Habit Formation and the Misallocation of Labor: Evidence from Forced Migrations

Matti Sarvimäki, Roope Uusitalo, and Markus Jäntti

Journal of the European Economic Association, Volume 20, Issue 6 (2022), Pages 2497–2539



This paper examines the long-term effects of large-scale forced displacement in Finland in the mid-20th century. The authors exploit the large-scale population resettlement of 430,000 people (11 percent of the population) following the cession of Finland’s eastern parts to the Soviet Union during and after World War II. Approximately half of the displaced population were farmers, who were allocated farmland in comparable resettlement areas (matching soil and temperatures to the extent possible) and close to former neighbors. The resettlement policy aimed to keep rural communities together and give displaced farmers land and assistance to establish farms comparable to the ones they had lost. Resettled farmers were permitted to sell/buy land and move across locations.

The authors estimate the impact of forced migration by comparing the outcomes of: (1) displaced individuals to those who were not displaced; (2) individuals who lived just east of the post-war border (and were therefore displaced) and people who lived slightly more to the west (and were not displaced); and (3) displaced persons and the local population of their resettlement areas.

The analysis is based on individual longitudinal data covering over 78,000 individuals born between 1907 and 1925, of whom approximately 7,800 were displaced. The individual data combine information from two population censuses (1950 and 1970) and 1971 tax records. The 1950 census includes data on the pre-war municipality of residence, occupational status, and industry codes. The authors also draw on municipality-level data on the pre-war income distribution and industry structure.

Main results:

  • A quarter-century after being displaced, displaced farmers earned more than other men who worked in agriculture before the war. Forced migration increased the long-term income of the displaced male farmers by 16 to 30 percent .
  • Displaced farmers were more likely to move from agriculture to other sectors between 1939 and 1970. Forced migration increased the likelihood of leaving agriculture by 12–17 percentage points from a baseline of 28 percent.
  • Forced migration increased the likelihood of moving to a city and completing secondary education among the displaced farmers. In contrast, being displaced decreased income and increased the likelihood of moving to rural locations among the urban population. In either scenario, the average 1971 income of displaced persons was close to that of similarly educated non-displaced persons working in the same industries and living in the same locations in 1970.

The authors conclude that forced migration increased farmers’ income because it increased the likelihood of leaving agriculture. Furthermore, the results imply that the returns to leaving agriculture were large in post-WWII Finland.

The authors investigate the possible reasons why most farmers stayed in agriculture when they could have earned substantially more in the modern sector. They do not find any evidence to suggest that these effects arise because forced migration affected farm quality, education, networks, learning, cultural differences, and discrimination. Instead, they propose a theory of “habit formation” whereby people derive utility both from income and from their residential location, and utility from a location increases with the time the person has already lived there. Put simply, “people are willing to forgo even large monetary gains to stay at home”. They argue that a person who has grown up on a farm may choose to remain in agriculture to enjoy their location capital even if they could earn more elsewhere. However, if they are forced to move, then they lose location capital tied to their old home and hence choose the location providing them with the highest income after the displacement.