host cou n try under small un certainty a b ou t future in com e w ill first b e com p a red w ith that under certainty. It is then show n that p recau tion ary savings o f m igrant workers are likely to b e higher than those o f com p a ra b le native workers.

Let t° and c 10 b e the op tim a l length o f stay and the op tim al level o f con su m p tion

in the host coun try, w hen x and z are know n to b e equal to their e x p e c te d values

x = E ( x ) and z = E (z ). In oth er w ords, t° and c 10 solve (8 ). T o com p a re the op tim a lly chosen level o f con su m p tion in th e determ in istic case, c /0 , w ith that chosen

un der sm all uncertainty, ex pa n d (7 -a ) around x = x and z — z. N eglecting term s o f

order higher than 2, and assum ing that y E and y1 are linear in x and z, respectively,

this results in th e follow in g expression (derivation see A p p en d ix 3):

jy- ^ 2 u'"E(cE ) [V a r ( y E + y ‘ )} (1 1)

w here E °(.) = E (.) w hen z — z and x = x. It follow s from the secon d order c on d i­

tions that <j>ci ci < 0 (see A p p e n d ix 1). A ccord in g ly , d £7°(ti/ / ( c / ) — u'E(cE))/dcI < 0.

T h erefore, th e op tim a lly chosen level o f con su m p tion in the host cou n try under sm all un certainty is sm aller or larger than that chosen in the certain ty case, d epen din g on w h eth er th e term on th e right hand side o f (1 1) is negative or positiv e, respectively.

Since V a r (y E + y ') will always b e p ositiv e, the sign o f th e term on the right o f (11)

depen ds on th e sign o f u"'E(cE), ind icatin g the change in th e a ttitu d e tow ards risk

w hen c B changes. W h en u"'E{cE) = 0, th e op tim a l level o f con su m p tion is not affected

b y uncertainty. T h is is, for instan ce, the case for a qu ad ratic u tility fu n ction .

H ow ever, for u'"E(cE) > 0, it follow s from (11) that c ,a > c1, w h ere c ' is the

o p tim a l level o f c on su m p tion when sm all un certainty about in com e at h om e and abroad

is present. It is easy to sh ow that u"'E(cE) has to b e p ositive when ab solu te risk aversion

is d ecreasin g and th e u tility fu n ction is a d d itiv ely separable (see Leland (1 968) ) 1S If th e m igra n t’s u tility stru ctu re ex h ibits d ecreasing absolute risk aversion, he w ou ld,

un der sm all uncertainty, accu m u late p recau tion ary savings and increase the level o f 18

18For an extensive discussion of the properties of the third derivative of the utility function and its

impact on savings behavior, see also Mirman (1971) and Sandmo (1971).

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con su m p tion in the h om e cou n try even if he were indifferent betw een con su m p tion at h om e and ab roa d . T h e interesting question that arises is w h eth er p recau tion ary savings o f m igrant workers differ from those o f com p arab le na tiv es.19

It is obv iou s from (1 1) that the im pact o f u n certainty on the savings decision

depen ds on th e size o f V a r (y E + y 1), the variance o f lifetim e in com e. V a r (y ,:i + y l )

m ay b e rew ritten as:

V a r(y B + y ') = V a r (y E) + V a r (y ') + 2 C o v (y E + y 1) = \y^o\ + y B2o\ + 2pyIxy f a x<rz\ (

12

)

A ccord in g ly , th e variance o f th e m igran t’s lifetim e in com e consists o f th e variance o f tota l incom es in the host- and in the sou rce country, b oth d epen din g p ositiv ely on the tim e spent in either country, and on the covariance betw een b oth . T h e degree o f risk

ex h ibited by th e resp ectiv e la b or m arket m ay b e m easured by erf, i = z ,x . Assum e

first that th e ran d om variables x and z are un correlated.

