Chapter 8, Problem 1RQ

To determine

Maximizing the lifetime earnings and calculating the net gains to migration by the labor.

Explanation of Solution

Migration is the process of transferring the labor force from one place to another in search of a better job opportunity and higher salary expectations by the labors. Migration of labor takes place mainly due to three different factors such as the Net present value of continuing in the job at the same place where the labor is currently working, net present value of switching the job and location, and the marginal cost of migration. The labors take the net present value of the new job before taking the decision to move from one job to another and changing the location of their job in the economy.

The decision to move from one job to another is taken with the factors as explained above. The equation that helps the individuals to determine whether to take the new job and migration from one place to another can be expressed as follows:

$\begin{array}{c}\text{Net Gain to Migration}=\left[\begin{array}{l}\left({\text{PV}}^{\text{NJ}}={\text{W}}_{20}{}^{\text{NJ}}+\frac{{\text{W}}_{21}{}^{\text{NJ}}}{\left(1+\text{r}\right)}+\frac{{\text{W}}_{21}{}^{\text{NJ}}}{\left(1+\text{r}\right)}+\mathrm{...}\right)-\\ \left({\text{PV}}^{\text{CJ}}={\text{W}}_{20}{}^{\text{CJ}}+\frac{{\text{W}}_{21}{}^{\text{CJ}}}{\left(1+\text{r}\right)}+\frac{{\text{W}}_{21}{}^{\text{CJ}}}{\left(1+\text{r}\right)}+\mathrm{...}\right)-\text{M}\end{array}\right]\\ ={\text{PV}}^{\text{NJ}}-{\text{PV}}^{\text{CJ}}-\text{M}\end{array}$

Where PV is the present value of the lifetime earnings and NJ represents the New Job and the CI represents the Present Job. M is used to represent the marginal cost of migration. The laborer would decide to migrate from one place to another when the net gain is positive. When the net gain is negative, the labor would stay back in the current job and would not go for the new job.

The net gains to migration would become positive when the wage rate in the destination is higher than the wage rate in the state of origin. This means that the income in the state of origin and state of destination is very much correlated while determining the net gains to migration. The migration costs are also to be deducted from the net present value of the new job and when the result becomes negative, it is better not to migrate and vice versa. Thus, both the income and the migration costs are very important in determining the net gains to migration.

Economics Concept Introduction

Migration of labor: Migration of labor is the mobility or transportation of labor from one place to another. Thus, it is the mobility of labor force from a state of origin to a state of destination.