Essays on Internal Migration and Factor Reallocations in India

This thesis contains three essays on the Indian economy. They aim to contribute towards understanding the role of geographical and sectoral mobility by examining the important components of demographical changes that bring up new economic opportunities. The first essay investigates the relationship between geographical mobility and over-education. Another key outcome of geographical mobility is that it generates remittances in the origin areas; our second essay is therefore related to this aspect of geographical mobility, analysing the impact of remittances on left-behind household expenditure behaviour. Our third and final essay is related to sectoral mobility, where we use information on workers in India who switch sectors to decompose the drivers of inter-sectoral wage gaps. The three different empirical analyses give us some indication of the role of mobility in the process of development. The investigation of the outcomes of mobility also informs us if the markets work properly and if resources are efficiently allocated in the economy. In the first chapter, we use data from India and correct for the selection bias problem by using an instrumental approach and propensity score matching methods. Our objective is to investigate the relationship between geographical mobility and the probability of being over-educated for the present job. We measure geographical mobility in terms of internal migration; over-education is defined as a job-educational mismatch, where a person works in a job that requires the level of education lower than he possesses. The main objective of the study is to determine the extent to which more mobile workers have better job-educational matches in comparison to those who are not mobile. The results show a positive relation between internal migration and the probability of over-education, which implies that a worker’s decision to relocate within India in search of a job does not contribute towards reducing the risk of over-education. Instead, a migrant has a slightly higher probability of incidence of over-education relative to those who are not mobile. In addition, we also try to investigate the consequences of over-education by looking at the wage effect of over-education among movers and stayers. In terms of results, we find that over-educated migrants are more likely to overcome the risk of the wage penalty associated with over-education. Overall, if these i two results are linked, then they suggest that the job-educational mismatch among migrants is not driven by some discriminatory practises or lack of local knowledge; instead, this mismatch could represent a trade-off for better wages. If not, an alternative explanation could be that migrants have some strong bargaining power that enable them to overcome the risk of lower wages associated with over-education. In the second chapter, we look at the impact of remittance flows on the economic well-being of households in the rural part of India. To measure household well-being, we construct indices of households productive assets, financial assets, housing quality and consumer durables by applying a principal component analysis. Using panel data from the Indian Human Development Survey, we evaluate the changes in the stock of various kinds of assets by the incidence of remittances. The empirical findings show that remittances have a significant effect on the nature of investments carried out by the left-members in the rural household. However, the direction and significance of the effect mainly depends on the initial income status of the households. Poor households with remittances lose out on the stock of consumer durables, but gain more in production inputs and financial assets than those without remittances. In contrast, in the case of rich households, we do not find any significant impact on the stock of consumer durables, production inputs and housing quality, with one exception being the positive and significant effect on financial assets. In terms of policy implications, these findings suggest that remittances help to reduce poverty in rural areas. Finally, in the third chapter we explore the inter-sectoral wage gaps in India. Like any other developing country, wages in Indias agricultural sector are significantly below those of other sectors. In addition, more than 50 percent of the workforce is employed in the agricultural sector. In our study, we try to look at a puzzle which has been closely examined by several macro-economic studies i.e. why are so many workers employed in the agricultural sector, despite other sectors of the economy paying better wages? To answer this question, we will study the wage trajectories of the workers who switch sectors and compare them with those workers who do not switch sectors. Examining the wage premium from a worker’s intersectoral switching will help us to determine whether the difference in wages across sectors are ii due to unobservable characteristics or, alternatively, if they reflect the presence of differential pay between similar workers across sectors. Our results hence show a positive wage gain from the reallocation of workers out of agriculture. This finding suggests that the inter-sectoral wage gap is driven by the misallocation of resources in the economy.