Stanford Business

NOVEMBER 2006


The Economics of Worker Migration

Robert Flanagan’s look at the globalization wave of a century ago provides clues to the economics behind the current immigration debates.

Globalization and Labor Conditions book cover

As a labor economist, Business School Professor Robert Flanagan stays tuned to debates about whether globalization harms workers—their wages, working conditions, and rights. In a new book, Globalization and Labor Conditions (Oxford University Press), he reports evidence that the three major mechanisms of globalization—international trade, migration, and capital flows—benefit workers in general, especially the poorest workers in the poorest countries. While these trends also cause some short-term pain for the least skilled workers in rich countries, Flanagan argues that policies to promote opportunities for low-skilled workers are far better than current efforts to limit immigration. Given the recent controversies surrounding immigration in the United States and Europe, Stanford Business asked Flanagan to summarize the evidence that immigration is important to improving global working conditions and standards of living.

Q: One chapter in your book provides a fascinating account of how immigration early in the last century altered working conditions in the Old and New Worlds. Could you summarize that for our readers?

Robert_Flanagan

Mass trans-Atlantic migrations in the late 19th and early 20th centuries were part of the first wave of globalization, which dramatically narrowed real wage differences between the Old and New Worlds. They also provoked a political reaction in the form of development of restrictive national immigration policies that are still controversial today.

By the mid-19th century there were dramatic differences in labor conditions between the land-rich, labor-scarce countries of the New World and the labor-abundant, land-scarce countries of the Old World. The slave trade, which had been the main source of labor in the United Sates, had ended, although slavery had not. Real wages for urban, unskilled male workers in the United States were over four times those in Sweden. Australian wages were over three times those in Ireland, and wages in Canada and in South American countries were also multiples of European wages. However unpleasant the working conditions faced by immigrants in the New World, they were superior to the conditions they left behind.

Q: What triggered the wave of migrations?

In the last two-thirds of the 19th century, the costs of trans-Atlantic transport fell dramatically relative to real wages. That stimulated migration for those who could afford the trip and were willing to incur the nonmonetary costs, which included the costs of job search and settlement in the new country while separated from normal social and economic networks. Research by economic historians shows that the earliest trans-Atlantic migrants were not those who would have benefited the most from migration. Most workers in the lowest wage countries simply could not afford even the falling costs of getting to the New World. Many would-be migrants had to wait for remittances from the trailblazers who could afford to make the trip. Consistent with differences in the present value of migration returns, migrants were also younger and had a higher labor force participation rate than home-country populations. By the early 20th century, the huge differences in labor conditions induced annual migration flows from Europe as high as 1.4 million people. Economic historians Kevin O’Rourke and Jeffrey Williamson have calculated that by 1910 the cumulative impact of international migration was to increase the New World labor force by 40 percent and reduce the much larger Old World/European labor force by 13 percent. Migrants raised the labor force in Argentina by 86 percent, in Canada by 44 percent, in Australia by 42 percent, and in the United States by 24 percent. Labor force reductions in source countries were equally dramatic, ranging from 45 percent in Ireland and 39 percent in Italy to the low single digits in France, Germany, and the Netherlands.

Migration produced a substantial convergence of unskilled real wage rates between sending and receiving countries. Wages rose in Europe. There were no real wage losses for unskilled native workers in the receiving countries, but their wages grew at a reduced rate. The convergence itself gradually diminished one of the most important incentives to migrate between these regions.

There was also a political backlash that began modestly in the 1880s and eventually evolved to full-scale quotas based on national origin during the interwar retreat from globalization. In the 1880s and 1890s, subsidies and related incentives to attract migrants were modified or dropped first by Australia and New Zealand and then by Argentina and Chile. In the United States, a Chinese exclusion law passed in 1882 was followed by barriers to Japanese and other Asian immigration in 1908 and 1917. The United States also instituted a literacy test in 1917, followed by national origin quotas in 1921 and 1924.

Q: What lessons for today can we take from this?

The history of the first wave of globalization dramatically clarifies how migration can be a force for equalization of working conditions among nations that participate. Things did not go nearly so well for the peripheral nations that did not participate in global markets. Overall inequality increased, and working conditions did not improve in those nations of the Atlantic community that did not participate. Nor did conditions improve in the Asian and African nations that remained largely outside the globalization process.

