Friday, June 27, 2014

Immigration and wages

Following up on my last immigration post, a thought occurred to me.

The most common objection is the claim that letting immigrants in will hurt American wages. Before, I've addressed this on its merits: If labor doesn't move, capital will. Your doctor's lower wages are your lower health costs. Immigrants come for wide open jobs, and to start new businesses. And so on.

What occurs to me this morning is the inconsistency that conservatives make this argument.

Suppose it were true. Would that mean the government should keep out migrants to keep American wages up?

Well, do you believe that the Federal government should mandate a large minimum wage, to raise American’s wages? Do you believe that the Federal Government should ban imports and subsidize exports, to raise American’s wages? Do you believe that the Federal Government should give more power to unions, to raise American’s wages? Do you believe that the Federal Government should pass even more stringent rules in its own contracts to pay higher wages? Do you believe that the government should pass more licensing restrictions, to lessen competition and raise American's wages? Should Illinois restrict people Indianans working in Illinois, to keep up Illinoisans' wages?

These are all the same sorts of steps. At least people who believe all these wrong things believe them together. It makes no sense whatsoever to oppose, correctly, all of these counterproductive economic interventions, but to support exactly the same intervention aimed at immigrants.

As usual in the immigration debate, incoherence is a sign that the real arguments are not the ones people are talking about.  On both sides. 

36 comments:

  1. If we had a Laissez-faire society, we could have open borders. But, we don't. We have a social welfare state. Open borders are a disaster in a social welfare state. Immigrants will be used to drive down wages forcing citizens on to welfare. This demoralizes citizens who lose job skills and become unemployable. Further it leads to drug addiction and alcoholism.

    Mr. Cochrane, you and I might wish to have a Laissez-faire society, but what we have is a social welfare state and open borders. We are stoking the fires and one day they will become a conflagration that consumes us.

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    1. This is simply not true. Us immigrants are not a huge welfare state problem. They come to work. Red herring. Out welfare state blowout is spent on us born citizens. You're making my case about people who make demonstrably wrong arguments while something else is really on their minds.

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    2. That is not what I said. Immigrants take the low wage low skill jobs, citizens wind up on welfare and are demoralized. The same thing has happened all over Europe.

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    3. This doesn't make any sense. Why do citizens end up on welfare as a result? If they're low-wage citizens, then they're probably already on "welfare" (which program are you even referring to?).

      If they weren't on welfare, and somehow lost their job to an immigrant, then why are they suddenly, irrevocably, unemployed? You seem to be suggesting that there's a finite amount of work to be done in an economy. Realistically, the economy grows as the population grows.

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    4. Mr Cochrane do you actually mean to deny that the thousands of minors now streaming across our borders will NOT be a burden upon taxpayers? Are you unaware that the Obama administration is now providing free lawyers for each of these illegal immigrants in order that they may more effectively fight the very same government he administers? Are you willfully blind or just ignorant of how the likes of La Raza have captured the immigration regulatory apparatus of government? To argue that illegal immigration is not a burden on an already overextended government leaves me speechless.

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  2. "What occurs to me this morning is the inconsistency that conservatives make this argument."

    You are confusing free market principles with conservative principles - they are not the same thing.

    Should the government require that you pay wages in federal reserve notes?
    Free market answer: No
    Conservative answer: Yes

    Should the government require that you pay taxes in federal reserve notes?
    Free market answer: No
    Conservative answer: Yes

    Should the government require that you must be fluent in the English language to receive benefits provided by the government?
    Free market answer: No
    Conservative answer: Yes

    Free market types look at the sovereignty of a nation as an impediment to economic progress. Conservatives look at the sovereignty of a nation as a means to unify dis-separate parties.



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    1. When the economy and markets were booming immigrants where welcome, who cared.

      If immigrants sign up and pay social security, taxes etc would you care?

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    2. I don't have a horse in this race. My only point was that free market supporters and conservatives are not ubiquitous.

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    3. Gross oversimplification (as usual) of conservatives. I happen to be a fusion libertarian-conservative, whom favors liberalized immigration, as in the pre-1920's era (without the racist exclusions). My conservatism is more fiscal and cultural in nature. I do think Cochrane also oversimplies--in fact, if we want to talk inconsistency, what about Uncle Milty Friedman with his "not until we get rid of the welfare state" policy? Like THAT'S going to happen....

