Tag Archives: place premium

What will the rapid economic growth under open borders look like?

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Open borders will lead to rapid economic growth in some countries, particularly the countries that receive migrants. This will be true even if the per capita income of natives doesn’t rise much (or even if it falls). The total size of the economy will grow. The situation with countries sending migrants is more complicated: the decline in population means that the size of the economy could shrink, even if per capita income rises. On the other hand, very high remittances or reverse migration and joint multinational businesses could offset the huge population loss. This blog post explores the sorts of things that could happen under open borders.

A few historical and current examples worth considering:

  • The United States in the second half of the 19th century: The example fits well in the following ways: immigrants were quite poor, the economy as a whole was backward but improving fast, and the immigrants were from many different cultures and spoke many different languages. The example fits badly in the following ways: the US was at the technological frontier, the place premium wasn’t huge (both sending and receiving countries were poor), and the whole event occurred in a time when many other aspects of global culture and technology were different. In particular, due to greater costs of transport and communication, and many other reasons, the total foreign-born proportion of the population was not too high: it peaked at 15% in 1910, compared to about 13% now under fairly closed borders in the US (more here).
  • China from after the death of Mao Zedong in 1976 (we expect to write more about China later; for now, check out our blog posts tagged China): The very rapid “catch-up” economic growth in China is comparable to the sort of growth we’d expect to see in migrant-receiving countries under open borders. The scale of rural-urban migration over the preceding and coming decades is in the hundreds of millions, comparable to the levels we’d expect with a decade or more of open borders. The proliferation of cities in China in recent years provides a model for what might happen under open borders. On the flip side, migration in China is happening across a far more homogenous linguistic and cultural milieu than what we’d expect under open borders. Moreover, China has a single government that can (and to some extent does) coercively restrict and coordinate migration in ways that wouldn’t work for global open borders unless there is world government or some supranational body that exerts heavy control over the coordination of international migration. China is also unrepresentative of global open borders because the place premium isn’t that huge.
  • India since its economic liberalization beginning in the late 1980s and with the main big step around 1991 (more on India here; see also all blog posts tagged India): India offers an example that’s both better and worse than China in terms of predicting what will happen under open borders. On the “better” side, there’s the fact that India is linguistically more diverse, so that many of the global challenges faced by migrants are experienced on a smaller scale in India. Although India is also religiously diverse, the religious diversity isn’t too strongly linked to location (the major religions are dispersed over many locations). India also offers a better model of a situation where the government does not plan either to stop migration or to prepare to accommodate it, unlike China, where both national and local governments have taken a more proactive approach to regulating flows. As of 2001, India measured 191 million internal long-distance migrants, about 20% of the population then. This number is comparable with the sort of migration magnitude we’d see under open borders, though it’s somewhat less than the amount of rural-urban migration in China. As with China, the place premium isn’t big enough to test some of the concerns associated with open borders. On the “worse” side, India is an even poorer country than China, so the parts of India that receive immigrants serve as bad models of how the destination countries under open borders would look.
  • The European Union today (see this related post by Hansjoerg and all our posts tagged the EU): This example is better suited in the respect that the target countries of migration are wealthy First World countries, which we expect will see a lot of immigration under open borders. But none of the source countries is too poor: the poorest countries in the EU are Romania and Bulgaria, which are middle-income countries (things will become more interesting once Albania joins). Quantitatively, migration between EU states on the whole is much lower than intranational migration in India and China, and much lower than what we’d predict under global open borders. About 3.2% of EU residents were born in another EU country, compared to 6.3% who were born outside the EU (see here and here).

The following table provides a comparative summary of the four cases considered above in terms of how good they are in their similarity to how we expect open borders to unfold (so “good” here means “good as a model for figuring out how things will be under open borders”, not “normatively good” or “desirable”):

Attribute 19th century US China India EU
Scale of migration Moderate Good Good Bad
Absolute poverty in source countries Good Good Good Bad
Absolute wealth in target countries Moderate Moderate Bad Good
Place premium Moderate Moderate Moderate Moderate
Cultural heterogeneity Moderate Bad Moderate Moderate

A few other examples that aren’t quite as good because the scale involved is too small, but are still interesting in some respects:

  • Open borders between Puerto Rico and the United States (see this blog post by Bryan Caplan): The place premium was moderate, the cultures were different (English versus Spanish). The scale of migration, over the long term, was huge relative to the sending country, but small relative to the receiving country. This example isn’t so helpful for our purpose because the US is too huge relative to the Puerto Rico for the migration to have had huge effect; however, some parts of the US (such as New York and Florida) have been influenced by Puerto Rican migration.
  • Israel has had open borders of sorts for Jews from around the world. A large number of East European and Russian Jews have migrated to Israel. Joel Newman crunched the numbers in this blog post. Although this is open borders of sorts, the small absolute size of the experiment makes it uninteresting in terms of figuring out how migration works at scale and can lead to rapid economic growth.
  • South Africa’s end of internal apartheid (discussed by Grieve Chelwa here) is also interesting, but again the scale of migration is insufficient to provide a clear sense of how things will proceed under open borders. The South Africa example is more interesting in that it involves a significant policy change in the open borders direction, but the focus of this blog post is more on the economic growth facilitated by mass migration than on the suddenness of the change.

