Tag Archives: double world GDP

Wage discrimination’s elephant in the room

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Besides illuminating the horror of both candidates’ immigration policies, the 2nd US presidential debate this year was noteworthy for other reasons, such as Mitt Romney’s by-now infamous “binders full of women” remark. Romney was responding to a question about what he would do to erase the wage gap between men and women. The questioner specifically asserted that women make “only 72 percent of what their male counterparts earn.”

The Atlantic has an interesting interview with labour economist Francine Blau on this; it seems clear from the data that some statistically-inexplicable wage gap exists between male and female workers, although the difference is closer to 9% than the 28% suggested at the debate. What didn’t come up in the debate, and what Blau failed to highlight, is that these wage gaps, appalling as they are, are the tip of the iceberg. I refer, of course, to the horrifying place premium. Continue reading Wage discrimination’s elephant in the room →

Gains from migration: GDP versus surplus

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A couple of days back, I wrote a blog post titled the story behind the “double world GDP” estimates. Yesterday, I chanced upon a blog post by Michael Clemens titled Do the Gains from International Migration “Go to the Immigrants”? (do read that — it makes a lot of points which I make in a slightly different way in this post). And reading that, I now think that some of what I said in my original blog post was, although not quite wrong, misleading.

GDP is roughly calculated by adding up the (price times quantity) of all final goods and services produced within a country’s domestic territory in a calendar year. World GDP is the sum of the GDPs of all nations. In the previous blog post, I tried to get into the story behind the double world GDP estimates. My overall statement was that the gain is seen largely through a direct effect in an increased value of production of the migrants themselves. This increase is not due to an increase in the skills of the migrants (though that might also eventually occur) but rather, is due to the place premium, whereby the exact same worker with the exact same skills produces more values, and gets paid more, in some places than others. That “more value” could be due to higher total factor productivity. Or it could simply be because the job the migrant does is more valued. For instance, a nanny in the United States may earn more than a nanny in India, because parents in the United States have more to gain by leaving their babies in a nanny’s hands and going to work instead.

On the other hand, a utilitarian or welfare-based analysis looks, not at price times quantity, but at the social surplus: difference between the reservation prices of buyer and seller, multiplied by (or rather, integrated over) the quantity. Graphically, it’s the area of a certain “triangle” between the demand and supply curves. Part of the social surplus is captured by the buyer, and part of it by the seller.

For any individual economic transaction, the social surplus can tell a very different story from the “GDP contribution” of that transaction (examples below). At a macro level, I think GDP offers a reasonable approximation to “utility” concepts, but it’s mathematically different.

Why is this relevant? As I said in my previous post, most of the GDP gain from migration is due to the increased value of production of the migrants — though there are also secondary occupational mix effects (see this paper by Dixon and Rimmer, for instance, or more general discussion at the suppression of wages of natives) where natives are relieved of some aspects of their jobs by immigrants and can switch to other jobs that create more value. However, even ignoring the occupational mix issue for the moment, the claim that the GDP gain is mostly registered to the migrant is quite different from the claim that the social surplus is largely captured by the migrant. Certainly, the claims are related, but they aren’t the same. I will make four points to clarify this.

  • Consumer surplus: When Apple introduces a new iPhone, the gains in world GDP are registered to Apple and their suppliers, manufacturers, retailers, and employees. There may also be some compensating losses as other phone manufacturers lose out on buyers. However, the welfare gains are experienced not just by phone producers, but by phone consumers — aka all iPhone users. They’re the ones, after all, who are buying the phones, which means that they value the phone at least as much as Apple prices them. It’s the same story with migrant labor — the welfare gains go to the migrants, their employers, and all the customers of their employers who benefit from the employer’s ability to hire better or cheaper labor in the form of better quality or lower prices.
  • Shifting of non-economic activities into the economic realm: This is a somewhat complicated point. The key idea is that part of the gain to world GDP will happen because non-economic activities return to the market. For instance, suppose I value my time spent cleaning up my apartment at $18. I value a clean apartment at $20, but the cheapest cleaning service costs $25. So, I choose to clean my apartment myself, getting a private surplus of $2, but there is no economic transaction. Now, suppose an immigrant arrives, who would be willing to clean my apartment for $11 or more. We negotiate and agree to a price of $14. The immigrant gets a surplus of $3, and my surplus is $6. My surplus has gone up by $4 (from an original of $2). But the GDP shows a gain of $14 corresponding to the shifting of the activity into the market realm.

