We’ve all heard of the economic benefits of free trade, whether we agree with these arguments or not. Likewise, it’s common for economists to argue in favor of removing capital flow restrictions, which refers to how easy it is to invest in a foreign country.
Free trade is supposed to make the products we buy cheaper, thereby increasing our average income. Likewise, free capital flows are supposed to make it easier for people to invest where it makes the most sense for growth and economic advancement, making sure we get the most from our money on a global level.
What if neither free trade nor free capital growths represent the largest economic opportunity?
What if the world was more likely to gain wealth by removing restrictions on immigration?
That’s what economist Michael Clemens found in a controversial 2011 paper titled, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?”
And what he found, by reviewing existing studies and exploring the data, is that the economic benefits of free trade are a drop in the bucket when compared to the benefits of free migration.
In fact, the economic gain could be as high as 150% of today’s global gross domestic product.
That would be an increase of $117 trillion.
Computing the Gains From Migration
How exactly does anybody know or estimate how much the world would gain from open borders?
We know existing average wages in different countries. We can even break down wages by type of labor and by type of laborer. If you remember, it’s how Gianmarco Ottaviano and Giovanni Peri could study the effects of immigration on native and non-native wages.
We also know that differences in wages are not just related to the employee, but also to the capital that’s invested in that employee.
What does that mean?
In the U.S., what makes American wages higher than China’s is not only the quality of the employee, it’s also the machinery that’s invested to increase the productivity of said employee.
Suppose that you work as a computer typist. Your job is 100% dedicated to transcribing hand-written records and turning them into e-documents. Your wage will be related to the value of what you’re doing, right? Imagine how much more you will be worth if a scanning machine is introduced that automates the typing and allows you to focus on editing incoming documents to make sure no computer errors were made, AND now with all the extra time you have you can add to your responsibilities. The value of what you produce has now increased, and so will your income.
In the U.S. and in Europe, we’ve benefited from centuries worth of capital accumulation. We’ve been working to increase the productivity of our workers for a long time.
In China, for example, this process started only more recently.
In some countries, like Chad or Sudan, this process may not have started at all, or it still may be at a very early stage.
Here’s the thing, the more people produce, the better off we all are because the cheaper the things we buy will get.
Migration allows people in low-investment countries move to high-investment countries, where they can be more productive and can add more value to the global economy.
Back to the original questions, how do we begin to estimate the gains from international labor mobility?
We know that immigration will lower the average wage in the country the immigrants are going to (increase in supply), and we know it will raise the average wage in the country they are leaving (decrease in supply). We can, therefore, take the existing average wage and estimate what the new wage will look like after a specific number of people migrate.
By comparing that new average wage to the old average wage, then multiplying by the number of migrants, we can get an idea of just how much value these workers would add by simply moving from a less productive country to a more productive country.
Michael Clemens, the author, provides us an example of how the math works:
Divide the world into a “rich” region, where one billion people earn $30,000 per year, and a “poor” region, where six billion earn $5,000 per year. Suppose emigrants from the poor region have lower productivity, so each gains just 60 percent of the simple earnings gap upon emigrating—that is, $15,000 per year. This marginal gain shrinks as emigration proceeds, so suppose that the average gain is just $7,500 per year. If half the population of the poor region emigrates, migrants would gain $23 trillion—which is 38 percent of global GDP.
As it turns out, the estimates change depending on the assumptions economists make. Luckily, we have a variety of estimates and we have a plausible range for the gains we can expect from a more immigrant-friendly policy.
If we completely removed immigration barriers across the world, we’d see a global GDP increase between 67 and 147%.
Compare even the smaller number of the two to expected gains from other policies. If we were to eliminate all barriers to merchandise trade, we’re looking at a gain between 0.3 and 4.1%. Alternatively, if we were to remove all capital flow barriers, we’re looking at only a 0.1 to 1.7% increase in global GDP.
It turns out the phrase ‘drop in a bucket’ isn’t an exaggeration, in this context.
Are You Sure These Economists are Thinking This Through?
There are certain questions an economist must answer before coming up with figures like these. Let’s quickly explore what these are.
How does emigration affect the people who don’t leave the country? For example, do they lose if all their smartest and brightest leave? That certain is an important question, because if they do then we have to consider that cost when deciding what that true global gain is. Because migrants might be gaining at the cost of those who stay home.
The evidence says that those who don’t migrate don’t lose from their neighbors leaving for another country. In fact, the data suggests that both migrants and non-migrants win in this case.
What about the effect on people who already live in the country of origin? We know from the abovementioned Ottaviano and Peri study that the degree to which native workers in the receiving country are affected by a wage decrease is more limited than we may have assumed at first. There are advantages that native workers have over non-natives, on average, that make them more lucrative employees, therefore deserving of higher pay.
And over the long-run we may be able to expect higher pay, in the real sense of being able to buy more, from immigration. This is something that we’ll explore in our next blog.
Overall, economists have found that the benefits of more global migration well exceed the costs. That’s reflected in the massive increase in wealth gain that we would accrue with new immigration policies.
Here’s something we should consider: global gains say nothing about how these gains are distributed. There are always winners and losers, even if the winners win more than the losers lose. We know, for instance, wages in the home country will go down if the labor supply increases, even if ‘only’ in the short-term. If you’re divorced from reality, this may not seem like a big issue, but it can be a problem for the man or woman trying to provide for the family. These very real considerations should also be part of the debate.
If we were to ask ourselves what the single most effective policy would be in order to lift the world out of poverty, the evidence makes it clear that the leading candidate is freedom of labor mobility. Even if we take the lowest estimate, we’re talking about a 3.2 trillion gain if we liberalized trade versus a 52.5 trillion gain from liberalizing labor migration. That’s over 16 times more wealth we’d produce globally.
There are certainly also arguments on the other end of the spectrum. And many of them are valid. For example, what impact do immigrants have on our culture and our institutions? What’s the cost of this impact?
Here’s the thing. Even if only 5% of the world’s poorest people were allowed to move to the world’s richest countries, we’d already see a bigger gain than free trade and free capital mobility combined. In other words, it’s not about having no immigration laws, it’s about rethinking the ones we have to make sure we’re getting the most out of our domestic and global resources.
What are your thoughts? I’d love to hear them in the comments below.