The mix of labor and capital

Economic growth has been classified as intensive growth and extensive growth. Intensive growth involves changes in the mix of inputs and/or changes in the production technologies, i.e., the introduction of new ideas or new methods to produce more from the same inputs. Extensive growth involves an increase in inputs.

Now, to some extent, the change under open borders is extensive: a lot more labor is being added to the world economy. But in another respect, the change is intensive: the ratio of labor to capital shifts drastically worlwide, and even more so in countries that are migrant destinations. For more on this point, see Nathan Smith’s blog post on John Kennan’s paper on open borders. I quote a part of Kennan’s original paper that Nathan quoted; Nathan’s elaboration is worth reading at the link:

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.

I see two sorts of trajectories that could unfold:

  • The planned trajectory is one where borders are opened gradually and labor regulations are modified to better use the new labor mix. In this case, people have more time to accumulate more capital stock. I would expect that in this case, industry will play a big role in migrant-receiving countries: entrepreneurs and industrialists will set up large factories in anticipation of the huge migrant workforce they can have access to. They will undertake huge construction projects or expand agribusinesses.
  • The unplanned trajectory, where migration barriers are removed quickly with little coordination and planning, would probably see more of a shift to the services sector, which is less capital-intensive and where new people can join quickly.

Indeed, of the examples of China and India, the more planned and controlled case (China) has had more reliance on industry whereas the more chaotic case (India) has had more reliance on services (see more here). Note that in the longer run, I’d expect everything to move in the direction of services, when industry becomes so efficient that adding more people isn’t worthwhile at all (even at zero wages). But we’re far from there yet.

What about growth due to technological progress at the frontier? It’s possible that the progress of the frontier will not be affected much by open borders, but I personally expect that frontier progress will happen somewhat faster under open borders than under the counterfactual. This is the basis of the innovation case and the one world vision of open borders. I do expect that sending countries are likely to experience intensive growth and technological progress due to the circulation of people and ideas, though whether their economies as a whole grow or shrink would depend on how the magnitude of this effect compares with the decline in population. For arguments that open borders impede the progress of the technological frontier, see our page on killing the goose that lays the golden eggs.

The creation of new cities

There’s evidence to suggest that migrants who travel long distances tend to move to cities, for a variety of reasons. While living in one’s own village or small town may be preferable for many, living in a small town that one does not have connections with is hard. Cities are more conducive to strangers from faraway lands. They offer a wider range of job opportunities as well as amenities. The existence of a larger population allows for restaurants and supermarket products offering ethnic cuisine that wouldn’t be economically feasible in a smaller town.

It’s likely that there will be a lot of migration to the existing top cities of the world, but these cities have sky-high rents and are unaffordable to many poor migrants who don’t have enough skills to find jobs that could pay those rents. What I expect to see is many new cities crop up. Most likely, these cities will grow from existing small towns, potentially disrupting the lifestyles of residents of those towns. Natives are likely to have a mixed reaction: those who wanted city life but didn’t have the money for the big cities can benefit from the greater urbanization of their small town, and those who didn’t like city life may experience a decline in their quality of life (some of them may migrate to other places in their own country to get away from the overcrowding). Recall also Nathan Smith’s land value windfall argument: the price of new housing of a given quality can remain the same or even decline, even as the price of existing housing can keep rising due to an increase in the demand for living in established cities and towns.

It’s also possible that entire new cities can be created from scratch. One can imagine, for instance, a few companies setting up large factories in an area, and a huge amount of cheap housing for the people working in those factories. Another possibility is that new cities will emerge in wasteland that is at the periphery of existing cities, or from suburban or exurban regions of existing cities.

A useful historical model is China, which is undergoing the world’s most rapid and large-scale urbanization. For more, see Wikipedia, the McKinsey Global Institute report, and this presentation for a Stanford University course. In 1976, about 18% of China’s population was urban, and now about 52% is. It is estimated that by 2025, China will add over 350 million more people to its urban population, of which 240 million will be migrants. That 240 million is more than the number of people who indicate the US as their first-choice migration destination. The following are some key features of growth in China:

  • The rate of migration itself has been accelerating and may be plateauing now, though it will eventually start decreasing once rural areas have depopulated. While part of the mechanism here is diaspora dynamics, the more likely explanation is simply the increasing rate at which the economy is restructuring to increase demand for labor in urban areas and decrease it in rural areas.
  • The creation of new cities is concentrated in the middle phase (city creation was most intense around 1990-2005) rather than very early (when migration is still just beginning, existing cities have enough room for the initial migrants, and it’s not clear where more people will want to settle) or very late (when the patterns of migration are already set).
  • New cities are generally created close to existing cities.

