Human Capital Flight: Impact of Migrationon Income and Growth
IMF Working Papers, December 1, 1994
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- Human Capital Flight: Impact of Migrationon Income and Growth
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Bibliographic details
- Published: December 1, 1994
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451921335.001
Summary findings
- The paper analyses the impact of government tax and subsidy policy on immigration of human capital and the effect of such immigration on growth and incomes.
- Human capital flight or “brain drain” arising out of wage differentials, for example because of differences in income tax rates or technology, can bring about a reduction in the steady state growth rate of the country of emigration.
- Permanent differences in the growth rates as well as incomes between the two countries can occur, making convergence unlikely.
- In a closed economy, tax-financed increases in subsidy to education can have a positive effect on growth; however, when human capital flight is taking place, such a policy can have a negative effect on growth.
- Subsidizing higher education is more likely to induce substantial brain drain and is likely to be inferior to subsidy to lower levels of education if growth is to be increased.
Model and mechanisms
- Framework: two-country endogenous growth model with heterogeneous agents and human capital accumulation.
- Mechanism: wage differentials driven by factors such as differences in income tax rates or technology induce migration of human capital (brain drain).
- Consequences:
- Reduction in steady state growth rate in the country of emigration.
- Possible permanent divergence in growth rates and income levels between countries.
- Policy spillovers: educational subsidies in an open economy can alter migration incentives and thereby affect growth outcomes adversely.
Policy implications and recommendations
- Tax and subsidy policies that increase returns to education in origin countries can unintentionally increase emigration of skilled workers, reducing domestic growth.
- When brain drain is present, policymakers should weigh subsidies to higher education against the risk of inducing emigration; subsidies to lower levels of education may be preferable for increasing growth.
- Policy design in open economies must account for cross-border human capital mobility; policies that are effective in closed-economy models may have opposite effects once migration is possible.