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why the welfare state needs foreign labor

Continuing on the Breaking the Gridlock kick, foreign labor opponents are keen to depict foreigners as a threat to the host nation’s economic self-interest. At their most beneficent, opponents argue against an influx of unskilled labor, which would hurt unskilled labor currently in the country. In theory, this argument is valid. As Lant Pritchett notes, however, evidence suggests the impact is marginal:

The evidence of the Mariel boatlift of a huge influx of workers into a single labor market (Miami) shows little impact on employment or wages (Card 1990). Even Borjas’s (1999) regression evidence that the labor movement of nationals is affected by the patterns of migration and hence the impact on the national labor market needs to be considered shows that only 4 percent of the decline in the real wage of high-school-educated workers can be attributed (and the cross-state regression evidence was apparently driven by the experience of California).

Given that national legislation involving a similarly “huge influx of workers” is politically impossible, the economic fate of low-skilled nationals will not be much affected by foreign labor for the foreseeable future. For those whose concerns stand unabated, Pritchett takes another tact:

The economists’ usual response to distributional arguments against efficient policies is “instruments to targets,” and for economists to resist migration on this ground while advocating free trade is intellectually inconsistent.

For fear of some anti-free traders remaining unimpressed, I would add that we also don’t allow distributional considerations to take precedence over more efficient technological innovations.  I don’t expect this counter-argument to impress anti-free traders in isolation, but free labor has the advantage over free trade in that the direct benefits accrue to those most in need; folks against an unskilled labor influx out of a concern for distributional effects would do well to consider Pritchett’s points in the previous post on the morality of labor mobility.

It would do the case for labor mobility a disservice, however, to simply argue that it wont harm national interests. I won’t waste kilobytes on the obvious benefits of allowing in more labor that firms want to pay to create products, but Pritchett does offer useful clarity on foreign labor as a way to address the problems facing aging industrial countries:

The populations of Germany, Japan, and Italy have already begun to shrink and, for Italy and Japan, are projected to be only 60 percent of their 2000 size by 2050. France and the United Kingdom will remain roughly the same size during the next fifty years. Among large industrial countries, only the United States is expected to continue to experience sizable population growth (these projections already assume some level of migration).

Current projections show support [to retiree] ratios falling in Germany from 4 to 2, and in the more dramatic cases of Italy and Japan they fall to about 1.5—only 1.5 workers for every retiree. The systems of social transfers in Europe can be sustained only with very high tax rates even at current support ratios and program design parameters (which include a combination of tax rates, ages, benefits, and so on). But if support ratios fall to anything like projected levels, then it is not clear that there are politically feasible combinations of design parameters that can make the systems solvent—either tax rates need to be too high or retirement benefits drastically curtailed.

This country-specific focus foretells of Pritchett’s final recommendations for bilateral labor agreements, which I’ll explore soon. More generally, it stirs a hope that the industrial nations will soon understand that it is in their economic interest to allow in young, tax-paying workers to correct their demographic imbalances.

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Filed under: General Welfare, World,

One Response

  1. […] In those posts, I addressed the morality, the positive development implications, and the benefits to host nations of increasing work visas. The tragedy in Haiti has pushed the question to the forefront, thanks in […]

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