Increase in international trade and foreign direct investment

Immigration and trade can be both complements and substitutes, but I expect that, unless tariffs are raised havily, more migration will facilitate more trade. Multinational small businesses run by family members around the world will become more common. Larger businesses will find it easier to set up shop in a greater range of countries. Diaspora will be eager to invest or get their associates in their new countries to invest in ventures in their source countries, so there will be more foreign direct investment. As people become better connected, there will be a reduction in the anti-foreign bias that motivates restrictions on trade and FDI. Another relevant point is that the move towards open borders is likely to be accompanied by a move towards free trade and FDI, because both proceed through the gradual expansion of free trade and free migration zones (such as the European Union).

A somewhat different vision

I’ll quote below Nathan’s detailed questionnaire answer (this is answer #4 in this very long blog post):

Some of the major problems of developed countries today would be solved by open borders. Government debt becomes less burdensome when population and total GDP rise, even if per capita GDP falls. As mentioned above, long-term demographic problems of shrinking and greying populations would be mitigated or eliminated by open borders (this does depend on the composition of immigrants, but given the relative youthfulness of the world population as a whole and the greater propensity of the young to move, the prediction that open borders would help can be made fairly confidently). Almost all homeowners and owners of real estate would enjoy a windfall benefit from rising population as demand and prices rise. This effect would not be offset by losses to renters, or to people unwilling to sell, from higher rents and property taxes. As cities expanded, renters could still live in comparably dense, interesting places, and homeowners who stayed put would get the windfall not in cash but in being through the midst of more economic activity (i.e., more shops, restaurants, entertainment, interesting streets, jobs and business opportunities, etc.– all the amenities of urban living for which people pay high urban rents).

Savers and owners of capital would tend to benefit as well, from an abundance of investment opportunities, but there would be downward pressure on wages. Crudely speaking, “unskilled” workers would see their wages fall, while some “skilled” workers would probably see their wages rise. But then, some of the basic skills Americans take for granted, like speaking native English, cultural fluency, and driving cars, would become “skills” for which premia could be earned. Immigrants would help poorer natives as customers, by creating a mass market for low-price goods, and giving companies a stronger incentive to pursue “frugal innovation.” There might be more business opportunities for entrepreneurially inclined natives even without a lot of education. Overall, it is extremely likely that natives as a whole would benefit, but without deliberate efforts to prevent it via fiscal policy, a substantial minority of natives would be likely to see their living standards fall due to open borders.

I would both advocate and anticipate that policy would do much to protect the least fortunate natives against a fall in living standards due to open borders. Moreover, this would be fiscally feasible, because open borders would greatly expand the tax base. Some natives might find jobs scarce and/or wages very low, yet receive transfer payments from the government which would enable them to live a “middle class,” house-and-car-in-the-suburbs, lifestyle. Others would see their wages fall but find themselves more than compensated by a rise in the price of their home and the value of their stockmarket portfolio– while also, perhaps, enjoying new transfers and/or tax cuts from a government flush with revenues from immigrant taxes. The hardest part of adjustment would be the moral impact of labor falling in value. One tenet of what I call “the macroeconomic social contract”– that anyone who is willing to work should be able to find a job that enables them to earn a decent living standard– would be further undermined.

Also discombobulating for natives would be the emergence of vibrant shantytowns and ethnic districts on an enormous scale. Pre-assimilation would mitigate the problem of absorbing immigrants into mainstream society, though on the other hand the number of immigrants would be larger than in the 19th century both in absolute numbers and as a share of the population. But Americans would hear more languages spoken on the streets, see more holidays celebrated, see a wider variety of religious buildings and of clothing. There would be neighborhoods where native-born US citizens would have the experience, charming to some but frightening to others, of being on American soil yet feeling like they were abroad. European countries, I expect, would face a different problem, namely, that some immigrants would prefer to assimilate to an “Anglobalized” international bourgeoisie, rather than to Dutchness or Norwegianness or Italianness. They would have to cope with large populations of foreigners who seemed content to reside permanently in their countries, getting by with English. Sweden or the Netherlands might see their living standards rise under open borders, even as Swedish and Dutch faced displacement by English as the nation’s first language. (That might happen anyway, but open borders would accelerate it.)

While the native-born citizens of the rich world need not see their living standards fall and most to all would probably see them rise, likely by a lot, under open borders, there would be far more poor people in the rich world. Germans and Danes and Italians and Washingtonians and Californians would have to get used to seeing a lot more deep poverty on the streets, and content themselves with knowing that there was much less poverty in the world because there was a little more at home. The moral underpinnings of the national socialist models of society that prevailed in the 20th century would have to be abandoned. Territorialism as a meta-ethical prejudice would have to be refuted at the level of reason and then wrung out of people’s intuitions.

Open borders would abolish Bangladeshi sweatshops

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Substandard working conditions recently murdered over 1,000 people in the deadliest garment factory accident in history. This accident in Bangladesh drew attention to the substandard wages of “sweatshop” workers in the developing world, and industrialists’ scant regard for their workers’ safety. Many on the left in the developed world saw this as an indictment of free market economics, urging government action to prevent such future disasters. Responding to such pressures, the US government recently raised tariffs on a number of Bangladeshi goods. I’m as concerned as anyone that Bangladeshi workers aren’t earning a fair wage or working in dangerous conditions. So it strikes me as strange that utterly absent from this debate has been the one measure that we know for sure would alleviate these conditions for countless Bangladeshis.

