The purpose of this paper is to provide a theoretical explanation for the empirical observation that the relative migration of unskilled (skilled) labor tends to occur from developing economies that are relatively unequal (equal).
Wealth inequality is related with migration incentives of skilled and unskilled labor in a model of occupational choice using a two‐period overlapping generations framework.
It is shown that high inequality creates a disincentive to migrate for skilled labor. Too much equality however creates a disincentive to migrate for unskilled labor. Thus, a highly unequal (equal) economy sustains unskilled (skilled) labor migration only.
Relative to the existing theoretical literature on migration, the distinguishing feature of this model is that it has entrepreneurship as an alternative occupational choice. This implies that the incentive to migrate is not affected solely by wage differentials across countries. It is shown that in a highly unequal developing economy there is no skilled migration – despite the gap between the skilled wage of the source economy and that of the foreign economy – in equilibrium.
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