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My marching orders

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C.S. Lewis, in Mere Christianity, wrote:

People say, “The Church ought to give us a lead.” That is true if they mean it in the right way, but false if they mean it in the wrong way. By the Church they ought to mean the whole body of practicing Christians. And when they say that the Church should give us a lead, they ought to mean that some Christians- those who happen to have the right talents- should be economists and statesmen, and that all economists and statesmen should be Christians, and that their whole efforts in politics and economics should be directed to putting “Do as you would be done by” into action.

That’s what I’m trying to do here.

World poverty

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If there is a single worthiest cause, a goal most deserving of our best efforts, that goal may be the alleviation of world poverty. That is not the only reason I favor open borders, but it is the biggest. It was to try to do something about world poverty that I enrolled in the MPA/ID program at the Kennedy School of Government ten years ago. I had lived in Prague, far from the poorest place in the world but certainly poorer than the US, and traveled through Bulgaria, Serbia, and Turkey. I felt the guilt of privilege. I had a very high opinion of my own intelligence then, and when I was admitted to the MPA/ID program, I was confident I could be useful, somehow, though I had no idea how. Afterwards, I went to the World Bank, and spent a couple of months, in the spring of 2004, on a project in Malawi.

It may be that by the time I’m an old man, such poverty as I saw in Malawi will have vanished from the world for good. Malawi has improved since I was there (nothing to do with my work), though it’s still one of the poorest countries in the world. At that time, it was chronically on the brink of hunger. There had been, not quite a famine, but a food shortage in 2002. I was there in the spring, and my colleagues would look at the maize fields and say it wasn’t enough, they foresaw hunger coming. A Peace Corps volunteer I met, who had been there during the hunger in 2002, said she had seen someone dead in the road, dead simply of hunger. I was told that people from the cities visiting their relatives in the villages in those days would bring food, but with a layer of clothes on top. If stopped, they would claim they were delivering clothes. Food would be stolen. That’s hearsay, but I saw plenty with my own eyes. There were beggars everywhere. That seems to be a cultural difference, in part, for even well-off Malawians would ask you for stuff. One group of young people we met and spent an evening with had jobs in government ministries, yet afterwards they sent us an e-mail explaining their problems and asking for a few hundred dollars. But most of the beggars really were desperate.

There was a general lack of professionalism. I was working with people from the Malawian statistical agency. We would work 9am to 4pm, at a leisurely pace, which I was always pushing, and then they’d go home and I’d go back to the World Bank offices and keep working. The culture is relaxed. Indeed, the people were as friendly and pleasant as the weather. Americans, by contrast, seem much busier and more stressed. This is only an impression, and I don’t want to give offense, but it seemed to me that Malawians exhibit a good deal less forethought than Americans, or Europeans, or Russians do. It’s not an American thing, nor even a Western thing: in China, I had a very different impression, and I suspect that the Chinese practice forethought as much as Americans do. And doubtless there are exceptions among Malawians; but that did seem to be the pattern. If a Malawian had a full belly– again, take it with a grain of salt, but it was my impression– he was happy. That’s good in a way, but it doesn’t contribute to the long-term planning that grows the economy. Continue reading World poverty →

How Does Immigration Impact Wages?

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This post was originally published on the Cato-at-Liberty blog here and is republished with the permission of the author.

Many Americans are curious about the impact of immigration on the wages of other Americans.  The best research on this focuses on the period between 1990 and 2006, when almost 17 million people immigrated to the U.S. lawfully and a net 12 million came unlawfully.  The first major study is by Borjas and Katz (B&K) and the second is by Ottaviano and Peri (O&P).  O&P borrowed much of B&K’s methodology.  Here are the long run findings:

B&K draw a more negative conclusion than O&P.  The main differences are that O&P assume capital adjusts quicker to increased labor abundance and immigrants are more complementary.  B&K’s paper reflects their assumptions about native-immigrant substitutability.  Since immigrants are more likely to have less than a high school degree and more likely to have a graduate or professional degree than natives, B&K’s model assumes natives in those categories are competing with immigrants for jobs and therefore experience wage declines. 

