Precautionary saving by young immigrants and young natives.

• Author: Amuedo-Dorantes, Catalina

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 precauti onary 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. 1997). Furthermore, the covariance of labor market conditions across the home and host country labor market could result in lower precautionary saving and wealth accumulation in the case of immigrants.

   The bottom line is that one can devise various arguments regarding the precautionary saving and wealth accumulation behavior of immigrants relative to native workers. Nonetheless, there is little evidence to date on those relative saving patterns. Knowledge of immigrants' behavior in this regard may generate insights not only into immigrants' wealth accumulation patterns, but also immigrants' responsiveness to changes in eligibility to welfare and income programs, medical assistance and educational services, and their fiscal impacts.

   We attempt to gain insight into the saving behavior of immigrants versus natives by comparing the precautionary savings and wealth accumulation patterns of immigrants and natives using data from the 1979 Youth Cohort of the National Longitudinal Surveys (NLSY79). The analysis investigates whether immigrants accumulate more, less, or the same wealth as natives, and the factors driving their wealth accumulation patterns over time; in particular, whether they carry out precautionary saving to face income uncertainty.

   A drawback to using the NLSY79 data is that confidentiality concerns prevent us from learning the country of origin of the immigrants in the survey. Therefore we cannot test propositions regarding the wealth accumulation behavior of immigrants as they relate to country of origin variables. For example, we cannot test hypotheses that relate wealth accumulation of immigrants to the covariance of conditions at home to conditions in the United States. However, there are advantages to using the NLSY79. We are able to follow immigrants and natives over time and, thereby, better separate out changes in wealth accumulation due to changing economic conditions and to household-specific heterogeneity. Furthermore, working with longitudinal data (in contrast to simply cross-sectional data) allows us to construct a time-varying, conditional measure of income uncertainty. This measure of income uncertainty fluctuates over time in accordance with the economic circumstances instead of relying on a constant, unconditional, su mmary measure of income uncertainty for the entire period under consideration. Finally, an additional bonus to using the NLSY79 is that we examine the behavior of young natives and young immigrants. Much of the literature on U.S. saving patterns has focused primarily on wealth accumulation patterns of mature men and women nearing retirement (Kazarosian 1997; Lusardi 1998). In contrast, the analysis of young households' accumulation patterns as they finish college, start their careers, raise families, buy homes, send their children to college, and start planning for retirement has not received much attention (Engelhardt 1998).

   We first analyze the composition of young natives' and immigrants' assets and liabilities. Assuming a buffer-stock model of savings (Carroll and Samwick 1998), we then estimate the responsiveness of wealth accumulation to income uncertainty once we control for other factors, including personal characteristics and attitudes towards risk.

   The paper proceeds as follows. Section 2 discusses the theoretical framework. A detailed description of the data, as well as some descriptive evidence on immigrants' and natives' wealth composition, are outlined in sections 3 and 4 of the paper. The empirical methodology and our findings are presented in sections 5 and 6, respectively. Section 7 concludes the paper with a summary of our findings.

2. The Model

   The main challenge of precautionary saving models is that they do not allow for a well-defined, closed-form solution to be implemented empirically (Carroll and Samwick 1998). An exception is the work by Caballero (1990), who derives a closed-form solution using a constant absolute risk aversion utility function. Following Deaton (1991), Carroll (1992, 1997), and Lusardi (1998), we assume consumers have a wealth-to-permanent income ratio as a target. When wealth is above the target, consumption will exceed permanent income and wealth will fall. If wealth is below the target, permanent income will exceed consumption and wealth will rise. This "buffer-stock" model appears to be consistent with macro- and microeconomic evidence on savings (Carroll and Samwick 1998).

   Wealth accumulation, captured by the household wealth-to-permanent income ratio, can be expressed as a function of personal characteristics of the household ([Z.sub.h]) and of income uncertainty facing such households ([[sigma].sub.h.sup.2] Therefore,

   [W.sub.h]/[Y.sup.p.sub.h] = f([Z.sub.h], [[sigma].sup.2.sub.h]) + [e.sub.h]. (1)

   The personal characteristics of the household include factors related to the household heads (Browning and Lusardi 1996; Lusardi 1998). Income uncertainty is proxied by the sum of the squared residuals of annual income regressions up to the year in question, normalized by permanent income. According to the buffer-stock model, as income uncertainty rises, individuals will accumulate more so as to maintain their desired wealth-to-permanent income target. The magnitude of the coefficient on the income uncertainty proxy will capture the extent of precautionary savings carried out by respondents. Differences between immigrants' and natives' wealth accumulation behavior may also result from different attitudes toward risk. We, therefore, control for the latter when examining respondents' wealth accumulation patterns.

3. The Data

   We use microlevel data from the NLSY79. The longitudinal nature of the NLSY79 provides information regarding the time profile of natives' and immigrants' wealth accumulation instead of a snapshot, as a cross-sectional set would. In addition, by surveying...