Unequal Pay or Unequal Employment? What Drives the Self-Selection of Internal Migrants in Germany?

Abstract

This paper examines the determinants of internal migration in a context where wages tend to be rather inflexible at a regional scale so that regional labor demand shocks have a prolonged impact on employment rates. Regional income differentials, then, reflect both regional pay and employment differentials. In such a context, migrants tend to move to regions that best reward their skills in terms of both of these dimensions. As an extension to the Borjas framework, the paper thus hypothesizes that regions with a low employment inequality attract more unskilled workers compared to regions with unequal employment chances. By estimating a migration model for the average skill level of gross labor flows between 27 German regions, we find evidence in favor of this hypothesis. While rising employment inequality in a region raises the average skill level of an in-migrant, higher pay inequality in a region does not have a significant impact on the average skill level of its in-migrants. A higher employment inequality in Eastern as compared to Western Germany may, thus, be the missing link to explain the fact that East-West migrants tend to be rather unskilled.