T h e variance o f lifetim e in com e o f a m igrant w orker, and, a ccord in gly, his p re­ cau tion a ry savings, m ay then b e higher than that o f a com p a ra b le n ative worker for tw o reasons: the variance o f in com e to be accum ulated in the host cou n try is higher than that o f th e native worker, o r /a n d the variance o f in com e to b e accum ulated at h om e is higher than that o f th e n a tiv e worker, b o th evaluated over th e sam e p eriod

length t.

F irst con sid er V a r (y I), th e variance o f total in com e to b e accu m u lated abroad.

E valuated for th e sam e t, V a r (y ! ) is higher for m igrant workers than for com p arab le

natives if m igrants perceive the host cou n try lab or m arket as m ore risky than native workers. It is likely that this is th e usual case. For instance, in m any im m igration countries m igrant workers d o n ot have th e sam e rights in the la b or m arket or the sam e benefit entitlem ents than n ative workers. Furtherm ore, discrim in ation m ay prevent m igrant workers from having the sam e op p ortu n ities to stay in the jo b , or to find a new jo b , esp ecia lly during e c o n o m ic dow nturns. T h e variance o f lifetim e in com e for a m igrant worker w ou ld then b e higher than that o f a native w orker, given that the

19Since the analysis of precautionary savings requires at least a two-period framework, assume, as

before, that the life o f the comparable native is divided into two periods of unequal length, period

1

corresponding to t and period 2 to (1 — t). Comparisons o f savings of migrant workers with those of

natives refer then to the first period.

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variance o f in com e in the h om e cou n try over th e rem aining p eriod [1 — f] is not lower than that o f th e resp ectiv e n ative worker over that p e rio d .20

S econdly, high er p recau tion ary savings o f m igrants m ay b e induced b y th e desired, tem p ora ry natu re o f m igration . I f the m igrant stays on ly tem p ora rily in the host coun try, and, after retu rn , enters th e la b or m arket o f the h om e country, th e variance o f his lifetim e in com e depen ds on the riskiness o f th e h om e cou n try la b o r m arket. E m ig ration coun tries are often characterized b y p o o rly d evelop ed benefit sy stem s.21 T h e y usually ex h ib it fairly high rates o f un em p loym en t, low sta b ility and are som etim es h igh ly sensitive t o e c o n o m ic shocks. T h erefore, the variance o f the m igran t’s incom e to b e accu m u lated after return m ay b e high, thus fu rther increasin g the variance o f lifetim e in com e, resp ectiv e t o that o f a com p arab le n a tiv e worker.

F urtherm ore, th e correlation betw een the effects o f som e shocks on the labor m arket o f em igration and im m igration cou n try m ay well be p ositiv e or n egative. In

this case, n ot on ly th e variances o f yE and y 1, but also th e cov aria n ce betw een y h and

y 1 determ in es th e size o f V a r (y E + y l ). A p ositiv e correlation betw een total incom es

to b e accu m u lated at h om e and abroad w ou ld signify that the sam e ty p e o f event has either a p ositiv e or a negative effect o n la b o r m arkets and earnings in b oth cou n tries. A n eg a tiv e correlation w ou ld corresp ond to o p p osite effects on la b o r m arkets in the tw o countries.

A ssu m e, for instance, that the em igration cou n try is a net im p orter o f som e raw m aterials, e.g. cru d e o il, w h ile the im m igration cou n try is a net ex p orter. A r ise in oil p rices w ou ld then have a p ositiv e effect on the econ om y o f the im m igration cou n try and a negative effect on the econ om y o f the em igration cou n try. On the contrary, if b oth econ om ies were net im porters o f cru de o il, a rise or fall in oil p rices w ould affect b o th econ om ies sim ilarly.

20The variance of total income to be accumulated in the host country should he particularly high for illegal migrants. They usually do not have the right to claim any benefit support in the host country. Furthermore, their illegal status prevents them from appealing to any labor market law that concerns minimal wages or job security.

