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Tuesday, June 25, 2013

Why do Legal Permanent Migrants Return?

Is it because of consumption, investment, or employment in the home country? Which factors are salient? Do home country conditions even matter at all? These are questions I attempt to answer in my new paper on the return motivations of legal permanent migrants. I am pleased to finally put up a draft. 

I focus on legal permanent immigrants in Australia and their motivations for return. Are these migrants more likely to be target earners, who move abroad in order to accumulate resources to invest in some business at home, or are they life-cycle consumers, who primarily balance the marginal benefits and costs of staying abroad? One can distinguish between the two by their reactions to shocks. For instance, target earners are thought to cut their stays abroad shorter when their purchasing power for the home country increases while life-cycle migrants react by making their stays abroad longer.


I use the 1997 Asian Financial Crisis as a quasi-experiment. The figure above encapsulates the empirical strategy (exchange rates are normalized to 1 in 1996). In particular, the crisis generated varied and substantial exchange rate shocks between home country currencies of migrants and the Australian dollar. Moreover, this crisis was largely unexpected, hence plausibly exogenous. Immigrants from Australia come from different countries so it was as if they were randomly allocated different exchange rate shocks, shocks to their purchasing power. The basic approach simply looks at whether those who obtained more favorable exchange rate shocks (depreciations in their currency) returned more or less compared to those who obtained less favorable shocks.

In sum, I find that a 10% increase in the exchange rate (a home country currency depreciation) leads to a 0.37 percentage point reduction in the probability that a migrant returns. The 2-year permanent return rate in this period is small at 4.1% so this effect is almost equivalent to a considerable 10% of the return rate. That these migrants continue to be sensitive to home country conditions is a somewhat surprising result, given that these individuals are granted permission for indefinite stay in Australia. The result is robust and consistent with the story that migrants return due to life-cycle considerations. A substantially larger effect is found for migrants who have pre-determined that they would want to return, evidence that migrants optimally time their return to favorable conditions. Moreover, I show evidence that this exchange rate shock effect is not merely a proxy for the influence of other macroeconomic conditions, such as GDP per capita growth or the change in unemployment in the home country. This suggests that return is primarily a function of purchasing power and consumption rather than employment possibilities in the origin country.

 More details are in the paper. I welcome comments and suggestions at pabarcar@umich.edu.

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