If we truly find it disgusting that Bangladeshis aren’t earning a fair wage for their work, or are being forced to work under slave-like conditions, we should ask ourselves: who is trapping Bangladeshis in their antiquated, inefficient economy? Do Bangladeshis really want to risk death every day to earn a pittance?

The standard analysis of this problem points out that the alternative to most Bangladeshis employed in industry is a life of subsistence agriculture. Farmers run the perennial risk of crop failure, and in the developing world, most subsistence farmers literally live hand to mouth, doing backbreaking labour in the sun. Industrial work may be risky, but it’s often a better alternative.

In response, you can argue that if people have to choose between a life of subsistence agriculture versus risking their lives for a job paying 50 cents an hour, this only illuminates the utter rottenness of the choices open to people in the developing world. And you’d be right. But it’s odd that we stop ourselves there. Sweatshops have been debated time and time again for decades, and yet hardly anyone seems to have stopped and asked themselves why these are the only two real choices open to sweatshop workers of the world. What’s keeping the Bangladeshi in the factory from doing the same work at a better wage elsewhere?

The answer, quite simply, is us. By politically and morally legitimising laws that ban Bangladeshis at gunpoint from working in our countries, we have left them no choice but to toil away in sweatshops. If we allowed them to cross borders in search of work, how many of them do you think would embrace the abominable wages and working conditions they’re forced to endure right now? Hundreds of thousands of Afghans literally risk being shot to death today so they can find work in Iran — if we allowed people to search for work across borders, without fear of abuse and murder, how much longer could sweatshops endure?

Part of the reason compensation in Bangladesh is lower than it is elsewhere is simply because of the differences in its economy versus the economies of developed countries: skill and human capital levels are different, the cost of living is different. But a major reason Bangladeshis are so underpaid is because we, the citizens of more developed countries, ban Bangladeshis from earning higher wages. The economic concept of the place premium illustrates this quite well: statistical analysis allows us to take an identical person and predict how their wages for doing the same work would vary depending on which country they work in.

When you consider the place premium, the magnitude by which people in the developed world are underpaid for their work is astonishing. People in the West get upset by wage discrimination on the basis of gender; without adjusting for statistical differences, women might underearn men by almost 30%. The magnitude of wage discrimination on the basis of nationality is so shocking, I cannot find any term to describe it that would be less apt than global apartheid.

For the exact same work that their American counterparts do, Bangladeshis are underpaid by almost 5 times — in other words, they are underpaid by almost 80%. And they aren’t even the worse victims of global apartheid — Yemenis and Nigerians are underpaid 15 times over compared to Americans. If Americans had allowed those dead Bangladeshi workers to work in the US, doing exactly the same work they were doing, not only would they be alive today, but they would be earning 5 times as much.

It is morally unconscionable that our conversations about sweatshops ignore the elephant in the room: we are the ones who put those sweatshop workers to death. It wasn’t just that we bought the goods those workers produced. It was that we banned those workers from working for us in our countries. We forced them to stay in Bangladesh, despite knowing that this would guarantee them an unfair wage and unsafe working conditions. We made them slaves to those sweatshops because they had no other choice — we took all their other choices away from them.

Until labour mobility and freedom of movement become part of the conversation about our economic rights and responsibilities, we might as well not be having any conversation at all. To ignore our immense fault for these people’s plight is morally callous and unjustifiable. In concluding his seminal 1997 essay on sweatshops, Paul Krugman wrote:

You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative? Should they be helped with foreign aid? Maybe–although the historical record of regions like southern Italy suggests that such aid has a tendency to promote perpetual dependence. Anyway, there isn’t the slightest prospect of significant aid materializing. Should their own governments provide more social justice? Of course–but they won’t, or at least not because we tell them to. And as long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard–that is, the fact that you don’t like the idea of workers being paid a pittance to supply rich Westerners with fashion items.

In short, my correspondents are not entitled to their self-righteousness. They have not thought the matter through. And when the hopes of hundreds of millions are at stake, thinking things through is not just good intellectual practice. It is a moral duty.

That is a perfect summation of the case for doing business with sweatshops — except for one thing. Krugman utterly ignored the possibility of allowing the wretched of the earth to serve as sewers of sneakers for the affluent outside their home country. Allowing people to work under alternative economic and legal regimes if they are born into unjust and insensible regimes only makes sense. What reason do we have to not consider this alternative that Krugman couldn’t even bother to list? Are we willing to deny desperately poor people the best chance they have of progress for the sake of an aesthetic standard — because, say, we don’t like the idea of guest worker programmes?

Our conversation today on sweatshops automatically takes open borders off the table. We automatically rule out the one thing that would automatically abolish sweatshops, and automatically give the people of the world a fair choice in determining where they work and on what terms. What reason do we have not to give this proposal serious consideration? It’s our guns and tanks that ban good, honest people from taking better-paying jobs — that ban people from working in safe factories where they won’t have to worry daily about the roof caving in or the machinery catching fire. We need a damn good reason not to consider revoking our ban on people seeking fair work at fair wages.