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    4. Ronald,

      The only thing that I was trying to demonstrate was that a free market supporter and a conservative are not the exact same thing.

      You could also say that I made a gross oversimplification of free market supporters as well.

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  3. I found the last couple of lines the most interesting, and they reminded me of an important paper of "Jonathan Haidt", in which he proposes that our moral judgements are based on "intuition" and the reasoning we offer is for the purpose of social interaction. Here is the article and his summary (from http://people.stern.nyu.edu/jhaidt/publications.html). I suspect that this apply more generally to political/social debates.

    Haidt, J . (2001). The emotional dog and its rational tail: A social intuitionist approach to moral judgment. Psychological Review. 108, 814-834. Request article
    --This is the most important article I've ever written. It was my effort to bring together the newest developments in many fields in the 1990s, and link them up to older ideas (from David Hume and Robert Zajonc) about the primacy of affect. I formulated the "Social Intuitionist Model" as an alternative to the rationalist models that had dominated moral psychology in the 1980s and 1990s. The model says that most of the action in moral psychology is in our intuitions -- our automatic evaluative responses. People do indeed reason, but that reasoning is done primarily to prepare for social interaction, not to search for truth. We are just not very good at thinking open-mindedly about moral issues, so rationalist models end up being poor descriptions of actual moral psychology.

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  4. Countries with a high capital to labor ratio have high standards of living. That is, the average wage for all Americans is relatively high compared to the rest of the world because of our high capital to labor ratio. Americans are more productive, and hence have higher wages, not because we are “Americans” but because we have more and better tools than most other countries. By limiting immigration, the capital to labor ratio remains high, and so does U.S. wages.

    Do any of your examples have the effect of increasing the average wage for all Americans? The minimum wage does not raise the wages for all Americans. The effect of the minimum wage is raise the wages of some, but also reduces the wage of others that do not meet the minimum threshold of productivity. Those who productivity is below the amount that is required for hiring have a wage of zero. It does nothing to raise the productivity of all Americans and hence the wage of all Americans.

    Protectionist policies banning imports and subsidizing exports would raise the real exchange rate and leave net exports unchanged. Certainly some Americans (exporters) would benefit at the expense of other Americans (consumers of imports). Total trade would be reduced. Such policies would not raise the wage of all American. An increase in the amount of capital per worker would raise the wages of all Americans. Unlimited immigration, for example, would reduce the capital per worker ratio and the wages for all Americans.

    More Union power would not raise the wages of all Americans. Again, this is another redistributionist policy that would benefit some Americans (union workers) at the expense of other Americans (non-union workers). By limiting the amount of workers in a unionized industry, by strike and strike threats, it can increase the unionized wage, but only be having the excess labor that would have entered unionized industries enter into non-unionized industries and causing wages to be lower. The overall wage for all Americans is not increased with unions.

    Licensing restrictions and other mercantilist policies will once again limit the amount of labor in certain occupations raising wages in those occupations, but only by driving labor into other occupations which would have the effect of lowering wages. Overall wages do not increase with licensing restrictions.

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    1. You missed John's key argument which is that if Labor doesn't migrate, Capital will.

      Your argument hinges on a high capital-to-labor ratio.

      But if capital is scarce in other countries, capital WILL leave the USA and that will reduce that very capital-to-labor ratio you focus on.

      So ultimately, limiting immigration doesn't help maintain wages because the capital-labor ratio will converge to whatever it should be: whether it is by immigrants increasing the denominator, or by capital moving and reducing the numerator.

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  5. Should Illinois impose immigration restrictions on Indianans to keep of the wages of Illinoisans’ high? Unlike your other examples which only redistributes wages from one group of Americans and gave it to another group of Americans, we will first ask does immigration restrictions into Illinois cause one group of Illinoisans to benefits at the expense of another group of Illinoisans? The answer would be no. The capital to labor ratio would be unchanged and all Illinoisans would benefit or at least not be harmed if Illinois imposed restrictions on immigration from Indiana.

