Thursday, September 8, 2011

The Economics of Migration

Removal of cross-country barriers to labour mobility has often been described as the largest single policy intervention to address global poverty and the last remaining prominent distortion in the global economy.

Micheal Clemens, one of the leading researchers on labor migration and who has described it as the "world's greatest arbitrage opportunity", has an excellent summary of the literature on migration in the current issue of JEP. His conclusion about the benefits of labor migration is unambiguous,
"The available evidence suggests that the gains to lowering barriers to emigration appear much larger than gains from further reductions in barriers to goods trade or capital flows — and may be much larger than those available through any other shift in a single class of global economic policy... For the elimination of trade policy barriers and capital flow barriers, the estimated gains amount to less than a few percent of world GDP. For labor mobility barriers, the estimated gains are often in the range of 50–150 percent of world GDP. In fact, existing estimates suggest that even small reductions in the barriers to labor mobility bring enormous gains."
He finds "trillion dollar bills on the sidewalk" from liberalizing restrictions on emigration. The paper has a nice summary of the estimated benefits from emigration.

He argues that research on migration has hitherto focussed on remittances and "brain drain", and paid limited attention to the considerable direct and indirect human capital externalities that arise when people migrate from poorer countries to richer in search of livelihood opportunities. More fundamentally, migration research has focussed on the effects of immigration but little on emigration. He therefore sets out the agenda for work on this field,
"It should be a priority of economic research to seek a better characterization of the gains to global labor mobility and to investigate policy instruments to realize a portion of those gains. The four questions in this paper suggest one structure for that agenda. We clearly need a better theoretical and empirical understanding of human capital externalities; the dynamics of labor demand under large-scale migration flows; the magnitude and mechanisms of the effect of workers’ location on their productivity, relative to the effect of workers’ inherent traits on their productivity; and the policy instruments that might make greater labor mobility possible."
As Prof Clemens writes, the reason why "migration packs such an economic punch" is that a worker's productivity depends much more on location than any other factor, including skill. An earlier study (see also here), profiled the wage gaps of Peruvian workers with different profiles working in Peru and as immigrants in the US, and found massive differentials. The same would apply to workers from any other developing country migrating to developed economies and doing the same occupation. Differences in work environments, regulatory environments, legal systems, technology spill-overs, proximity to other high-productivity workers, etc explain this difference. The graphic below captures the differential for Peruvian domestic workers and immigrants.

The biggest challenge in achieving success with reduction of barriers to emigration will be political. In particular, it immediately raises the regular bogeys - loss of jobs for the destination country labour, downward pressure on wages there, impact on national security, and so on. Surmounting these very formidable and entrenched fears will be a big challenge before the issue of barriers to emigration can be addressed to some level of satisfaction.

The current weakness in developed economies is a dampener to immigration. The political opposition to immigration can be blunted only when the economy is flourishing and when the domestic workers in these developed economies are themselves not constrained by unemployment. At a time when protectionism is slowly creeping into international trade, policies that favor relaxation of restrictions on labour mobility may generate intense opposition in these economies.

However, the silver-lining could be the demographic trends in many developed economies. As the demographic profiles of these economies shift upwards, they will experience labour shortages across many areas. Once this starts affecting their economies, like what is already happening in Japan and parts of Western Europe, policies that favor immigration will find greater acceptance. This shortage is more likely to manifest itself in less knowledge-based and lower skilled professions, especially in services, which the older-aged workers will not be able to perform. Fortunately, these are also precisely the same labour categories where the marginal gains from immigration are the largest.

There are possibly two other reasons why this differential will be predominant among lower skilled than high-skilled knowledge workers. In case of the later, as part of globalization and demand in advanced economies, restrictions on labour mobility have been eased considerably over the past two decades. This has also had the effect of lowering arbitrage opportunities in their wages. Further, many of these activities are not location based and could be easily off-shored. In contrast, many semi- and lower-skilled professions in the services sector cannot be off-shored, and their persistent high wage differentials coupled with the impending labour shortage (in developed economies) will offer attractive opportunities for migrants.

Update 1 (9.11.2014)

Tyler Cowen makes the case of liberalization of immigration controls for developed economies facing adverse demographic headwinds.

Eric Posner and Glen Weyl makes the case that the Arab countries, despite their extremely high inequality (between locals and migrants), and through their liberal immigration policies, have been the biggest contributors to the reduction of global inequality. The graphic below shows that the developed economies, despite their low internal inequality, contribute little to reduction of global inequality, whereas Arab contribute, especially those like Qatar, contribute massively to the reduction of global inequality.

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