Introduction and Background
It is well known that individuals will desire to migrate to the location where returns to their abilities are the highest, other things equal. An important theoretical factor in determining these returns is the relative distribution of earnings in the source and host countries. If the earnings variance in the country of origin is less than that in the country of destination (assuming that the correlation in earnings across the two countries is positive and sizeable), we expect those from the upper tail of the distribution (that is, those with the highest skills) to migrate, since incomes will be maximized by doing so. Conversely, if the source country has a wider distribution of income than the host country, we would expect those from the lower tail of the distribution (that is, those with the lowest skills) to migrate, since they too would have higher earnings in the host country. In the context of a bilateral immigration relationship, this would then imply that the country with the wider distribution of income would have high-quality immigrants wishing to enter, while the country with the more egalitarian distribution would have lower quality immigrant flows.
Borjas (1988, 1993) has addressed immigration between Canada and the United States within the context of such a wealth-maximization model. He found that Canadians tend to perform well in the United States (in terms of earnings) relative to native Americans, while Americans tend to perform relatively poorly in Canada, even when controlling for different human capital characteristics. (1) He hypothesized the less equal distribution of income in the United States relative to Canada could cause this outcome and that individuals seeking to maximize wealth will self-select into the appropriate economy. Thus, insofar as people are free to move between the two countries, Canadians of high ability will choose to migrate to the United States where returns to their abilities are higher, while Americans of more limited ability will seek to enter Canada, since they will earn higher wages than they could in the United States. This result is somewhat puzzling given that Canada has, since the 1960s, explicitly followed an immigration policy that has sought to enhance the quality of immigrants (from all source countries) by screening out those who may have a limited ability to assimilate into the Canadian labor market. Borjas, however, argues that the screening process in Canada can only evaluate immigrants on the basis of observable characteristics, not unobservable characteristics, even though the latter are also important in determining earnings. (2) He asserts that: "In the end, regardless of what immigration policy says, only those persons who gain from immigration do so. Governments legislate, but it is people who immigrate" (Borjas 1990, 216).
It has also been well established that there has been an increase in earnings inequality in the United States in the 1980s. The review article by Levy and Murnane (1992) shows that earnings inequality increased in the United States for both males and females in the 1980s. Furthermore, this trend towards increased inequality has favored high-skilled workers. In Canada, earnings inequality also increased over the same period (Morissette, Myles, and Picot 1993; Morissette and Berube 1996; Burbridge, Magee, and Robb 1997). In comparing the changes in the earnings distribution in the two countries, however, the literature suggests that this increase in earnings dispersion has been much greater in the United States (Blackburn and Bloom 1993; Gottschalk and Smeeding 1997; Richardson 1997). (3)
This change in the relative earnings distribution should be manifest in the form of varying immigrant quality on either side of the border. In this context, the implication of the wealth-maximization model is that the United States should attract Canadians with greater skills (and hence higher earnings) than natives, and that Americans with lower skills (and hence lower earnings) compared to natives would continue to migrate to Canada. …