In our conversations today, I just don’t see those reasons. And so as Krugman says, I don’t see how anyone in this debate can be entitled to their self-righteousness. Anyone ignoring labour mobility, or the fault of the developed world in banning poor people from looking farther for work, has simply not thought matters through. They have not done their moral duty. If you won’t consider open borders as a solution to sweatshops, then don’t bother complaining about sweatshops at all. You’re clearly not interested in solving the problem.

A reply to “Direct Economic Democracy”

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Direct Economic Democracy has measured the open borders movement and found it wanting. I couldn’t find any biographical information on the blog other than that the author lives in the UK, so for now the author is just DED to me. Judging by the two posts, DED and I (and probably most advocates of open borders) have substantively different worldviews, but I think there is potentially some common ground. So in addressing our differences I’d like to keep an eye toward our shared aims as well. After all, DED’s tagline is “Everybody matters”, a statement probably every free migrationist would heartily endorse. We advocate open borders in most cases because we think it’s a good way to empower people in poor countries to escape poverty. Likewise, DED is not a committed adversary of open borders, but instead seems to think the world is not yet ready for open borders and demanding free migration too early may evade or worsen the fundamental causes of world poverty:

In principle I share the libertarian ideal of everyone being able to live wherever in the world they fancy. I think the way to go about realising that aim is to first address the issues that create the disparities between rich and poor countries. Once that is (even if only partially) achieved, then the vast bulk of people would no longer have any desire to migrate. A few people would because of personal reasons and for exchange of specialist expertise. However opening borders would then not be opening the floodgates to a torrent of people driven by macroeconomic forces. It is only the prospect of such a torrent that keeps the borders closed now. My total disagreement with the Open Borders campaign is that they advocate opening the borders to a torrent of migration as a first-line response to the disparities between rich and poor countries.

DED begins the (second) post by criticizing free migrationists for describing labor in the rich world as “more productive” than identical labor in the poor world.

To my mind it is grossly insulting to describe that as “less productive” than working in yet another New York restaurant where insufficient custom means the food largely ends up down the sluice. Yet, in terms of how much the workers earn, it is “less productive”. It is all down to the fact that diners in New York have massively more money to spend than diners in Dhaka.

I agree that “productivity” is an unfortunate phrase, especially among non-specialists. It’s important to note that productivity is value-neutral as a technical term. Discussions of productivity differences between rich and poor countries, or similarly between rural and urban environments, have nothing to do with moral character. Because of the potential for connotative misunderstanding though, I prefer not to discuss “worker productivity” but simply wages instead. The pertinent fact is that wages for similar labor and skill sets are higher, sometimes vastly so, in the rich world than in the poor world, and liberalizing migration is the quickest and most straightforward way to eliminate this form of wage discrimination, to the immediate benefit the global poor.

DED suggests this approach is misguided because it fails to address the root causes of global poverty and assumes that such poverty is the result of bad governance in poor countries.

It could be argued that those in the rich world have little capacity to eliminate poverty in foreign countries and so have a greater chance of benefiting the lives of poor people by opening borders to immigration. That argument hinges on the idea that poverty is due to bad governance abroad and that the only answer is for the population to vote with their feet and emigrate. Firstly, I don’t think it is actually true that the rich world is a mere passive observer of poverty abroad. From what I can see, much of the blame for that poverty lies with active policies conducted by the developed world.

[…]

Much of the Open Borders logic seems to stem from the idea that market finance already has an inbuilt characteristic that would always lead towards an optimal solution for the world’s problems if only meddling governments were to stand aside.

I agree that the rich world is not merely a passive observer, but actively enforces policies that inhibit effective development in much of the world. Such policies include the arbitrary borders imposed by Western colonialism, agricultural subsidies cosseting rich farmers and tariffs inflicted on poor farmers, and, I must include, the coercive restrictions on movement known as border controls. I do think that another culprit behind persistent poverty in the world is bad governance. It seems hard to deny that governance has at least some impact in a world that has supplied such natural experiments as the Korean peninsula and East/West Germany. Although too often even the fault of bad governance can be laid at Western feet: the governments of the rich world have exhibited a nasty habit of propping up authoritarian dictators who are friendly to Western interests, or at least the interests of insiders. Then again, it’s important to remember that the “natural state” of humanity is grim poverty and early graves.

My point is not to enumerate the causes of world poverty but only to demonstrate that advocating open borders is consistent with any number of causes of world poverty, including causes DED likely favors. DED rather unfairly implies that advocates of open borders believe that our favored policy is the one true Way to cure what ails the world. But nothing about our advocacy suggests that other complementary policies should not be pursued as well. “Complementary” here is, to some extent, to taste. DED and I will likely disagree on the most effective and most just package of policies to subdue world poverty, but I see no reason in principle why DED, who has no fundamental problem with the freedom to migrate, should not include the opening of borders among their favored policies. Simon Caney’s slate of proposals might be of interest to readers of DED’s ideological persuasion (unfortunately gated). If DED fears the effects of a “torrent” of immigrants, (see here and links therein for a discussion of how likely this is) then the appropriate response is to advocate a gradual opening of borders, rather than defending the status quo.

