Recently, I read snippets from George Borjas’s book, We Wanted Workers (I got distracted and reverted to reading Leah Platt Boustan’s Competition in the Promised Land).On its heels came this article by Dani Rodrik in Foreign Policy. Both work make the same case, that free movement of goods and people may imply some negative effects on inequality. Borjas argues that immigration increases inequality while Rodrik argues that low-skilled workers are displaced.
Both arguments are not convincing.
First of all, immigration will always increase inequality in one area. This is by definition. Unless the migrants follow the same distributional pattern as the host population, inequality will increase. If somebody from Cuba enters the United States at the tenth percentile, he increases inequality by swelling the ranks of low earners. If somebody from China enters the United States at the 90th percentile, he increases inequality by swelling the ranks of the high earners. However, from a global perspective (world population), inequality has actually dropped since the migrant has a greater income than in the past. After all, bringing a Haitian to the US may increase US inequality measures but the ten-fold increase in his income (this number comes from my colleague Ben Powell) means that worldwide inequality drops.
To be honest, I know that Borjas is probably aware of this point, but many of those who spin his work don’t get it. Borjas’s argument is little more sophisticated. His claim is that low-skilled workers (high school dropouts) see their wages go down while everybody else (high school graduates and university graduates) gains from immigration. This increases inequality because they are left behind economically. But this is where his argument is alike that of Rodrik and where it misses the target dramatically.
While I could be lazy and simply say that many other scholars place Borjas at the extreme of the spectrum of academics with regards to the effects of immigration on labor markets. Indeed, there are more scholars who find that low-skilled workers also gain from immigration all things being equal. But, I won’t be lazy. Let me assume, for the sake of argument, that the empirical result is valid. If unskilled workers are displaced, why can’t they find new employment elsewhere. If the effects of immigration are so positive for everybody else, it means that everybody else is substantially richer and they can demand more goods. Are there barriers preventing the unskilled from acquiring jobs? The answer is emphatically yes.
The ability to find a new form of employment following changes in the labor market depends on the frictions that exist on the labor market. Some of them are natural. We have to assume search costs (time, energy, some money) to look for a job and get the training for that job. But there are also barriers that create unnecessary frictions. The rise of occupational licencing is one of those (growing) frictions (see here, here and here). We could also point out that product regulations tend to affect the prices of goods that weigh more heavily in the consumption baskets of lower-income workers (here and here) thus pulling the poorest down. We could also point to the fact that states with right to work laws seem to have enjoyed more limited increases in inequality than the states without such laws (here). We could also underline the fact that housing regulations are making it harder for unskilled workers to move to dynamic areas, thus locking them in low-productivity areas (here). And the list could go on for a few more pages, but I think the point is made: there are tons of factors that make displacement a problem. However, those who worry about it when it comes from changes resulting from trade or immigration are concerned with a minor (and positive in the long-run) variable. In a way, Borjas and Rodrik are (rightfully) concerned about the poorest but they fail to identify the problem like if a doctor was concerned with his patient’s loss of sight rather than concentrating on the brain tumor that caused the loss.
Free trade and open borders generate massive benefits. But there are short-term costs as production methods and resources are being reallocated. Many government policies amplify exponentially these costs and delay reallocation. This creates the inequality they bemoan.