Earnings expectations and the role of human capital in the migration decision : an empirical analysis

This study investigates the role of human capital in the migration decision. A dominant theory in the literature views migration as one means of investing in human capital. This theory assumes that potential migrants seek to maximize the present value of net gains to geographic mobility. In other words, people migrate in response to the locational difference in the present values of two future income streams of destination and origin, respectively. For convenience, this theory can be termed the PVD theory, with PVD standing for "present value difference." On the other hand, an alternative theory states that people migrate in response to the locational difference in current incomes between destination and origin. For convenience, this theory is termed the CID theory, with CID standing for "current income difference."

The study provides a test of the often claimed superiority of the PVD over the CID theory. Such a test requires information on current and future incomes at both one's present location and at alternative locations across spaces. Most previous studies of this topic used a "rather narrow and simple methodology for the formulation of future income: taking the simple average of incomes of a given population subgroup and inflating that average by a growth rate to obtain an estimate of future income. However, this empirical "convenience" for future income estimation most likely oversimplifies the method by which individuals formulate income expectations. Therefore, there is a need for comparison of the two theories, using various formulations of future income.

Empirical results show that the superiority of the PVD theory is confirmed if sufficient and reliable information is available to potential migrants so that they can perceive accurately their future incomes. If only limited amounts of information are provided, the CID theory may prove slightly superior to the PVD one.