People who are not well matched with employment opportunities in their community can be made better off by an impetus to move — even if it comes in the form of a volcanic eruption.
That’s the conclusion of Emi Nakamura, a professor of business and economics at the Columbia Business School and a Chazen Senior Scholar, in her recent paper “The Gift of Moving: Intergenerational Consequences of a Mobility Shock.”
“My colleagues and I studied the Westman Islands, a small fishing village off the southern coast of Iceland where a volcano erupted in 1973,” she says. All 5,200 inhabitants had to evacuate as ash covered the island. Thanks to quick action and some luck, only one person perished. But the eruption yielded a true “natural” experiment: only one-third of the houses were covered in lava, and residents whose houses were destroyed were much less likely to return. This allowed Nakamura and her coauthors to study the consequences of an impetus to move unrelated to family or personal circumstances.
By studying data that covered the next few decades, Nakamura and her coauthors uncovered some striking outcomes: People younger than 25 years old who were induced to move achieved an 83 percent boost in annual earnings and 3.6 years more education than their similar-aged peers who remained on the island. The effects for their kids were even larger.
“But the effects of the ‘lava shock’ were distributed very unequally within the family,” Nakamura says. People who were older than 25 at the time of the eruption fared marginally less well if they were induced to move by the eruption; while the children who moved did much better.
As a consequence, “the economic costs of moving fall disproportionately on the parents in a family, while the economic gains accrue to the children. This implies that moving can be an immensely valuable but also somewhat costly gift that parents can give to their children,” she notes.
Relocation costs go beyond financial concerns. For some, embracing a new lifestyle — such as moving from a rural locale to an urban center — can be difficult. But the differential effects on parents and children add another factor, since parents often make the final decision about where to live.
Fishermen versus Bankers
What might explain the large benefits to moving? Nakamura and colleagues are quick to emphasize that not everyone on the island will gain, particularly people well suited for the highly lucrative jobs in fishing that dominate the local economy. However, the Westman Islands, despite being one of the richest towns in Iceland, doesn’t offer much diversity in career choices, and the jobs on the island don’t require much education. “If you’re well suited for the fishing industry,” Nakamura observes, the Westman Islands offers the chance of a six-figure income. “But if you’re a future computer whiz or a great legal mind, then the jobs on the island won’t make the best use of your talents.”
She likens the situation to that of other regions whose income is largely resource-based, such as locations dependent on the oil industry or tourism, or towns dominated by a single large employer.
Other research has studied people displaced from low-income areas and found they tend to have higher income and education outcomes in the long run. But the study by Nakamura and her colleagues is unusual in that it shows there can be large gains from moving away even from a prosperous location—at least for some fraction of the population.
What is the government to do?
While cultural factors and information no doubt play a role, the financial costs of moving are the most tangible constraint. Nakamura credits the Icelandic government with providing the means for families to move if that was their choice. A disaster relief fund compensated victims for the cost of damaged or destroyed homes, providing a financial cushion both for those who rebuilt and those who decided to move.
About the researcher
Professor Nakamura joined Columbia Business School in 2008. Before coming to Columbia Business School, Professor Nakamura received an A.B. in Economics from Princeton and...Read more.