Even by DED’s own standards of wanting to “address the issues that create the disparities between rich and poor countries” and getting the money to go to where the people are, liberalizing migration is effective. Remittances sent by immigrants to their countries of origin move resources directly into the hands of the poor by magnitudes greater than current official aid from the rich world. Diasporas facilitate investment in the poor world by increasing information flows between agents in rich and poor countries and, importantly, providing economic links augmented by trust and long-term commitment that is absent from far-removed investors.

I have tried to be constructive and non-confrontational in this post because at the end of the day, someone with DED’s concerns and commitments is exactly whom I want to reach (I speak personally here, and not necessarily for my fellow bloggers). But I do want to address some distracting and unnecessary provocations in DED’s posts. Linking to a study relating migration to schizophrenia in a throwaway comment (first post) is insulting to migrants. Hopefully we can all agree that restricting the freedom of movement of people around the world is not an effective way to prevent schizophrenia. And the mention of the Highland Clearances was jarringly irrelevant. No advocate of open borders is proposing a forced relocation of anyone anywhere. It shouldn’t come as a shock that we would decry the Trail of Tears as a blight on American history as well. These were brutally coercive policies that have nothing to do with a liberal migration regime.

It’s reasonable to highlight the abuses that can occur when people migrate to places with minimal standards for human rights protections, as in DED’s link to the story of indentured labourers in Dubai. But I see this as an argument for nations more committed to human rights to open their borders to provide more and better options for the world’s inevitable migrants. This story “underlines a wider phenomenon of migrant workers being in a less assertive position to ensure that they receive a fair level of pay”, something advocates of open borders seek to correct by bringing migration into the formal, regulated economies of democratic societies.

I’ll just close by urging Direct Economic Democracy and their readers to reconsider open borders, or at least reform in that direction, as a policy that could bring substantial benefit to millions of people, even as other systemic maladies of our imperfect world continue to demand solutions.

Understanding the place premium, or; building the economic intuition behind open borders

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There are plenty of misconceptions about the place premium — the arbitrary wage gap between different countries of the world. (The term “place premium” was introduced in a working paper titled The Place Premium: Wage Differences for Identical Workers across the U.S. Border – Working Paper 148 by Michael Clemens, Claudio E. Montenegro, and Lant Pritchett. See also our blog posts that mention the place premium). Some common ones include the mistaken beliefs that estimates of the place premium don’t account for purchasing power, or that the place premium doesn’t adjust for characteristics like job type or labour quality. But even if one avoids these missteps, it can be difficult to grasp the source of the place premium and the intuition around why labour mobility would erode the place premium by increasing real incomes worldwide.

Here’s the classic example of the place premium: the bus driver. You take the bus driver in Yemen and transplant him to the US. Same guy, doing the same job, driving the same bus, even. Just in a different place. You’ve just boosted that Yemeni’s income by about 15 times over, because now he’s ferrying highly-productive Americans instead of relatively unproductive Yemenis. He’s driving them between Boston and New York instead of between Sana’a and Aden. And yes, that 15x multiplier is real — it’s the actual point estimate from the seminal paper on the place premium, calculating the premium between Yemen and the US in terms of real wages, adjusted for all statistically-identifiable characteristics of the worker and the job.

Now, you might contend that the Yemeni bus driver isn’t himself being more productive. After all, he’s doing exactly the same job he was before. The extra income he earns now doesn’t represent any increase in his productivity; it just represents some income he’s siphoned away from Americans, who pay a Yemeni bus driver the wages of an American bus driver, even though he’s plainly less productive than the American who might otherwise drive that bus.

This intuition, I think, is related to why people make a couple of rather unintuitive (to me, anyway) conclusions about the place premium and its implications:

  1. Open borders erodes the place premium primarily, if not only, by redistributing the income of richer people to poorer people. The poor of the world do in fact benefit immensely from migration, but this is not because migration makes them more productive. They simply earn an economic “rent” by taking rich-world wages which are incommensurate with their actual poor-world productivity. World GDP does not actually increase from open borders, and rich-world GDP actually falls.
  2. People in poor countries are poor because they are innately unproductive. This is because of one or both of the following:
    1. Levels of productivity are endogenous to you as an individual, not the society you happen to be in. The value of your work is determined by you and you alone, not the society you live in.
    2. Levels of productivity are endogenous to your country of origin. The value of your work is determined by some combination of your personal qualities and the institutions you grew up in. The society you live in has little to no impact on your productivity.

These claims are incredibly unintuitive to me, because even if they might be true to some degree, there isn’t any economic theory or data to support the strong claim that where you live has no impact on productivity. The very fact that economists who study labour mobility consistently conclude that the gains from open borders would roughly double world GDP means that these conclusions are wrong. Moreover, there are plenty of reasons why your intuitions about the relationship between your environment and your productivity ought to run the exact opposite way.

If you lived in a society currently facing a civil war, or a natural disaster, you would be incredibly unproductive. An engineer isn’t of much use in a famine-ridden country; he has to spend most of his time looking for food, instead of designing bridges. The claim that the society you live in has no impact on your productivity is totally unintuitive; of course the engineer becomes less productive if you take him from his comfy home in an OECD country and plop him into somewhere like Somalia or the Congo. So vice-versa, if you find an engineer in Somalia or the Congo, and you take him with you to somewhere like France or Italy, you’ve immediately increased his productivity. He spends less time figuring out how to get food and shelter, and more time figuring out how to build bridges.

