TCA Srinivasa-Raghavan: Why the West doesn't want to import labour

OKONOMOS

The resistance has less to do with wage rates than with tax rates, which increase to finance the dole.

Most readers of this newspaper, I imagine, have visited Western Europe and the US . Few, if any, could have failed to notice how much more things cost there. The economists amongst the readers would have rationalised it by saying that their labour is very costly.

The question, of course, is why these countries don't import labour. The usual answer is that voters don't want their wages to come down and ensure that immigration is controlled tightly.

But do wages really come down as a result of inward migration? It depends, say Timothy J. Hatton and Jeffrey G Williamson in a remarkably insightful paper* "" which has the merit of being short as well.

They have compared the current round of globalisation with the one before in 1914, by examining the relationship between migration and capital flows, with a view to finding out what happens to wages and employment "with and without international capital mobility".

I should point out a major difference, though. In the first phase of globalisation, both labour and capital were mobile because about two-thirds of the world's population had been colonised and labour could easily be shifted around at will. But this time, globalisation is judged only by the extent of capital mobility. Labour mobility is not considered as an integral element of globalisation.

Be that as it may, the authors make several important points:

First, and most crucially, they say that much depends on the importance of fixed factors of production. In the first round, they say, land "was a much more important input to aggregate production than it is today." This meant that the wage effects of migration were significant, not least because those who were left behind saw their earnings from land increase even if their productivity did not increase.

Likewise, "the more open are capital markets, and the less important are immobile factors such as land, the smaller should be the wage effects of immigration." And given that capital is much more mobile today than labour, "host country policy backlash that arises from wage effects should be smaller today than it was a century ago."

But that is not the case. Why not? The authors offer a very convincing explanation for why not. The truth is that the importance of fixed factors has not decreased at all. Instead, land as the immobile factor has been replaced by skills.

"While land has become less important, skills have become more important. And if unskilled migrants (unskilled relative to host country natives) dominate the flow from poorer to richer countries, then skills might be viewed as an immobile factor just as land was in the 19th century."

Does this really mean that there is no difference at all? Not quite, they say. Before 1914, landowners were a minority but today skilled workers are in a majority, and, moreover, they have a vote. This is the great difference. The result is policies that limit migration.

But is this sensible? No, say Hatton and Willia- mson, because the in-migration of relatively unskilled or less-skilled workers leaves the wages of the skilled or more skilled workers unaffected. Then what is the problem? The welfare state, they say, which guarantees the unemployed migrants a dole which is financed by higher taxes on the skilled native-born fellows.

In short, the protest is not so much about lower wages but about higher taxes. "The larger is immigration and the bigger is the welfare state, the more costly this is likely to be for the average host country voter."

Finally, the authors say that "we have made no mention of racism, patriotism and xenophobia since there is no reason to think that the intensity of these attitudes changed between the two global centuries."

In which continent, one mi-ght ask "" Europe or America?

*What Determines Immigration's Impact? Comparing Two Global Centuries; NBER Working Paper No. 12414, July 2006