The Economics of Labor Mobility

1. The Economics of Labor Mobility Lant Pritchett Harvard Kennedy School May 11, 2012 Immigration: Moving Forward At The Ohio State University

2. 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.

3. 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.

4. Gaps in opportunities… My family on the Ganges river in India… Indians on the same river (and a bicycle)

5. Why don’t people move to opportunity? Because we use force to stop them… …your tax dollars at work

6. The simple (partial equilibrium) economics of border based restrictions Quota on number of people allowed W WageWTP Price equivalent of the quota restriction on mobility of labor: gap between “willingness to pay” of hirers and “willingness to accept” of workers S WageWTA D L

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

8. Simple Arithmetic of Gains

9. 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

10. 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

11. 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

12. 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

13. Of 100 Haitians who aren’t poor

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

15. 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

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

17. Everyone agrees the overall impact is very near zero, the only disagreement is about the least educated (less than high school)

18. 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 Labor content embedded in shoe adds to labor content of USA consumption Capital and technology in turbine adds to capital in Vietnam’s consumptions USA has lots of high skill labor, lots of capital and so produces turbines and sells them to Vietnam

19. 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

20. 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.

21. 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

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

23. Is the face of stagnating wages… Is the future of nursing Rosalie or robots? This face? Or this Face?

24. 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