    To move this from the state level to a national level, would maintaining the current capital to labor ratio by restricting the amount of immigration benefit one American at the expense of another American? The answer would be no. All Americans would benefit with a high capital to labor ratio. Would restricting immigration and maintaining the current capital to labor ratio benefit Americans at the expense of non-Americans? The answer would be yes. By restricting immigration, Americans do benefit and the expense of non-Americans. Would unlimited immigration that significantly reduced the capital to labor ratio benefit immigrants and harm Americans? Yes it would. Immigrants coming from counties that had little capital per worker would benefit tremendously coming to a country that has lots of capital per worker. On the other hand, Americans would be harmed greatly with a sudden lowering of the amount of capital per worker with the influx of a large supply of immigrants.

    The next questions are one of values that economics cannot answer. Do you value being an American and keeping the American standard of living high, albeit at the expense of keeping world output lower than it otherwise would be? If you say yes and would prefer high wages at the expense of non-Americans, then you should be against the unlimited influx of immigration. Or do you place no value in being an American, and that immigrants have a right to higher wages at the expense of a significantly lower standard of living for Americans? If you have no special feeling about be an American and would like to see non-Americans benefit at the expense of Americans then you should be in favor of open borders and unrestricted immigration.

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    1. Thoughtful and generous response Tom. I would argue that Professor Cochrane's views are, when we get to the roots of it, Ricardian and Neo-liberal. That is trade, capital and labour flows lead to win win outcomes. We could of course make an equally coherent Marxian argument that it leads to winners and losers. In the end each individual case has to be shown on its own merits with very detailed, preferably model and ideology free, empirical study of both primary documentary evidence and data. I think absolutism and excessive abstraction has been a big problem with this and similar discussions.

      I would say though that immigration is not necessarily a choice between the national and global good. For example, students that Professor Cochrane are talking about who want to emigrate to the US could actually lower world welfare by doing so. They are needed in countries short of skills and their marginal social product would be higher where they are needed. Europe, for example, gets many doctors and engineers from third world countries who desperately need them. Training of locals in medicine has become hollowed out and now the UK is also short of doctors and very foreign trained doctor dependent. In this case, you could argue that uncontrolled movement of labour is bad both nationally and globally.

      Perhaps it is more a choice of individual freedom vs social optimums?

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  6. Taking the costs and benefits into account, I think the net benefits to a more open immigration policy would be positive. At the higher end of the skill distribution I have some friends from graduate school who were forced to take positions with established companies rather than start their own (even in cases where they had all of the funding lined up) because it was the only way they could obtain a visa to stay in the country after graduation. That's insane.

    That being said, I think the argument that most immigrants come here to work (which is true) is not a valid argument for expanding immigration policy. The reason is because a change in the immigration policy is a structural break which could (and likely would) change the composition of immigrants. You outline some qualifications we could place on immigration in your Hoover piece (deposit, job offer, etc.), I'm not quite sure those are feasible. In the end though, we cannot observe entrepreneurial ability and productivity and I think the benefits from a more open immigration policy that allows those at the higher end of the distribution to obtain citizenship more easily would more than offset any moral hazard type problems.

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  7. "If labor doesn't move, capital will."

    A country's policies should not be dictated by, and its sovereignty should not be undermined by capital. For sure capital is behind a lot of the push for mass movement of peoples. The influence of monopolistic and oligarchic capital is already too high. In fact, controls on some of the behaviour of capital are probably more important than those on large migration flows - which if very large are likely to have a redistributive impact with the weaker members of society hit the hardest. The result is that the costs may outweigh the gains pretty much for everyone.

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    1. "A country's policies should not be dictated by, and its sovereignty should not be undermined by capital."

      Sovereignity, or control of the people by the state, should be undermined in as every non-violent means possible. Free movement of goods,services,capital, and people would help to constrain the power of the state in a way superior to the ability to vote.

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  8. "If labor doesn't move, capital will."

    This reminds me of arguments for a "light touch" to financial regulation in the UK during the 80s and 90s, well up to 2008. The argument was that if controls were put in place, London would lose business and its status as an "international financial centre".

    What we got was a race to the bottom.