Both O&P and B&K found that increased immigration has a larger affect on immigrants than natives.  Depending on their level of education, longer settled immigrants experience greater wage declines and smaller wage gains from more recent immigration compared to natives:

Both sets of authors rightly assume that more recent waves of immigrants are most similar to immigrants from older waves, making the two arrival cohorts of immigrants substitutes in the workplace.  Recent papers by Ethan Lewis and Giovanni Peri and Sparber make convincing argument that language ability of recent immigrants makes them more similar and, thus, substitutable with previous waves of immigrants.  Language ability also makes immigrants complements to natives, partly explaining why O&P and B&K found wage increases for so many American workers as a result of immigration.

Here is a comparison of the long run wages effects on immigrants and natives from the O&P and B&K study:

These charts merely explain the results of previous waves of immigration on the American labor market.  If immigration increases in the future these numbers will likely be different but the past is always a useful guide for anticipating the effects of future policy changes.

Bibliography:

Borjas, George, “The Labor Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market.”

Borjas, George and Lawrence Katz, “The Evolution of the Mexican-Born Workforce in the United States.”

Ottaviano, Gianmarco and Giovanni Peri, “Immigration and National Wages: Clarifying the Theory and the Empirics.”

Peri, Giovanni and Chard Sparber, “Task Specialization, Immigration, and Wages.”

Lewis, Ethan, “Immigrant-Native Substitutability: The Role of Language Ability.”  

America Does Not Have A ‘Genius Glut’

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This post was originally published on the Cato-at-Liberty blog here and is republished with the permission of the author.

On Friday, Ross Eisenbrey of the Economic Policy Institute wrote an op-ed in the New York Times titled “America’s Genius Glut,” in which he argued that highly-skilled immigrants make highly skilled Americans poorer. 

A common way for highly-skilled immigrants to enter the United States is on the H-1B temporary worker visa. 58 percent of workers who received their H-1B in 2011 had either a masters, professional, or doctorate degree. The unemployment rate for all workers in America with a college degree or greater in January 2013 is 3.7 percent, lower than the 4 percent average unemployment rate for that educational cohort in 2012. That unemployment rate is also the lowest of all the educational cohorts recorded. 

Just over half of all H-1B workers are employed in the computer industry. There is a 3.9 percent unemployment rate for computer and mathematical occupations in January 2013, and an unemployment rate of 3.8 percent for all professional and related occupations. For selected computer-related occupations from the Bureau of Labor Statistics’ “Quarterly Census of Employment and Wages,” real wage growth from 2001 to 2011 has been fairly steady:   

 

 11 percent of H-1B visas go to engineers and architects but wage growth in those occupations has been fairly steady too:

 

Mr. Eisenbrey concludes that those rising incomes would rise faster if there were fewer highly-skilled immigrants. 

The unemployment rates for engineers and computer professionals are low but not as low as they used to be. There are a whole host of factors explaining that, but highly-skilled immigration is not likely to be one.  

Mr. Eisenbrey also claims that American firms hire H-1B visa workers because they are paid lower wages. Complying with certain regulations prior to hiring an H-1B can cost a firm $10,000, filing and other fees can cost additional thousands of dollars, and legal fees can be steep. The cost of hiring H-1Bs is high.

Contradicting Mr. Eisenbrey’s story about H-1Bs lowering American wages, IT workers on H-1Bs actually earn more than similarly skilled Americans. According to survey data, H-1B workers are more willing to work long hours and relocate to a job, making them more productive and raising their wages. Additionally, H-1B engineers are paid $5,000 more a year than American born engineers. If the goal of employers was to hire cheaper workers through the H-1B visa, they’re going about it in an odd way. The high regulatory costs and wages of employing H-1B workers incentivizes firms to hire foreign workers when they are expanding and can’t find American workers fast enough.  

Mr. Eisenbrey’s doesn’t touch on other characteristics of highly-skilled immigrants such as their high rates of entrepreneurship, inventiveness, or skill complementarity. If the New York Times chooses not to run one of my letters to the editor about those topics, I will be writing about them in the upcoming weeks.