21

Although institutionally established benefit systems are often less developed in potential emi­

gration countries, it would be wrong to conclude that migrants are always better off in immigration countries. Less economically developed emigration countries have very often a well-functioning, non- institutionalized benefit systems that is based on kinship and family. While the migrant worker may rely in his home country on family support in the case o f unemployment or illness, he may end up with no benefits at all, if the host country benefit system discriminates against foreigners.

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T h e correlation o f the effect o f such an event on lab or m arkets and, accord ingly,

earnings is cap tu red b y the correlation coefficient p in (1 2 ). W h en p = 0, total incom es

in the tw o coun tries are un correlated. Should p < 0, som e sh ock w ould have o p p osite

effects on the tw o econ om ies. T h is allows the m igrant to hedge against risk. For a negative correlation , there exists an op tim al level o f con su m p tion and an op tim al length o f tim e abroad so that all risk w ou ld b e rem oved from the m igrant’s decision p rob lem . A ccord in g ly , th e correlation betw een th e effects o f som e rand om shocks on the la b o r m arkets, m irroring characteristics and interdependencies o f the econom ies con sid ered, m ay weaken o r reinforce th e size o f p recau tion ary savings.

C onsequen tly, when th e u tility stru ctu re o f m igrants exh ibits d ecreasing absolute risk aversion, m igrants are likely to accum ulate p recau tion ary savings that are higher than th ose o f com p a ra b le natives. T h e size o f savings that are due to p recau tion ary m otives depen ds on th e p erceived riskiness o f the host cou n try la b or m arket and the h om e cou n try la b or m arket, d eterm ining the variance o f total earnings in either country, and on th e length o f m igration. It fu rther depends on th e correlation o f the effects o f som e sh ock on la b o r m arkets in b o th countries.

2.3

Uncertainty and Migration Decisions

U ncerta inty d oes n ot on ly influence m igrant’ s savings in the host country, as was shown

a b ov e, b u t also his op tim a l length o f stay abroad and, when an alyzed around 1° = 0,

the m igration decision itself. T o investigate the effect o f in com e un certainty on the

op tim a l ch oice o f f, d en ote t° and c /0 as those realizations o f t and c 1 w hich solve the

m igran t’ s decision p rob lem when x and z are know n to b e equal to their ex p ected

values. E x p a n d in g (7 -a ) around x = x and z = z , and assum ing that y r and y E are

linear in x and z , respectively, results in th e follow in g expression (for th e derivation

see A p p e n d ix 3): £ ° [ u V ) - « ( c B)] + E °

1

1

u'E(cE) d c ? . . ^ r

[1

~ <! A 1 = 2 [1 - f]2 u

'"

E

(

c E

)

d

^_ +

u

„

E

(cE)

at t A 1 + A 2 = A [V a r(y E + y l )\ (13)

A

₂₄

[rV£(c£)

I t V a r (y E + y ')

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w h ere E ° again in d icates that the ex p ecta tion s are evaluated at x — x and z = i . For <t>it < 0 (see A p p e n d ix 1), th e term o n the left decreases in t. A s a result, th e op tim a lly

chosen level o f t u n der sm all un certainty, t, is sm aller or larger than that chosen in the

d eterm in istic case, t°, d ep en d in g on w h eth er A is sm aller or larger than zero:

U n certa in ty affects th e op tim a l ch oice o f t d irectly and indirectly. D irectly becau se the

m igrant is risk averse. In d irectly becau se a change in i changes th e variance o f total

lifetim e earnings, and, b y w ay o f altering c®, changes the a ttitu d e tow ards risk. T h e d irect effect o f risk aversion and the in d irect effect via a chan ge in th e d egree o f risk aversion are cap tu red b y A 1. T h e indirect effect via a chan ge in the v ariance o f total lifetim e in com e is ca p tu red b y A 2.

