Endogenous Skill Formation and the Source Country Effects of Skilled Labor Emigration from Developing Countries

In this paper we set up a simple theoretical framework to study thepossible source country effects of skilled labor emigration fromdeveloping countries. We show that for given technologies, labor marketintegration necessarily lowers GDP per capita in a poor source countryof emigration, because it distorts the education decision ofindividuals. As pointed out by our analysis, a negative source countryeffect also materializes if all agents face identical emigrationprobabilities, irrespective of their education levels. This is in sharpcontrast to the case of exogenous skill supply. Allowing for humancapital spillovers, we further show that with social returns toschooling there may be a counteracting positive source country effect ifthe prospect of emigration stimulates the incentives to acquireeducation. Since, in general, the source country effects are not clear,we calibrate our model for four major source countries - Mexico, Turkey,Morocco, and the Philippines - and show that an increase in emigrationrates beyond those observed in the year 2000 is very likely to lower GDPper capita in poor economies.