Tuesday, January 31, 2017

The nuanced case for labor migration

It has taken Donald Trump and Brexit to make the intellectuals realise that unfettered trade is not desirable. In the aftermath of the global financial crisis, the IMF cautioned against unqualified capital account liberalisation. As I blogged earlier, the same realisation is also dawning on the adverse consequences of automation. Another area that is equally contentious is the impact of migration from developing countries on labor markets in developed economies.

There is a constant in all the four issues - Dani Rodrik. Even as intellectuals and the mainstream academia dug their heels in and refused to acknowledge mounting evidence on the first three, Rodrik was at the leading edge in urging caution. He has now become the mainstream in the first three areas. The fourth one is playing itself out, with the mainstream view downplaying the potentially adverse effects of migration. But there is little to feel that this is going to be any different.

His position on labor migration is articulated nicely in a new paper. The short answer is that significant migration will be bad for low-skill workers in developed economies, but less harmful than further trade liberalisation.

Rodrik puts the magnitude of the barrier to labor migration in perspective, drawing from the work of Clemens et al which documented "place premiums" of gains for migrants from different countries in moving to the US,
Assuming transport costs and cultural disamenities aside, a wage multiple of six for Pakistani workers implies that the ad-valorem equivalent of labor visa restrictions is around 500 percent. In other words, it is as if Pakistani workers were free to move but had to pay a 500 percent tax on their earnings once in the U.S. Contrast this to average U.S. tariffs on manufactured goods, which is about 3 percent, or the prevailing import barriers on sugar, which is the archetypal highly-protected industry with domestic prices exceeding world prices by 80 percent on average – and the asymmetry between freedom to trade in goods and the restrictiveness of trade in labor services becomes strikingly clear. 
Rodrik's case for easing labor restrictions is made in comparison to trade liberalisation. While acknowledging the adverse effect on low skilled labor, he makes the point that the impact in terms of redistribution of income from labor to capital (in developed countries) is likely to be far lower with easing migration restrictions than with trade liberalisation.
While there would likely be adverse effects on low-skill workers in the advanced economies, international labor mobility has some advantages compared to further liberalizing international trade in goods.
He uses a political cost (redistribution of income away from labor) benefit (efficiency gains) ratio is argue that given the very high barrier (a migration tax equivalent many times higher that import tariffs) to migration, the income redistribution needed to achieve a unit of efficiency gain is much smaller. At an intuitive level, while an imported good helps the importer capture all the gains in bulk, in case of a migrant labor, the production cost structure of the developed economy still applies when he produces something as a migrant. Thus the case for easing migration over trade liberalisation. 

Stripped off all empirics and stuff, this is insightful and applies to many other areas of debate on social policies,
Institutions are maintained either through solidarity (I care for you, so I am willing to share with you); social trust (I trust you, and know that you would do for me what I am doing for you), or enforcement (government coercion, requiring in turn legitimacy). All of these things are likely to be undermined by greater heterogeneity and inequality within countries – especially if the numbers involved are large.
So his proposal,
I have proposed elsewhere a temporary work visa scheme, administered bilaterally on the basis of specific home-country quotas. To maximize home country benefits and spread the gains around, the visas would be for a fixed period, say 3-5 years. They would not entail a path to citizenship, although guest workers would have the full protection of host country labor standard and regulations. A mix of sticks and carrots might be employed to ensure the bulk of workers do choose to return to their home countries when their visas run out. For example, a portion of guest workers’ pay may be docked in forced saving accounts, to be returned only upon repatriation. The quotas of home countries could be adjusted in relation to their success in attracting their workers back home. This would give home countries an incentive to provide repatriation inducements, just as they do with foreign capital or skilled expatriates.
I am inclined to agree. 

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