New Economics of Labor Migration Test
Also known as: NELM Test, Relative Deprivation Migration Model, Household Risk-Diversification Migration Test, Stark-Bloom Migration Model
The new economics of labor migration (NELM), launched by Oded Stark and David Bloom in 1985, recasts migration as a decision made by households rather than isolated individuals and as a strategy aimed at managing risk and relative standing rather than simply maximizing one earner's wage. In the neoclassical view a worker migrates because expected earnings abroad exceed earnings at home; NELM argues instead that families in economies with missing or imperfect insurance and credit markets send a member away to diversify income sources and to relax the constraints those market failures impose. Stark and Taylor's 1991 paper added a second, distinctive motive: households migrate to reduce their relative deprivation — their position in the local income distribution — so that a family can be absolutely well-off yet still send a migrant because it feels poor relative to neighbors. Testing NELM therefore means estimating migration and remittance behavior as functions of household risk exposure and relative deprivation, not just the wage gap. Massey and colleagues' 1993 review positioned NELM as the principal theoretical rival to neoclassical migration economics. The test is fundamentally a household-level econometric exercise that pits these motives against the simple expected-income account.
Key highlights
- Relocates the migration decision to the household and integrates remittances, capturing collective strategies that individual models miss.
- Yields the distinctive, falsifiable prediction that relative deprivation drives migration even when absolute income is adequate.
- Links migration explicitly to missing insurance and credit markets, connecting it to the broader economics of risk and development.
- Provides a clear head-to-head test against the neoclassical wage-gap account rather than merely fitting migration data.
Intuition
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How it works
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When to use it
Use the NELM test when you have household-level data and want to determine whether migration is driven by family risk-management and relative-standing motives rather than by individual wage maximization, especially in developing-country settings where insurance and credit markets are demonstrably incomplete. It is the right framework when remittances are central, when you can define a meaningful local reference group for relative deprivation, and when you can proxy households' exposure to uninsurable income risk. The approach is most powerful where you can include absolute-income controls and thus separate the relative-deprivation prediction from a simple poverty story. It is less appropriate when only individual-level or aggregate flow data are available, when the migration decision is genuinely individual (for example, single young migrants with no household ties), or when local markets are complete enough that the self-insurance motive is weak. Because the relative-deprivation and risk constructs are demanding to measure, NELM testing is best reserved for studies with rich household survey data rather than for coarse aggregate analyses.
Strengths & limitations
- Relocates the migration decision to the household and integrates remittances, capturing collective strategies that individual models miss.
- Yields the distinctive, falsifiable prediction that relative deprivation drives migration even when absolute income is adequate.
- Links migration explicitly to missing insurance and credit markets, connecting it to the broader economics of risk and development.
- Provides a clear head-to-head test against the neoclassical wage-gap account rather than merely fitting migration data.
- Relative deprivation depends on a chosen reference group, and results can be sensitive to how that group is delimited.
- Household income risk and market incompleteness are hard to measure and are usually proxied imperfectly.
- Migration and remittances are jointly determined with income, raising endogeneity that simple probit estimates do not resolve.
- Massey and colleagues note NELM and neoclassical predictions can coincide empirically, making the two motives hard to disentangle without rich data.
Common pitfalls
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Applications
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Frequently asked
How does NELM differ from the neoclassical model of migration?
The neoclassical model treats migration as an individual maximizing expected lifetime earnings, so the wage gap between origin and destination drives the decision. NELM shifts the unit to the household and the motive to managing income risk and relative standing under missing markets. A family may send a migrant not because that person earns more abroad but because the migrant's income is uncorrelated with local risks and thus insures the household, or because the family feels deprived relative to neighbors. The empirical test is whether relative-deprivation and risk terms carry their predicted positive signs once absolute income and the wage gap are controlled, which the neoclassical model says they should not.
What is relative deprivation and why does it matter for migration?
Relative deprivation measures how a household stands compared to others in its reference group — essentially how much of the local income distribution lies above it. Stark and Taylor argue that families migrate partly to improve this relative position, so a household can have a perfectly adequate absolute income yet still send a migrant because neighbors, perhaps already receiving remittances, have pulled ahead. This generates a self-reinforcing dynamic in which migration by some raises the relative deprivation of others and induces further migration. It is the construct that most sharply distinguishes NELM from absolute-income theories, which is why measuring it well, against a defensible reference group, is central to the test.
Why are missing markets central to the theory?
If a household could buy crop insurance and borrow freely, it could smooth income and finance investment without sending anyone away, and the neoclassical wage-gap logic would suffice. NELM's premise is that in many developing settings these markets are absent or thin, so the family must self-insure and self-finance. Migration becomes a substitute for the missing insurance market — the migrant's uncorrelated income cushions local shocks — and remittances become a substitute for the missing credit market, financing investment the household could not otherwise fund. Testing NELM therefore involves proxying market incompleteness and showing that migration responds to it, which is what ties the theory to the economics of development.
Sources
- 1.Stark, O., & Bloom, D. E. (1985). The New Economics of Labor Migration. American Economic Review, 75(2), 173-178.
- 2.Stark, O., & Taylor, J. E. (1991). Migration Incentives, Migration Types: The Role of Relative Deprivation. The Economic Journal, 101(408), 1163-1178.
- 3.Massey, D. S., Arango, J., Hugo, G., Kouaouci, A., Pellegrino, A., & Taylor, J. E. (1993). Theories of International Migration: A Review and Appraisal. Population and Development Review, 19(3), 431-466.
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ScholarGate. (2026, June 23). New Economics of Labor Migration Test. ScholarGate. https://scholargate.app/migration-studies/new-economics-of-labor-migration-test