The large income benefits of migration

This is an English summary of my master’s thesis in policy economics (University of Leuven). The thesis can be downloaded here.

Injustice, inefficiency and harm of migration restrictions

Unequal pay for equal work, a welfare loss of billions of euros, and thousands of deaths. Injustice, inefficiency and harm are the three consequences of a migration restriction or closed borders policy.

Migration restrictions create a global wage gap, with real wages (for the same work, the same skills and the same employer education level) about 4 times higher in rich countries than in low and middle income countries (Clemens, Montenegro & Pritchett, 2008). This factor 4 is the place premium that measures the increase in income of a foreign worker from a poor country who is going to work in a rich country. This place premium in wages is one of the biggest price disruptions on the international market. The hourly wage in a poor region is 75% lower than in a rich region. This percentage can be compared with the gender pay gap: in Belgium the average hourly wage of a woman is about 8% lower than a man (Van Hove & De Vos, 2017). The pay gap based on origin is almost 10 times larger than the pay gap based on gender.

This injustice is the result of a global labor market that is not in equilibrium. Productive workers are prevented from going to work where labor productivity is highest (Borjas, 2015). In poorer countries there is a labor surplus (or capital shortage), in richer countries there is a labor shortage (or capital surplus).

This disequilibrium in the global labor market also leads to a loss of productivity worth billions of euros. If workers cannot migrate to places with the highest labor productivity and entrepreneurs cannot migrate to places with the best entrepreneurial climate, then win-win situations are hampered. Stopping migrant families at the border prevents mutually beneficial transactions between employees and employers, between producers and consumers, between buyers and sellers, between tenants and landlords. Just like freer international movement of goods and capital, freer movement of workers will improve the efficiency of the world economy. A freer migration can increase real global income (according to purchasing power) or gross world product (GWP) by 10% to 100% (Clemens, 2011). For comparison: the potential global income growth of freer migration is an order of magnitude higher than the income growth from further liberalizing international goods and capital markets. The removal of barriers to goods and capital flows can increase global income by only a few percent (Clemens, 2011).

Finally, limiting migration and closing national borders is directly harmful. There is direct damage because migrants, asylum seekers and refugees often take unnecessarily high risks of entering a country. At least 1000 people die every year in their attempt to reach Europe via the Mediterranean (UNITED, 2018).

The income changes of migration

The income effects for different population groups were studied on the basis of a literature review (see references). The literature studies show coherent results. The migration surplus per migrant measures the expected increase of the world income (the sum of everyone’s income) when one extra migrant from a poor region is admitted to the labor market of a rich region. This migration surplus is almost 30,000 euros per year per migrant.

The migrants are the biggest winners, because they can see their real wage multiplied by a factor of 4.  But the native population in the recipient countries can also benefit from immigration. Extra migrants means: extra customers and extra tenants, but also extra entrepreneurs and of course extra workers who can, for example, mitigate the public finance problems associated with an aging population in rich countries. All this contributes to the local economy in a recipient country. As a result, about one third of the migration surplus of € 30,000 per year per migrant, is to the benefit of the native population, in particular capital owners (employers, shareholders, real estate owners).

The average real wages of native workers are almost unaffected by immigration: studies indicate small income changes, sometimes a bit positive, sometimes a bit negative. If mainly low-skilled workers immigrate, then the wages of native low-skilled workers and the already present migrants may fall. For the low-skilled workers in the rich region, this is a decrease of around 1000 euros per year per new migrant. This cost is distributed over the entire population of low-skilled native workers and can be more than offset by the increase of 10,000 euros per year for the rest of the native population. With a progressive tax and income redistribution, the net wages of (low-skilled) native workers can rise.

The migrants receive roughly two thirds of the migration surplus (i.e. € 20,000 per year per migrant), but a bit less than half of their share is send to their relatives who are left behind in the poor region. Due to these remittances, the population in the countries of origin can also benefit from emigration. Especially workers in those poor countries can see an income increase.

The result of the literature overview can be summarized in the figure below. The width and height of the bars correspond to the population size and the real incomes of the various population groups, respectively. The dotted lines represent the situation after migration. The biggest winners are the migrants (green bar) who see their income increase sharply. The remaining workers in the countries of origin (yellow bar) see their income rise because there is less labor surplus in those countries during emigration and because the local population receives money transfers (remittances) from the migrants. The capital owners in the recipient countries (blue bar) see their capital income increase because their capital becomes more productive with extra workers. The average wages of workers (red bars) remain approximately constant. The highly educated can get slightly higher incomes, the lower educated slightly lower.