You might protest that this is a high-skilled immigrant, so let’s go back to the bus driver. Exactly the same intuition applies. Take an American bus driver and drop him down in Yemen. Would he still really deserve his American wages in Yemen? Sure, it’s no fault of his own that we’ve forced him to live and work in Yemen instead of the US. But the fact is that the Yemenis he’ll be driving around are less productive than his old American passengers. He used to drive software engineers and Starbucks baristas (you laugh, but baristas save productive doctors and executives plenty of time and money) in the US; in Yemen, he drives shepherds and hotel cooks. Given that the entire productivity of being a bus driver comes from ferrying valuable people around, it’s unsurprising that when the economic productivity of the people he transport drops, his productivity drops as well. So vice-versa, taking a Yemeni bus driver and giving him a bus in the US to drive makes him incredibly more productive. He used to support a small, relatively undeveloped economy; now he supports a much more prosperous economy. His taking that American job has directly lowered the transportation costs for quite a few highly-productive people.

You might protest that while this is true at the individual level, you couldn’t simply take every person from Yemen and put them in the US and expect to achieve the same result. You’d be right, which is why nobody that I know of seriously suggests forcing poor people to immigrate to the rich world. It’s the people who have a lot to gain from immigration — those whose potential productivity means they can reasonably expect a substantial wage hike from moving to a better society even just doing the same work they’re used to doing — that will migrate. People who aren’t productive enough to justify the large financial and non-financial costs of moving simply won’t move. Unless you subsidise migration, you won’t see unproductive people swarming highly-productive societies.

Still, on one level, it can seem intuitive to say that if you’re doing exactly the same job in two different places, your productivity doesn’t matter: you should earn the same wage for the same work wherever you are. But that’s actually incredibly unintuitive. Even if you’re just a farmer, your crop yields depend on where you are. If you can buy or rent land elsewhere that is more fertile, you can do the identical job on that piece of land and immediately become more productive. And that’s just the simplest scenario. If you’re a machinist, you are more productive working in a society with a functioning power supply than you are working in a society with frequent blackouts. If you’re a hairdresser, you are more productive working in a society where your clients are corporate executives instead of a society where your clients are subsistence wage-earners — because even if you save your clients exactly the same amount of time and effort, in one society your clients’ time is worth a lot, and in the other it is worth little.

It might be intuitive to conclude that open borders is simply redistribution, allowing unproductive people to claim wages meant for highly-productive people. But some basic economics suggests this can’t be true. If a Yemeni bus driver is 15 times less productive than a US bus driver, he basically will get his passengers lost or injured so often that the only way his employer can find it profitable to keep him on staff is if they slash his wages down to the levels he earned in Yemen — if they slash his high-productivity wages by 15 times. Something has to give: either he has to be productive enough to merit higher wages, or he has to go back to Yemen and back to his old job. Otherwise, he ends up jobless and destitute in the US.

Having travelled on public transport in different countries, I could swallow the claim that a bus driver from a poor country is only half as productive as a bus driver from a rich country (because of poorer driving habits, etc.), though I’d still be skeptical of it. But I’ve never met a bus or taxi driver who is so thoroughly incompetent that I would deem his driving skills worth 1/5th or 1/10th of his professional counterparts whom I’ve encountered in the rich world.

The place premium doesn’t actually mean all the gaps we see between rich and poor countries would disappear under open borders. Even in jurisdictions with open borders, such as between Guam or Puerto Rico and the mainland US, we observe a place premium where it seems the American bus driver earns 25% to 40% more than his statistically-identical counterpart in Guam or Puerto Rico. That probably is explained by true productivity differences (though some of it might also stem from xenophobia or other reasons making it difficult for a bus driver in Guam or Puerto Rico to undercut a bus driver on the mainland). But nowhere in the history of the world have wage gaps as big as the ones we see internationally today been observed. We can quite surely say that most of the place premium comes from arbitrarily coercing otherwise productive people into staying in unproductive regions or societies.

The intuition behind this is clear: your productivity does in fact depend on where you are. You produce more living in Australia than you do in Antarctica for a reason — just as you produce more living in South Africa than in Zimbabwe for a reason. Whether it’s a better geophysical climate or a better political climate, some places just make us more productive citizens and human beings than other places do. We need a damn good reason to arbitrarily force people to stay unproductive — especially when it means consigning them to a life of grinding poverty that would shock just about anyone reading these words.

The photograph featured in the header of this post depicts Italian immigrants laying tram tracks in Springfield, Massachusetts circa 1900.

Why Are There So Few Unlawful Immigrants?

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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.

Open Borders Note: See also Vipul’s post and our posts tagged economic determinism.

Labor markets are heavily distorted by immigration restrictions, producing wide and persistent wage differences for observably identical workers in developed and developing nations. Income for low skilled American workers is 16 times as high as Haitians in Haiti, about 7 times as high as Indians in India, and about 4 times as high as Mexicans in Mexico—all adjusted for purchasing power parity. Just by moving here immigrants can largely close that wage gap.