C on sid er first A 1: sin ce Var^y1 + yE) > 0, the sign o f A

1

d epen ds on th e sign o f

U" /£ ( CE) f urther depen ds o n the m agnitudes o f u"'E(c E) [dcE/dt] an d u"E(c E). For a

giv en v ariance o f tota l lifetim e in com e, u "E(c E) captures the d irect effect o f un certainty

o n the ch oice o f t. T h e term u "'£ (c E)[d c® /d t] represents th e indirect effect b y a chan ge

in the a ttitu d e tow ards risk, caused b y a change in desired con su m p tion at h om e, cE,

that results from a change in t.

G iven th e stru ctu re o f the p rob lem , d ecreasing absolute risk aversion w ou ld im ply

that > 0. A ccord in g ly , for dcE/dt = [y{ + y f — c 1 + c E] > 0, an increase in t

w ou ld , b y w ay o f increasin g the flow o f con su m p tion in th e h om e cou n try, increase the w illingness to accep t som e given risk and influence the length o f m igration p ositively.

H ow ever, sin ce th e direct effect is negative (u "E(cE) < 0), the sign o f A

1

is am bigu ou s.

T h e secon d in d irect effect is in d u ced b y the im pact o f a chan ge in t on th e variance

o f to ta l lifetim e in com e. T h is effect is cap tu red b y the term A 2. S ince u"E(c E) <

0, the sign o f A

2

depen ds on th e sign on d V a r (y E + y')/d t. W h e n , for som e f° ,

d V a r (y E + y ! )/dt <

0

, an increase o f the tim e b ein g in the host c ou n try will reduce the varian ce o f tota l lifetim e in com e. T h is w ou ld b e the case w h en, for in stan ce, the la b or m arket o f the h om e cou n try is very risky, relative to that o f the host country.

C onsequen tly, risk aversion w ou ld then in d u ce the m igrant to increase the length

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T able 1: Changes in th e V arian ce o f Lifetim e In com e (| ^ V a r^ y 1 + y B)) CORR

(0

< <° <

1

) c II O P

= ~ 1

b f - y f <

7,1

b f , °x - yf, <^] y f b f, - y f, °x} > or< o

>0

<0

> o?< o o II b f y f , ° l + y f y f ° f \ y f yf,

>0

<0

<0

> or<o p =

1

b l + y f

0

z\ + b L + yf, <rz] y f b f , + yf,

>0

> or<o >or< o ________________> or< o______________

o f stay ab roa d . T h is can d irectly b e seen from (1 3 ): For d V a r (y E + y ! )/dt < 0, and

u"E(cE) < 0, A

2

> 0. A ccord in g ly , should A

1

> 0, or ( A

1

+ A 2) > 0, it follow s that i > t°.

T h e sign o f d V a r (y E + y r)/dt depends on the degree o f risk in the resp ective

la b or m arkets, as represented b y ax and Uj, and on th e correlation betw een the random

variables x and

2

. For p = —1, p = 0 and p = 1, the first colum n in ta b le 1 presents

[1 /2] d V a r (y E + y , )/dt when the solu tion o f the determ in istic p rob lem is an interior one

(0 < t° < 1). T h e secon d colu m n o f table 1 gives d V a r(y E + y')/d t w hen th e solu tion

o f the d eterm in istic p rob lem w ou ld b e t° =

0

(i.e. the o b je ctiv e fu n ction reaches it ’ s

m axim u m for t° = 0). W ith o u t further sp ecification o f y1, y E an d th e distribu tion

o f x and

2

as well as the m igran t’s utility fu n ction and the in com e fu n ction s in both

coun tries, it is am biguous w h eth er A

2

will tend to have an increasing or a decreasing

effect o n the tim e spent ab roa d , com p a red w ith w hat w ould have been chosen under certainty. In oth er w ords, d epen din g on the m igration situation and the p reference stru ctu re o f th e m igrant w orker, uncertainty m ay have a p ositiv e or a negative effect on the tim e the m igrant intends to stay abroad.