    We need a swing back in the pendulum now. The owners of capital have had too much influence. It is bad for society and democracy. Completely free movement in international capital can lead to cluster effects and concentrations of capital, not always convergence and equilibration as promoted by neoliberalism. (Reference Gunnar Myrdal.) Contrary to what many people think, large parts of the world are being left behind, particularly the Middle East and Africa. This is a humanitarian and security risk. Controlled internally generated investment and balanced participatory egalitarian growth at a local level is the answer, not huge movements of international capital and labour.

    We need to get beyond 1950s liberalism.

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  9. Dr Cochrane,

    we might not see eye to eye on a lot of subjects, but this is the kind of post that I always look forward to reading from you, together with the interesting and novel insights you tend to bring to macroeconomics. An excellent and elegant way of pointing out a certain degree of inconsistency from people who would otherwise call themselves as defenders of the free market.

    Of course, as you highlighted previously, there are other important issues to contend when talking about immigration, not in the least a more overarching question of how a society shapes and can deal with massive change in a short time span, but I think you've done a fine job of showing how the wages argument is incredibly weak, from a free market view point. And judging from the responses above, I think you've hit a nerve with this one simple because you've kept the argument so fantastically simple, and highly effective.

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  10. Dougherty's point is well known as a good general rule. It predicts the average wages of many countries, especially the two larger than the US: India & China. Cochrane apparently does not know this, like many economists.
    Gregory Benford

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  11. As for intellectual honesty, I always ask anti-immigration types where their grandparents were born and with how many millions of dollars they arrived. US Americans have no right to be anti-immigration. We have at worst the right to say "Last one in, close the door".

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    1. I've tried that. They usually answer "but my grandparents came here legally." To which I say "under current law, they would not be allowed." The conversation then moves on to other things.

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    2. I bet the native Indians wished they did could have implemented migration controls. Another example of how neo-liberalism ignores power relations in its examination of international capitalism.

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  12. I highly doubt immigration should be the actual focus. America have a higher wage rate than many other countries due to their technology advancement and innovation. The argument on immigration is always about immigrants taking the better jobs and therefore least educated Americans (high school dropouts, college dropouts etc) will receive a lower paycheck and lower wage rate. Shouldn't the American government reconstruct a educating system or policies to ensure the future generation of America's competence in the market?

    I think it is hard to say whether minimum wage should be raised by the federal government. Each states have different policies and taxation. I think it is better to urge each federal state to do research accordingly and raise in a appropriate margin to prevent unemployment rate or any other negative effects which can backfire. Besides, imports are actually one of the most important thing keeping the gap between the rich and the poor in the United States as close as possible and there's more to lose than to gain by banning imports and the federal reserve is actually quite low to be providing so much subsidization.


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  13. Well, do you believe that the Federal government should mandate a large minimum wage, to raise American’s wages?

    - minimum wage law doesn't shift supply or demand in the long run. it merely bans people from working in low-wage jobs. that isn't the same as raising wages for them.

    Do you believe that the Federal Government should ban imports and subsidize exports, to raise American’s wages?

    - this would mean the government micromanaging to pick winners and losers, something that it doesn't do well. firms would compete to win government support rather than customer approval. there is no analogy between this problem and immigration policy.

    Do you believe that the Federal Government should give more power to unions, to raise American’s wages?

    - the power of private sector unions is declining anyway due to globalization. the real union problem today is in the public sector. immigration brings in millions of people supportive of bigger government (for economic and cultural reasons). this is likely to increase union power.

    Do you believe that the Federal Government should pass even more stringent rules in its own contracts to pay higher wages?

    - the playing field between government and private sector should be level.

    Do you believe that the government should pass more licensing restrictions, to lessen competition and raise American's wages?

    - it's hard to do this without preventing technological and organizational innovation.

    Should Illinois restrict people Indianans working in Illinois, to keep up Illinoisans' wages?

    - there is no need to maintain a wage disparity between indiana and illinois like there is between US and third world.

    A few questions for you:

    Open door immigration would lead to the mass influx of indigent people far poorer than 95% of the native-born.
    Would you be willing to see wages for low-skilled jobs falling to the levels at which they're paid in the third world?
    Would you be willing to see low-skilled americans forced to accept them on equal terms with newcomers?
    Would you be willing to allow favelas in the US?
    Would you be willing to suffer the political pressures they bring?
    Would you be willing to extend entitlement programs to them?
    Would you have any ability to refuse?

