The Economics of Labor Mobility

Lant PritchettHarvard Kennedy School

May 11, 2012Immigration: Moving ForwardAt The Ohio State University

Four Points

The losses to human well-being from the rich countries of the world restricting labor mobility are the largest single economically caused loss in the world—there are trillions of dollars of gains—everything else economists talk about is trivial by comparison

Most of the losses due to migration are discrimination in the labor market based on national origin.

The economic arguments that the losses to migration are focused on the disadvantaged are exactly the same for imports or labor saving technological innovation—the economists typical (and correct?) response is “instruments to targets”

Restrictions on the movement of unskilled labor induce distortions in the pattern of innovation—we have the world’s scarcest resources (entrepreneurial and technical talent) economizing saving the world’s most abundant resources—labor.

The gaps in the world are the largest in history…

What a German family of four eats in a week… Compared to a family of six in Chad.

Gaps in opportunities…My family on the Ganges river in India…

Indians on the same river (and a bicycle)

Why don’t people move to opportunity?

Because we use force to stop them… …your tax dollars at work

The simple (partial equilibrium) economics of border based restrictions

Quota on number of people allowed

L

WageWTA

WageWTP

W

Price equivalent of the quota restriction on mobility of labor: gap between “willingness to pay” of hirers and “willingness to accept” of workers

D

S

The wage gap due to pure barriers to labor mobility from Haiti is 7.11$ an hour--$14,809 (adjusted for PPP)

"Willingness to pay" (actual earnings in USA)

"Willingness to accept" (earnings in Haiti scaled up by 1.55)

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000 $17,428

$2,619

Wages of an observational equivalent worker (male, 35 years old, born in Haiti, 9 years of school in Haiti, urban, formal sector) work-

ing in the USA or working in HaitiAnnual Earnings in Purchasing Power

adjusted dollars

Annual Gap is $14,809(7.11$/hour)

Simple Arithmetic of GainsAfter estimating the wage gains to observationally equivalent low skill workers the median gain is $15,000. We’ll adjust that downwards for potentially selectivity effects by 20 percent (almost certainly too high) to get 12,500 per year gains for allowing a typical low skill worker to move to the USA (or OECD high wage country)Thought experiment Number allowed

to move(cumulative addition to labor force)

Annual gains to movers (flow) in billions of dollars

3 percent increase in the OECD labor force 17.8 million(.03*586)

219

Additional half of one percent increase in US labor force each year for ten years

7.9 million 98

Additional one percent growth of OECD labor force for 20 years

129 million 1,612

Everything else economists talk about is trivial in comparison

• The economic losses to distortions are proportional to the square of the price distortion

• The world is already pretty liberalized so that there are few large price gaps (usually measured in percents) so the gains from additional removal of price distortions is small

• The gains of programmatic interventions to address poverty are also measured in percents—a hugely successful anti-poverty intervention raises incomes by 15 percent whereas labor mobility raises incomes by factor multiples

The world is pretty flat—except for the cliff at the borders that faces labor—hence the gains to developing countries from additional

capital market or goods market liberalization are on the order of 100 billion versus trillions in gains from labor mobility

65000

65 1090

10000

20000

30000

40000

50000

60000

70000

Complete liberalizationlabor mobility

Complete equalizatoinMPK

Complete liberalizationof goods markets, todeveloping countries

Wel

fare

gai

ns, i

n bi

llion

s $

• The gain from a lifetime of micro credit is the same as being allowed to work a few weeks in the USA

• Total annual gain to Grameen Bank borrowers (around) $30 million

• If I get 3,000 additional Bangladeshi workers into the US (same total economic gain as Grameen Bank) do I get a Nobel Peace Prize?—No, I get arrested

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

Annual gain,micro-credit

Monthly gain,migration

Net presentValue, lifetimeof micro-credit

Annual gain,migration

PPP

$

Evidence from a “development friendly” seasonal migration

Program

• Admitted workers for agricultural work in New Zealand

• Protection of domestic workers in New Zealand and of seasonal workers rights

• Incentives to ensure return (both of employers, workers, and sending countries)

• Admitting an additional 1971 workers (a small auditorium) was about half of total exports

Net Gain to Tonga of New Zealand admit-

ting 1971 workers

Bilateral aid from NZ

Total Exports0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

Tiny gains in labor versus totals

NZ d

ollar

s

Of 100 Haitians who aren’t poor

How do you make sense of this? You legally must and must not discriminate based on national origin

What are the impacts on us?• Well, who is “us”?• The impact on the economy as economy is positive—people were

willing to pay the wages because their productivity equaled the wage (but small)

• The gains to movers are because “institutions” make them more productive here (not their skills, not resources, not even so much capital) so as long as “institutions” are a “public good” (non-rival and non-excludable) then losses to non-movers are small

• The impact on average wages is very near zero because new low skill migrants are not a close substitute for the average skilled US worker

• The major impact is on the wages of those who are close substitutes in the labor market for those who are allowed to migrate—which in the USA has been the very low skilled

End of Apartheid: Huge Gains for Blacks, no losses for Whites

Everyone agrees the overall impact is very near zero, the only disagreement is about the least

educated (less than high school)

Basics of comparative advantage and free trade—the point of trade is to lower prices of goods

scarce in “autarky”Vietnam has lots of low skill labor, little high skill labor, little capital so produces shoes and sells to USA

USA has lots of high skill labor, lots of capital and so produces turbines and sells them to Vietnam

Labor content embedded in shoe

adds to labor content of USA consumption

Capital and

technology in

turbine adds to

capital in Vietnam

’s

consump

tions

What if someone invents a new machine that “destroys” jobs by reducing the demand for low skill

labor? The point of innovation is to increase productivity and economize on use of scarce resources

Instruments to targets• There is an externality to consuming carbon due to its impact on global

warming• This affects every single decision we make (where to live, whether to fly,

what kind of car to buy, etc.)• The government could either intervene to affect every single decision

people make or they could just get the carbon price right through a tax on carbon and let the rest of decisions play themselves out

• The economic principle “instruments to targets” suggests that concerns be addressed with the best (most effective and efficient) tools, not using every tool for every job.

• There are serious problems with the real wages of unskilled workers in the US—perhaps the single most pressing economic problem in America—but limiting immigration to solve this problem is an enormously costly way to do it.

The world’s least abundant resources are devoted to economizing on the world’s most abundant resource

• As anything gets expensive people have incentive to invent new techniques that use less of that resource

• If innovation is very successful then the previous technology becomes “obsolete”—e.g. kerosene lamps, adding machines, eight track tape players.

• This is also true in labor—”draftsman” or “porter”• By making low skill labor unavailable and expensive

immigration restrictions induce innovations that then reduce demand for marketed labor with capital and technology

Who is “taking American jobs”? Turns out it is me (and machines)

Is the face of stagnating wages…

This face?

Or this Face?

Is the future of nursing Rosalie or robots?

Choose People

• It is not “Luddite” to oppose technological innovation that is driven not by real scarcity but by policy induced distortions

• People worry about their “carbon footprint” because the price of fuels don’t reflect their impact on nature by consuming fuel

• What is your “people print”? You are consuming vastly too little unskilled labor because you are choosing at prices that doesn’t reflect the true impact on the world’s poor of your decisions