    A slight variant of this example — one where I value my own time spent cleaning the apartment more than $20 — would result in a situation where an apartment I would leave dirty getting cleaned up, so my social surplus went from zero (leaving the apartment dirty) to $6. In this variant, non-activity is replaced by activity. But in the original example, non-economic activity is being replaced by economic activity.

    In both versions, though, we see that the GDP gain is much larger than the social surplus created. Does this mean that “double world GDP” estimates are gross overstatements? Not quite. Social surplus as a concept here makes sense for a single transaction with a fixed backdrop, and it’s not easy to generalize macroeconomically. Further, the “double world GDP” estimates are proportional estimates, and so even if you say that GDP vastly overstates social surplus, the overstatement is prima facie likely to be proportional. To actually provide an argument against, you’d need to show that the kind of gains to world GDP that would accrue from migration are not the kind that tend to increase social surplus that much in proportional terms.

  • Occupational mix: Combining the occupational mix idea and the “cleaning my apartment” hypothetical: whether there are further increases in GDP depends on what I do with the time I’ve freed up by having somebody else clean the apartment. Do I use it for activity that would show up as economic production? Do I use it to consume more goods and services that would show up in somebody else’s production statistics? Or do I use it to just relax without producing or buying anything? In the first two cases, there will be a secondary effect of GDP gain from whatever activity I undertake instead of cleaning my apartment. In the third case, there is no secondary effect on GDP.
  • Intra-family transfers: If the income of the parents in a family goes up, does that mean that the gains go “only to the parents” and not to the children in the family? Probably not. The increased parental income probably means gains for the children as well in material and other terms. The key here is intra-family transfers. Certainly, many parents are not completely altruistic regarding their children (though some are more than altruistic), so the extent of intra-family transfers can be debated, but the phenomenon does exist. The same argument can be made regarding cases where only one parent is earning an outside income — in this case, increases in this parent’s income are likely to improve the standard of living of everybody in the family, and the way in which the gains are distributed remains an empirical question. The analogous phenomenon in the context of migration is in terms of remittances. Note, however, that as far as the GDP gain is concerned, the gain is registered only to the person who actually works and/or migrates, not to the other family members who share in the benefits.

So the overall welfare analysis, as we’ve just seen, is a lot more complicated than the GDP contribution analysis. Again, even in a welfare analysis, I think it would still be true that “most of the gains go to the migrants” — though less sharply so than for a GDP contribution analysis. The benefits to migrants are at the heart of the utilitarian case for open borders. However, even after you take out “most” of a doubling of world GDP, there’s still a lot left in terms of benefits to immigrant-receiving countries, benefits to immigrant-sending countries, and global benefits.

The story behind the “double world GDP” estimates

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[UPDATE: I have added a new blog post titled gains from migration: GDP versus surplus that covers an issue that I didn’t adequately address in this blog post: that even though the contribution to GDP is largely made directly through the migrant, the “benefits” of this, in terms of the social surplus, are captured more broadly.]

Critics of immigration generally spend very little effort critiquing the strongest quantitative argument in favor of open borders: that they would result in a one-time increase in world GDP by 50-150%, or, in short, slogan form, double world GDP (the canonical literature review is this paper by Michael Clemens and the slogan “double world GDP” seems to have first been used in this blog post by Bryan Caplan). Many of these critics are citizenists, and frankly couldn’t care less about world GDP. But others have scoffed at these estimates without providing a clear-cut argument against them.

To my knowledge, the best critique of these estimates is expressed in a series of blog comments by Ghost of Christmas Past, a commenter on EconLog. The most complete versions of the critique are in this comment by Ghost of Christmas Past on Caplan’s “National Egoism” post and this comment by Ghost of Christmas Past on Caplan’s persuasion bleg post. I would like to provide a detailed point-by-point response to Ghost of Christmas Past’s critique. Prior to that, however, I need to establish more clearly just where the “double world GDP” estimates come from and what I think are the weaknesses of these estimates.

The first question: how are these world GDP estimates calculated?

