Should I Stay or Should I Go? Inter-state Mobility and Earnings Gains of Young College Graduates

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RWP 24-08, September 2024

In the late 1990s, nearly 7 percent of young college graduates moved across state lines every year. These workers enjoyed 30 percent higher earnings three years after moving relative to similar stayers, but their gains were not immediate, amounting to only 7 percent in the first year post-move. By the mid-2010s, mobility fell by more than half, and average earnings gains among movers fell and became more front-loaded. At the same time, debt increased among all young college graduates. We propose a model of geographic mobility with incomplete markets, where moving to a new state can deliver earnings gains that are either front- or back-loaded. Incomplete markets and high interest rates on debt reduce workers’ acceptance of back-loaded opportunities, even if they have the same present-discounted increase in earnings as front-loaded opportunities. We find that lower potential gains account for most of the decline in mobility across periods, but that the lower initial wealth of young college graduates also reduced their mobility. The wealth effect on mobility is especially strong for poor individuals, so wealth changes generate an endogenous increase in income inequality later in the life cycle. Consistently, we find that tax-financed debt forgiveness policies generate higher mobility and earnings growth for low-wealth individuals and are, on average, welfare-increasing.

JEL classifications: D60, E21, E44.