John Kennan’s “Open Borders”

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This post is going to attempt to do something difficult, namely: bring a contribution to technical economic theory within reach of lay readers. The typical lay reader, or for that matter even an atypically intelligent reader who is not a specialist in economics, could understand little of Kennan’s paper, or for that matter most academic economics papers. I don’t totally understand the paper either, but I think I mostly understand it. I’m pretty sure I understand the main thrust. The work in question is “Open Borders” by John Kennan. If one had to pick one thing to stick in a newspaper headline, it would be Kennan’s prediction that

For the 40 countries in Figure 6 this gives an estimate of $10,798, per worker (including nonmigrants), per year (in 2012 dollars, adjusted for purchasing power parity). This is a very large number: the average income per worker in these countries is $8,633, so the gain in (net) income is 125%. For all of the countries in the Penn World Table that are not at the productivity frontier (as defined above), using GDP data to estimate relative wages, the estimated gain is $10,135, relative to an average income of $9,079, so the gain is 112%. These are of course just rough estimates, relying on a number of strong simplifying assumptions. But unless these assumptions are extremely far off the mark, the results indicate that the gains from open borders would be enormous.

In other words, open borders could double the income of the world’s most disadvantaged people. Far from causing a “brain drain” effect, harming poor countries by poaching productive people, even nonmigrants would benefit from open borders. Furthermore:

These gains are associated with a relatively small reduction in the real wage in developed countries, and even this effect disappears as the capital-labor ratio adjusts over time; indeed if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, there is no implied reduction in real wages.

How does Kennan arrive at this conclusion? Via a theoretical model, calibrated to fit certain real world data. The approach is oversimplified and crude, yet at the same time, in some ways, painstakingly subtle… but that’s economic theory for you. The logic must be impeccable, but economists’ tolerance for departures from realism can be opaque at first, then, once understood, rather shocking. But one has to do it. A question like “what would happen if the world opened its borders?” involves such a large departure from current reality that common sense and experience fail us. Theory can, so to speak, see in the dark. It allows us to keep thinking clearly, at least, about very remote situations. But down to business.

After a short intro, Kennan’s first really substantive paragraph is:

Before proceeding to analyze a world economy with open borders, the first question that must be answered is whether restrictions on factor mobility have any real effects. If product prices are the same across countries (because there is free trade and transportation is not costly, for example), and if there are two goods that are produced in two different countries, and if the production technologies (for these two goods) are the same across the two countries, then the factor price equalization theorem applies. That is, real wages and other factor prices are equalized across countries even though factors are immobile, because differences in factor prices are implicitly arbitraged through the product market. The theoretical argument is beautiful, but of course the facts are otherwise. For example, wages in the U.S. are about 2.5 times the Mexican wage, for comparable workers.

This will require some unpacking, especially “factor price equalization” and “differences in factor prices are implicitly arbitraged through the product market.” An important result in international economics is that in the “long run,” given certain fairly standard (albeit apparently unrealistic) assumptions, immigration will not reduce wages in the host country, because the mix of industries in the host country will shift to accommodate the new supply of workers to such an extent that wages will be exactly the same. (See the closely related Rybczynski theorem.) Thus, to use the example from the Feenstra and Taylor textbook that I teach this stuff out of, suppose there are two industries, computers and shoes. Computers are a capital-intensive industry, shoes a labor-intensive industry. If a lot of immigrants enter a country called, say, Home, then Home will start producing more shoes and fewer computers.

Fewer computers? Yes, fewer. Even though there are more workers? Not just proportionally fewer? No, fewer in absolute terms. Think of it this way. There’s the same amount of capital in Home as there was before. But there are now more workers. It’s not surprising that the shoe industry will take the lead in absorbing these workers, since its technology is the more labor-intensive of the two. But as it does so, it will lower the marginal product of labor and raise the marginal product of capital in the shoe industry. Or to try to express it without the jargon, the shoe industry will have trouble finding useful things for so many new workers to do without new machines, structures, and other capital goods for them to work with. Even if the shoe industry can’t increase its capital at all, it could find something for all the new workers to do. It will be able to make more shoes. But not that many more shoes. The greater supply of workers increases the shoe industry’s demand for capital. In fact, it implies that the shoe industry wants capital more, at the margin, than the computer industry does. As capital moves from the computer industry to the shoe industry, workers move too, since the scarcity of machines makes them less productive in computers. Importantly, the relative price of computers and shoes stays the same. This is because prices are pinned down by international trade: any deviation in the relative price would cause arbitrage. Wages don’t fall– again, this is in the long run– because relative prices don’t fall, and wages depend on relative prices. The growth of the shoe industry and the shrinkage of the computer industry raise the economy’s demand for labor relative to capital, exactly canceling out the tendency for a greater supply of labor to reduce its wage. This implies not only that wages shouldn’t be reduced by immigration, but also that wages should be the same in every country. Continue reading John Kennan’s “Open Borders” →