Precautionary Saving by Young Immigrants and Young Natives

Abstract

1. Introduction and Literature Review Foreign-born population accounted for approximately 9% of the total population residing in the United States by the mid-1990s and, including their children, they were responsible for approximately 51% of the U.S. population growth (Martin 1995). These dramatic changes in the U.S. population have prompted much economic research on the immigrant population. But despite the great deal of attention that has been paid to the labor market progress of immigrants, little is known about their saving and wealth accumulation patterns.1 Many studies requiring information on the saving behavior of immigrants simply assume that immigrant savings parallel that of natives (MaCurdy, Nechyba, and Bhattacharya 1998). However, it may be the case that immigrants behave differently, have different motives, different opportunities, and different needs with respect to saving and wealth accumulation vis-a-vis natives. Most of the limited literature on the saving behavior of immigrants is inspired by European and Middle Eastern guest-worker migration and consequently is geared to the behavior of temporary migrants.2 Three papers that focus on the saving behavior of immigrants in general are the papers by Galor and Stark (1990), Carroll, Rhee, and Rhee (1994), and Dustmann (1997). Galor and Stark note that immigrants and natives differ from one another in their migration probabilities. Because immigrants have ties to other countries, it is more likely that they emigrate relative to the native-born worker.3 Using an overlapping-generations model, Galor and Stark show that the higher the probability of emigration, the higher is the level of savings. Hence, they predict immigrants save more than the native-born. Dustmann models precautionary savings and assumes that immigrants maximize expected lifetime utility from consumption in the host and home country proportionally to the lifetime spent abroad and at home.4 Under appropriate restrictions,5 Dustmann shows that, if labor markets in the home and host countries are uncorrelated, immigrants will carry out more precautionary savings relative to a comparable native worker, because immigrants will be subject to greater income risk in the host country.6 However, it is also possible in Dustmann's formulation to have immigrants engaging in less precautionary saving relative to native workers. For example, if economic conditions across the two countries are correlated, immigrants could be subject to less lifelong income risk than natives, given their ability to diversify away labor market risk by operating in two markets rather than just one, as in the case of natives. Additionally, if the risk preferences of natives and immigrants are different, then the precautionary saving motive could be more or less pronounced in one group relative to the other, all else equal. Carroll, Rhee, and Rhee (1994) use the Canadian Survey of Family Expenditures to compare saving behavior of immigrants to Canada from different regions of the world. They conclude that immigrant saving does not significantly differ by country of origin. However, they do find that recent immigrants save less than do Canadian-born, and that immigrants' saving behavior approaches the pattern of the Canadian-born over time. Overall the theoretical literature tends to favor the hypothesis that immigrants carry out more precautionary savings than natives, which could result in immigrants accumulating more wealth than natives. Immigrants face greater uncertainty regarding their labor market participation, labor market progress, and health care coverage. These factors, along with geographic distance, may make it more difficult to obtain financial support from family members in times of necessity, requiring that immigrants maintain larger stocks of precautionary saving. But Dustmann's model, in consonance with a widely held view, also allows for immigrants to be more risk tolerant than natives since they are willing to undergo higher uncertainties and risks when they decide to migrate to a new country (Barsky et al. …