The Effect of Skilled Emigration on Real Exchange Rates through the Wage Channel
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More than two-thirds of all skilled migrants go to the US, the UK, Canada, and Australia, but they come from more than 100 countries. This affects the movement of real exchange rates in the source countries.
Building on an analytical model, we provide cross-country empirical evidence that net skilled emigration appreciates bilateral real exchange rates through the wage channel in source countries. Chains of causality in the presence of the Law of One Price run through the “spending effect” and the “resource allocation effect,” analogous to the remittance-based Dutch disease effect. A pricing-to-market model allows pass-through for both traded and nontraded prices when the Law of One Price is violated. The skilled emigration elasticity of real exchange rate is estimated to be in the range of between .6 and .8, with internal prices playing a dominant role. Alternative model specifications show robust outcomes.
WORKING PAPER NO: 823