Explanations of the income effects

On the basis of a global general equilibrium model, explanations were given for the absence of significant decreases in the average wages of native workers due to immigration. The two most important explanations for this wage inelasticity of native workers are:
1) the complementarity of migrant and native labor in the short run, because immigrants are more mobile and can therefore ‘grease the wheels of labor market’ in the rich region by migrating to places where their productivity is highest (Borjas, 2001), and
2) the additional capital investments in the long run , because they can greatly increase productivity and employment in the rich region.

Policy implications

Economics professor Bryan Caplan and supporters of open borders (Caplan, 2015; Matthews, 2014; Open Borders, 2019) argue that migration restrictions are comparable to stopping job applicants and workers at the gates of companies, or stopping customers at the doors of shops. This restriction of freedom is not only harmful to the applicant, worker or customer, but also to the employer and shopkeeper.

There is a lot of arbitrariness in the policy of closed borders: why should borders be closed to migrant workers while they are open to flows of capital and goods and to tourists? Why should borders be closed between countries or country unions (such as the EU), while they are open between municipalities, provinces, regions and states?

Migration restrictions lead to an unjust pay gap between poor and rich regions, a global loss of wealth of billions of euros (almost half of total income), an aggravation of the aging problem in rich countries, a disadvantage for both native people and migrants, a huge death toll of migrants, a restriction on freedom of consumers and producers, and an undesirable arbitrariness. If we look at the economic literature on migration, we see a clear consensus among economists that a policy of freer migration offers more advantages than disadvantages (New American Economy, 2017; Open Borders, 2019c).

Opening up national borders for labor migration (Caplan, 2015; Matthews, 2014; Open Borders, 2019a) is the most far reaching but logical recommendation of this study. Open borders between countries are an extension of open borders between municipalities: just as one can move from one municipality to another (subject to registration in the new municipality), one could move from one country to another for living, working and shopping. In the short run, when completely opening borders is not politically feasible, one could gradually liberalize migration and increase the immigration rate.

References

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Books

Altonji, J. G., & Card, D. (1991). The effects of immigration on the labor market outcomes of less-skilled natives. In Immigration, trade, and the labor market (pp. 201-234). University of Chicago Press.

Bouton, L., Paul, S., & Tiongson, E. R. (2011). The impact of emigration on source country wages: evidence from the Republic of Moldova. The World Bank.

Clemens, M. A., Montenegro, C. E., & Pritchett, L. (2008). The place premium: wage differences for identical workers across the US border. The World Bank.

Iregui, A. M. (2005). Efficiency Gains from the Elimination of Global Restrictions on Labour Mobility. In G. J. Borjas and J. Crisp (eds.), Poverty, International Migration and Asylum, Palgrave Macmillan, New York, pp. 211-238.

Moses, J. W., & Letnes, B. (2004b). If people were money: Estimating the gain and scope of free migration. In G. J. Borjas & J. Crisp (Eds.), Poverty, international migration and asylum. London: Palgrave, pp. 188-210.

National Academies of Sciences, Engineering, and Medicine. (2017). The economic and fiscal consequences of immigration. National Academies Press.

Posner, E. & Weyl, G. (2018). Radical Markets. Uprooting Capitalism and Democracy for a Just Society. Princeton University Press. www.radicalmarkets.com.

Pritchett, L. (2006). Let Their People Come: Breaking the Gridlock on Global Labor Mobility. Center for Global Development, Washington DC.

Van Hove, H. & De Vos, D. (2017). De loonkloof tussen vrouwen en mannen in België. Instituut voor de gelijkheid van vrouwen en mannen, Brussel.

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World Bank (2018). Moving for Prosperity. Global Migration and Labor Markets. World Bank Group, Policy Research Report, Washington.

Internet and media

Bulman, M. (2017). Brexit: People voted to leave EU because they feared immigration, major survey finds. Independent, 28-06-2017.

Caplan, B. (2015). The case for open borders, Time, 7-10-2015 time.com/4062074/migrants-open-borders/

Matthews, D. (2014). The case for open borders, Vox, 15-12-2014 www.vox.com/2014/9/13/6135905/open-borders-bryan-caplan-interview-gdp-double/

New American Economy (2017). An Open Letter from 1,470 Economists on Immigration. www.newamericaneconomy.org/feature/an-open-letter-from-1470-economists-on-immigration/

Open Borders (2019a). openborders.info/

Open Borders (2019b). openborders.info/immigration-tariffs/

Open Borders (2019c). openborders.info/economist-consensus/

Peri, G. (2013). The economic benefits of immigration, Berkeley Review of Latin American Studies, University of California, Berkeley clas.berkeley.edu/research/immigration-economic-benefits-immigration

UNITED (2018). The Fatal Policies of Fortress Europe, list of deaths. http://www.unitedagainstracism.org/campaigns/refugee-campaign/fortress-europe/