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  14. Grumpy, This is completely off topic, but there’s been a lot of reaction to Ann Pettifor’s defence of the existing banking system and her opposition to full reserve banking. See:

    http://www.primeeconomics.org/?p=2922

    Full reserve involves something you approve of, i.e. funding banks or lending entities just from shares rather than from depositors and similar. So how about a reaction from you. Even better, just look at my comments after her article and put them in your own words..:-)

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    1. Thanks for the pointer. The article gets a lot wrong in a short space.m

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  15. You can see why your mentors Lucas and Sargent preferred working in a world of celestial abstraction. Whether that was good for economics and the pursuit of human knowledge, I will not comment on. But it was certainly not good for democracy. It is most noble of you to engage with the general public (and people working with different intellectual frameworks in other social sciences) and while no doubt very time consuming, perform an important social purpose and are much appreciated.

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  16. Laura Ingraham has really been pushing the "immigration depresses native wages" lately.

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  17. Anonymous @10:13 AM
    Haven't there been well known economists pushing the same thing ("immigration depresses wages")? I am thinking of George Borjas, at Harvard (Kennedy, I think).

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  18. Let's say that the state prevents people from driving around. But some villain, say the Joker, has captured control of the traffic signals. If you're batman, how do you prioritize? If you fix the state before you fix the Joker...the result will be countless causalities.

    The Joker is economic ignorance. You don't solve economic ignorance by pushing for open borders. You solve it by helping people understand how the efficient allocation of resources depends on accurate information. Labor can't be efficiently allocated if wages do not accurately reflect regional differences in demand. Just like defense can't be optimally supplied if the actual demand for defense is unknown.

    Maybe I'm barking up the wrong tree? If so, then please share the correct info.

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  19. "New York Times - THE CHINESE IN AMERICA.; THE LABOR QUESTION CONSIDERED. REPORT OF THE HOUSE COMMITTEE ON EDUCATION AND LABOR-
    ...--THE PEOPLE NOT A DESIRABLE CLASS TO HAVE."

    "Washington, Feb. 25, 1878 - Mr. Willis, of Kentucky, in behalf of the House Committee on Education and Labor, to-day made the following report on the Chinese question..."

    "The Chinese who come to this country have no homes. They have neither home feelings nor home interests in any true acceptation of the words. With the conditions of their mode of life they never can have homes. They are willing to work for less wages than will secure homes or comfortably support white labor..."

    [article goes on to say they don't assimilate and smell bad as well]

    http://query.nytimes.com/gst/abstract.html?res=9C0DE0DF143EE73BBC4E51DFB4668383669FDE

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  20. Sounds like John is describing the Canadian system of immigrant selection where points are awarded for certain attributes ('standards', which include such things as English or French language proficiency, education, etc.) but controls on numbers are more-or-less determined by the bureaucracy's ability to handle the flow of applications. Canada has added 1 percent (gross) to its population by immigration, on average, for decades. The net immigration rate in Canada is twice as high as it is in the United States. It seems to be working out well.

    The difference, of course, is that it is a lot easier for Canada to choose its immigrants than it is for the United States.

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  21. Hey John, just stumbled upon this article. Although the issue of minimum wage does play a significant factor in immigration, it does not account for all of it. One area to look at is agricultural labor in the U.S. It's interesting to realize that most farm owners (particularly in Northern California), whether conservative or liberal, fully support immigration due to the significant demand for labor; however, the crackdown on immigration has placed a large burden on the farms (lack of supply), leaving the farms unable to meet production quota. Does this mean that increasing wage for less workers would balance out this issue and hence, lead to an increase in American wages overall? Let me know what your thoughts are.

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  22. It is true that immigrants will hurt the U.S. citizen because of how our wages would be reduced, but immigrants can also add to the U.S. economy. The U.S. economy is so large that immigration is not much of an issue. The net benefit would be so little that it shouldn't make a huge impact towards us. It does not necessarily fall on immigrants, but rather it is which immigrants. Immigrants from poorer countries would benefit our economy because what we have to offer helps them become better off unlike immigrants from countries that are more developed and rich.

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