T h e effect o f A

2

is m ore definite w hen th e m igration d ecision itse lf is considered.

N eglecting th e effect o f A 1, c olu m n 2 o f table 1 shows that un certainty w ith respect to fu tu re in com e w ould in d u ce th e m igrant to m igrate, even if he w ou ld not d o so under

p erfect foresight, w hen x and z are n egatively correlated or n ot correlated . T h is is due

to th e p u rpose o f the m igrant to hedge against risk or to diversify risk, respectively.

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An Example

A sim ple num erical ex a m p le m a y help to illustrate the a b ov e argum ents. A ssu m e the m igran t’s u tility stru ctu re to b e o f th e follow in g sim ple form :

However, when x and z are positively correlated, the effect o f A 2 on the migration decision is again ambiguous.

u (c') = G c 'o s ;

» ( c E) = F

ceo

'

s

where F and G are indices w hich cap tu re environm ental argum ents, like fam ily, friends

e tc. T h e u tility fu n ction has th e p ro p e rty that u'" > 0. Let F > G , and norm alize b y

settin g < 3 = 1 .

A ssu m e that tota l earnings in host- and hom e coun try, y 1 and yE, are linear in x

and z , as well as in t and

[1

— <]:

y 1 = w1 1 x ; yE = wE

[1

-- <] z

A g a in , w l an d w E d en ote earnings p er unit o f tim e in im m igration and em igration

country.

A ssu m e som e nu m erical values. S u p p ose that wE = 1, w ' = 2 an d F = 2.

A ccord in g ly , wages in the host cou n try are d ou ble as high as in the h om e country.

Further, let th e p rice level betw een host- and h om e c ou n try b e equal (p = 1), and set

th e fixed costs o f m igration t o zero (y =

0

).

W h en the ra n d om variables x and z are know n to b e equal to their ex p e cte d

values, an d ex p ecta tion s are equal to un ity (E ( x) = E (z ) = 1), the op tim a l flow s o f

con su m p tion at h om e and a b roa d and the op tim a l length o f m igration are given by the follow in g num bers:

C onsequen tly, th e m igrant w ou ld intend to spent 1 /6 o f his fu tu re life a b roa d . His con su m p tion per un it o f tim e ab roa d w ou ld on ly be 1 /4 o f what he plans t o con su m e

in his h om e country. His tota l savings rate sM , consisting o f s ^ and > >s given by:

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SM = s f + 3 ? = 0.416 + 0.416 = 0.83

In this sim ple exam ple, the m igrant w ou ld intend to save 83% o f his w age in com e.

C on sid er now th e case o f uncertainty. Let the rand om variables x and z have

m eans o f unity, variances <r

2

and cr

2

and covariance <jx az p.

T h ree situations will b e exam ined . In situation 1, th e m igrant perceives th e labor m arket o f th e h om e cou n try as riskier than that o f th e host country. In situation 2, th e o p p o s ite is the case: th e m igrant considers the host coun try la b o r m arket as riskier

th an that o f th e h om e cou n try

.22

In situation 3, the host c ou n try la b or m arket is

likewise riskier than that o f the h om e country, bu t the d ifference in th e degree o f risk is sm aller. T h e follow in g values w ill b e assum ed:

• S itu ation 1: ax = 0.5; <rz = 0.8

• S itu ation 2: <rx = 0.9; az — 0.3

• S itu ation 3: ax = 0.8; <r

2

= 0.5

In all situations, the m igrant will accu m u late p recau tion ary savings, since u"'(.) >

0. For the assum ed u tility stru ctu re, th e effect o f un certainty on th e desired length o f m igration depen ds o n th e riskiness o f th e tw o la b or m arkets, as well as on the correlation betw een th e effects o f som e event on th em . T able 2 presents qu alitative

results for d V a r (y ! + yE)/dt, A 1, A 2, and A

1

+ A 2.