There are very limited avenues for low skilled immigrants to immigrate legally, which raises an important question: if the economic benefits of immigrating are so high, why are there only 11 to 12 million unlawful immigrants here?

Below are the two broad reasons:

First, the benefits of immigrating are not as high as they seem. The probability of being employed in the destination country is a vital variable because unemployment does not confer any benefits on the immigrant. The skill level of prospective unlawful immigrants restricts job opportunities to certain occupations. If the sectors where low skilled immigrants work have high unemployment rates, as many do now, the chances of earning higher wages here is lower so the economic benefits of immigration are lower. Downward wage bargaining by immigrants is limited but unlawful immigrants do take a wage cut, all else being equal, of about 20 percent to compensate their employers for the legal risk of hiring them and other reasons. Growing economies in places like Mexico, China, and elsewhere might partially offset the benefits of immigrating by promising higher incomes in the near future.

Second, the cost of unlawfully immigrating is very high. Opportunity costs, search costs(including language barriers), transportation costs, legal costs, the probability of dying en route, the probability of being sold into slavery, and the probability of not making it to the United States despite paying the smuggling fee are all high and increase risk. Immigration enforcement is very effective at deterring most would-be unlawful immigrants. Highsmuggling fees are a high up front cost.

Immigration can be understood as an investment over a period of years.  The length of time the immigrant spends here employed at higher wages increases the economic benefits of immigrating. The costs of immigrating, like paying for a smuggler, are fixed while there seems to be a low marginal cost for staying here to avoid immigration enforcement. The psychic costs could shift with time.

Here is an example:

Assume a Mexican immigrant wants to illegally move to the United States and work in construction. A marginal worker in the construction sector would have about an 86.2 percent chance of being employed at $40,000 with an effective tax rate of about 18 percent (including income and FICA taxes) and a 2.6 percent annual average wage increase.

The cost of being smuggled in ($9,000 by boat, $4000 by land), buying documents to decrease the chances of detection, and opportunity cost from being out of the labor force is $11,000 assuming no psychic costs. After the first year, I assume that the out of pocket cost of living illegally was $1,000.

Assuming a two percent discount rate, the net present value of moving to the United States for five years is $126,000.  The net present value (NPV) of working in Mexico assuming a starting wage of $10,000 a year, 95 percent chance of being employed, a one percent wage growth, and a two percent discount rate is about $48,000. The wages are about 2.6 times as high assuming the immigrants successfully enters on his first attempt and immediately finds a job.

The uncertainty of working illegally in the United States, a higher smuggling price, and separation from one’s home dramatically increase costs. A relatively low annual cost of $11,000 a year in addition to smuggling fees of $9000 in the first year lowers the NPV to $77,340, just 61 percent greater than staying in Mexico. Psychic costs are higher for immigrants from countries that do not send many in the first place—like Yemen or the Central African Republic—because there is not a diaspora to fit in to. Unlawful immigrantsare typically young, male, single, and without families—groups with the lowest psychic costs of immigrating. The opportunity cost of using capital to pay smugglers is also high, especially in poor countries.

Immigration enforcement has a gargantuan deterrence effect—larger than any other factor. The vast majority of would-be unlawful immigrants are deterred by breaking immigration laws and the punishments—even if there is a small chance of being caught. A 10 percent increase in immigration enforcement hours along the border produced a 2.5 percent increase in smuggling prices—raising the cost of unlawfully immigrating. The size and scope of Border Patrol has increased substantially since 1980—virtually doubling in size since 2004.

Here are the first year wage gains including the cost of smuggling from different countries of origin:

Source Country

Smuggling Cost

Median Ind. Earnings, US Full Time

Income in Home Country

Wage Gain

Wage Gain/Smuggling
Brazil

$16,000

$31,905

$12,594

$19,311

1.21
China

$50,000

$31,863

$5,445

$26,418

0.53
Cuba

$10,000

$24,103

$5,400

$18,703

1.87
Haiti

$1,500

$35,103

$726

$34,377

22.92
India

$60,000

$50,443

$1,509

$48,934

0.82
Mexico

$9,000

$13,520

$10,047

$3,473

0.39

Source: 2011 American Community Survey, DHS, Havocscope. 

The smaller the wage gain to smuggling ratio is, the smaller the pure economic benefits of coming here are, assuming successful entry. If the Coast Guard was less effective or if Haitians could find a cheaper way to enter the United States unlawfully, many more would come. The pressure from Mexico is not nearly as great as many imagine. These numbers are only averages and probably understate the desirability of coming here but they explain why Indians and Chinese send so few unlawful immigrants despite the massive wage gains: immigration enforcement is very effective so it raises the price of smuggling.

The costs of moving to the United States are very high and the benefits are lower than international wage differences make them seem. The benefits from moving to the United States for millions of people would be enormous for most Americans, the immigrants themselves, and those who stayed behind. Given those large wage differences, it is truly remarkable that there are so few unlawful immigrants in the United States.