One of the things that Ghost of Christmas Past glosses over in his/her critique is that the “double world GDP” estimate is not simply the estimate made by Michael Clemens. Rather, Clemens does a literature review and considers the many different estimates, showing that they are in a range of 50-150%. The back-of-the-envelope estimate by Clemens is more of a sanity check of the following sort: okay, assume that gains are half of what we observe today, how much can that give us? Then, Clemens goes over the various aspects that go into computing these estimates and the degree of uncertainty behind each of these factors. For those who don’t have the time to read Clemens’ paper, a quick list of the factors that would need to be considered, solely from the migration of labor, are: the effect on migrants, the effect on competing labor, employers, and consumers in the target country, and the effect on competing labor, employers, and consumers in the source country. Of course, when people move, it’s a migration of both labor and consumers, as well as, possibly, a migration of capital. This would further complicate the analysis.

The overall story behind the double world GDP estimate is that the first-order effect on migrants — aka the benefit to migrants — is huge, thanks to the place premium. In other words, migrants gain a lot by migrating. What they do with these gains (for instance, whether they send part of the money to their home countries as remittances, or save and invest in businesses in the country they migrated to) is not directly relevant to the GDP gain estimate.

What about the gains and losses by others, including competing labor, employers, and consumers, in the source and target countries? These gains and losses could both be important, but they are quantitatively likely to be substantially smaller than the gains to migrants. There could be considerable debate about the sign of these effects. For instance, the debate surrounding the suppression of wages of natives is about the extent to which competition in the labor market from immigrants drives down native wages. Pessimists believe that the driving-down effect from three decades of immigration to the United States has been about 4.8% for high school dropouts in the United States, and closer to zero for other categories of workers. Optimists see the effects as zero or slightly positive at current levels of immigration to the United States (more US-specific stuff at the link). Both optimists and pessimists believe that substantially more open borders would probably lead to a bigger decline in native wages, though less so in the long term than the short term. The overall magnitude and sign of the effects is up for empirical debate. Note: Even with a modest wage decline, natives may still be better off if price declines and the expansion in the range of consumption options makes up for this decline. They may also be better off as employers and land-owners. It’s only a small fraction of natives who are unambiguously likely to be worse off — those who depend primarily on wages (i.e., don’t own land), work in unskilled jobs that directly compete with unskilled immigrant labor, and don’t value the expanded range of consumption possible through immigration.

So how does this fit in with the “double world GDP” estimate arguments? The crux is that these gains and losses figure as rounding errors compared to the huge gains experienced by migrants. Continue reading The story behind the “double world GDP” estimates →

Double world GDP versus scope insensitivity

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One of the things that puzzles me about immigration restrictionists is how minor the harms they think they need to establish from immigration to overcome the moral presumption in favor of immigration. Even for those who don’t have sympathy for the libertarian and egalitarian arguments for open borders, there remains an extremely strong utilitarian case for open borders, which includes the doubling of world GDP and the end of poverty.

One explanation for restrictionists’ reluctance to concede the strong utilitarian case is that there are various philosophical bases for anti-immigration arguments such as citizenism, territorialism, local inequality aversion, and nation as family, which fundamentally reject universalist morality and favor the interests of specific individuals.

In a blog post comment on EconLog, Evan offers a somewhat different explanation:

I don’t know what Bryan will argue, but I think you could make a good case by using “shut up and multiply” type arguments. I.E., immigration restrictions are such a horrible violation of ethics and liberty that they’re worth putting up with other violations in order to stop them.

I personally know that if I had a choice between the USA as it currently is, or a USA with no welfare state, but closed borders between states or counties, I’d pick the status quo. In fact, if I was forced to choose between doubling the size of the welfare state, or closed borders between states and counties, I’d probably pick the former. That indicates to me that closed borders are a monstrous injustice, and the only reason people don’t realize it is scope insensitivity, or by being lucky enough to not have personally been harmed by them.

Here’s a quick summary of scope insensitivity from this page:

Once upon a time, three groups of subjects were asked how much they would pay to save 2000 / 20000 / 200000 migrating birds from drowning in uncovered oil ponds. The groups respectively answered $80, $78, and $88 [1]. This is scope insensitivity or scope neglect: the number of birds saved – the scope of the altruistic action – had little effect on willingness to pay.

Is Evan on to something? I don’t know. I suspect that scope insensitivity is a real phenomenon in immigration debates, but restrictionists are often quick to point out numbers when it comes to talking about natives hurt by immigration. So, my best guess is that restrictionists employ selective scope insensitivity. Another possibility is that they are using the logic in Roy Beck’s gumball video to dismiss the gains from open borders.