In situation 1, a fu rther stay abroad w ou ld increase the variance o f lifetim e in com e (Var^y1 + y E)) for p = 1. It w ou ld decrease th e variance o f lifetim e in com e for p = 0

and p = —1. In situation 2, an increase in t increases th e variance o f lifetim e in com e for

all p's. In situation 3, th e variance rises likewise, e x cep t for p = — 1. T h e direct effect

o f risk aversion and the effect o f a chan ge in th e degree o f risk aversion on the op tim al

len gth o f m igration , as represented b y A 1, is p ositiv e in all situations and for all p’s. It

th erefore affects the desired tim e abroad positively. H owever, A 2, w hich captures the 22Note that the labor market of the host country may exhibit a different degree of risk for the migrant than for the native worker. The degree o f risk depends on the extent to which the foreign labor market is discriminative against migrant workers, the migrant’s legal rights to claim benefit support in the case of unemployment, illness etc.

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Table 2: The Impact of Uncertainty on Migration Decisions C o R R d V a r(yr Hh yE)/dt A 1 A 2 A 1 + A 2 Si t u a t i o n _{( i ) ( 2 ) ( 3 ) ( 1 ) ( 2 ) ( 3 )} ( 1 ) ( 2 ) ( 3 ) ( 1 ) ( 2 ) ( 3 ) P = 1 ( + ) ( + ) ( + ) ( + ) ( + ) ( + ) ( - ) ( - ) ( - ) ( + ) ( - ) ( - ) P = o ( - ) ( + ) ( + ) ( + ) ( + ) ( + ) ( + ) ( - ) ( - ) ( + ) ( - ) ( + ) P = - 1 ( - ) ( + ) ( - ) ( + ) ( + ) ( + ) ( + ) ( - ) ( + ) ( + ) ( - ) ( + )

effect o f a change in th e total variance o f lifetim e in com e on the op tim a l t, is negative

in situ ation 1 for p = 1. It is negative for all correlations in situation 2. In situation

3, it is again n eg a tiv e for p =

1

and p = 0, bu t p ositive for p = —

1

. Su m m in g up A

1

and A 2, th e tota l elfect o f un certainty in situation 1 w ou ld b e to increase the length o f the m igration p e rio d , com p ared to what w ou ld have been chosen under certainty. In

situ ation

2

, un certainty has a decreasing effect on th e desired length o f stay abroad.

F inally, in situation 3, the effect is negative for p =

1

and p ositiv e fo r p = 0 and

p = - 1.

T h is ex ercise should have d em on strated that in com e un certainty affects th e m i­ g ra n t’s desired length o f stay and, in th e lim it, the m igration decision itself. However, th e effect is n ot con clu sive w ith ou t specify in g the m igran t’s op tim iza tion p rob lem ex ­ p licitly. D ep en d in g on the m ig ra n t’s preferen ce stru ctu re, the sp ecifica tion o f th e in­

c o m e fu n ction s and the d istribu tion o f and correlation betw een the rand om variables x

an d z, un certain ty m ay increase or redu ce th e desired tim e in the host coun try, relative

to that chosen un der certainty.

2.4

Type 2 Uncertainty

So far, on ly th e im p a ct o f type 1 un certainty has been an alyzed . A d d itio n a lly to type

1 un certainty, type 2 u n certain ty m ay influence the m ig ra n t’s d ecision p rob lem .

W it h type 2 uncertainty, the p oten tia l m igrant is b e fo re m igration un certain a b ou t

how th e foreign la b o r m arket evaluates his abilities and his stock o f hum an capital. H ow ever, o n c e arrived in th e foreign country, he will gather in form ation a b ou t the requirem ents o f th e la b or m arket and thereby redu ce uncertainty.

U n certa in ty that is due to im perfect inform ation is likely to p lay a m in or role

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