The Brain Drain: Evidence from U.S. European Expatriates

Gilles Saint-PaulMunich Economic Summit

June 5 2008

The Concern

• Europe has pledged to become the most advanced knowledge society in the world 2 years from now (!)

• For this it is crucial to retain the most talented individuals: entrepreneurs, innovators, researchers, designers, artists…

• Yet it is observed that these top people quite often move to the United States

The suspects

• High marginal tax rates• High tax on wealth in some countries• Regulatory barriers put a drain on creative

activities:– Product market regulation– Labor market regulation– Large state involvement in education, media…

How serious is the problem ?

• I will look at the characteristics of European expatriates in the United States

• I will compare them to their non-expat compatriots, as well as the U.S. labor market

• I will do my best to approximmate « Exceptional » individuals

Data:

• U.S. census, 1990 and 2000• Country of birth used as defining variable– Potential measurement error due to Americans

born abroad

• Look at 6 countries: UK, Belgium, France, Germany, Italy, Spain

How many people?

Is that significant?

• Brain drain affects GDP per capita and the distribution of income in the home country if migrants have different characteristics from non-migrants

• Otherwise, only effect is on total population• But then it would not be called a brain drain• …unless Europe were only populated by

brains

Example

• 10 % of the workforce is “Skilled”• They earn 30 % of total wages• Assume 1 % of the population emigrates• Assume 30 % of them are “Skilled”• The wage gap between the two would go up

by 2.2 %, with +1.6 % for the skilled, -0.6 % for the unskilled

• GDP per capita = -0.4 %

Example II

• Assume now that the exodus is highly concentrated among the skilled (100 %)

• The inequality measure would increase by 10 %

• Skilled: + 7 %, Unskilled -3 %• GDP per capita: -2.1 %

Do people eventually return?

Expats are highly employable

Expats are highly educated

Skilled workers are more represented, the higher the skill level

The process of skill concentration is accelerating:

So what ?

• Assume 0.5 % of the population has a PH.D.• Assume 1 % of the population goes to the U.S.• Assume 10 % of them have a Ph.D.• 1 out of 5 Ph.Ds work in the U.S.• Key question: are they the best ones ?

An extrapolation

• Since emigration rates are larger, the larger the education level, we can assume that the best Ph.Ds are more likely to emigrate

• According to Zucker et al. (2003), the top 5 % Ph.Ds. are critical for innovation and growth

• Assume the fraction of expatriates is twice higher in the top quartile of any skill range

• This would imply that 40-80 % of the “stars” are in the U.S.

The European Wage Premium:

The wage premium is higher for highly educated Europeans

Implication

• We know that highly educated workers are overrepresented

• Within each education group, highly talented workers are also over represented

• Furthermore, such overrepresentation is stronger for the highly educated

Expatriates are more likely to be entrepreneurs than Americans…

…and much more likely than their fellows left at home

• According to the Global Entrepreneurship Monitor, the fraction of entrepreneurs in Europe is around 4-5 %, about half its level in the U.S.

Conclusion

• The skill composition of expatriates is much better than in the source countries.

• Moderate consequences:– +2-3 % in the relative wage of the skilled – -0.5-0.7 % GDP per capita

• But effects could be much larger if “superstars” matter• The loss in such individuals could be as high as 50 %• The long-term growth potential of Europe would be

reduced substantially