Returns to Regional Migration: Causal Effect or Selection on Wage Growth?

Human capital theory predicts pecuniary returns to regional migration, but also positive self-selection of migrants. Therefore, when estimating the causal effect of migration one has to take care of potential self-selection. Several authors recommend using fixed effects models thereby controlling for time constant unobserved heterogeneity. However, if selection operates not only on wage level but also on wage growth conventional fixed effects models are also biased. In this paper we want to investigate, whether migrants are self-selected on wage growth and if this biases conventional fixed effects estimates of the returns to migration. We use data from the SOEP 1984 – 2010. First we analyze the time pattern of the wage differential between migrants and stayers to see whether they are on different wage trajectories. Second we introduce a fixed effects model with individual slopes to investigate whether conventional results are biased.