Q: Are today’s migration patterns geographically different?

New World countries remain major migration destinations. Canada and the United States receive more than one-half of the world’s immigrants. Although migration reduced the European labor force by about one-eighth in the first wave, Europe has became a significant receiving region in recent decades, with 10 percent of its population originating in another country by 2000. Latin America, once an important destination for European migrants, now is a net source of labor. Migration from east and central Europe followed the end of the Cold War, and massive development projects in oil-rich Middle Eastern countries have drawn such large flows of migrant workers that foreign labor comprises close to half the labor force in several countries. South Africa, one of the few economic bright spots on the African continent, attracts migrants from many neighboring countries—and is almost alone on the continent in erecting significant legal restrictions on immigration.

Wages are not well documented in some of the poorest countries, but painstaking efforts to examine incentives to migrate from areas like sub-Saharan Africa conclude that the incentives far exceed those that stimulated 19th-century migration. Yet most current African migration occurs within regions, not across continents. Migration barriers in rich countries are partially responsible for this pattern, but strong tribal and kinship ties also tend to counter forces for migration. While some researchers expect far greater mass migrations from Africa than from 19th-century Europe, two factors may mitigate their conclusions: the future course of the HIV/AIDS epidemic in Africa and the immigration and asylum policies of developed countries.

It is clear to me that the influence of international migration on labor conditions has diminished during the current second wave of globalization. The shifting structure of incentives and public policies has altered not just the geography but the efficacy of migration as a tool for producing international convergence of labor conditions. International organizations and politicians within the receiving countries favor freer trade over free migration for improving the fate of people in the most destitute countries.

Q: Aren’t the majority of people in surveyed countries, whether sending or receiving, opposed to immigration?

The analyses of public opinion surveys suggest that nationalism and other ideologies predict anti-immigrant sentiments, but economic self-interest also plays a role. Consistent with theory, skilled workers are most likely to favor immigration and free trade in rich countries and to oppose it in poor countries. More generally, respondents who desire restrictions on immigration also prefer more [trade] protection. They apparently view free trade and migration as substitutes in threatening or enhancing their working conditions.

Q: Why then is there more freedom for goods to move legally across national boundaries than for people?

Perhaps the greatest impediment to international action on immigration is the difficulty of implementing any reciprocity. The ubiquity of trade barriers provide a basis for reciprocal actions—a quid pro quo in which each country lowers its tariffs to provide a political veneer of fairness. International migration does not provide a parallel opportunity. Countries of emigration have little to offer in exchange for reduction of barriers in destination countries.

Q: If trade is a substitute for immigration, perhaps it can do the whole job of equalizing working conditions.

This question is of enormous relevance to 21st-century policy debates. Some economic theorems hold that even in a world with no international labor mobility, trade in goods would equalize compensation across countries. Emigration will improve wages in poor countries, but so will the export of labor-intensive products to capital-rich, labor-scarce, high-wage countries. The example of the United States outsourcing computer programming to India would seem to support the idea that trade and migration are substitutes. However, neither trade theory nor empirical studies support substitution as a general case. Trade and migration can be complements, not substitutes, when the basis for trade is the differences in countries’ access to technology or natural resources. Even if all trade barriers were removed, significant differences in technology and resources between rich and poor countries limit the prospects for a complete convergence of working conditions via trade.

Q: Do you believe immigration policies will change?

I say in that book that relaxing barriers to international migration offers the most promising opportunity for expanding the positive impact of globalization on labor conditions, but prospects for action seem dim. The short-term distributional consequences motivate strong resistance. Yet few people overtly support poor labor conditions in poor countries. A very useful first principle of policy choice when addressing the consequences of globalization is to favor policies that expand, rather than contract, opportunities for target groups. Efforts to freeze current employment structures fail by this criterion. So do policies that provide lump-sum transfer payments to workers who claim to have lost jobs to globalization, although admittedly, the case for such transfers may be stronger for older worker cohorts. Much better are policies that provide incentives for workers to make transitions. The other mechanisms of globalization—international trade, and the spread of multinational companies, which tend to pay above-average wages in the countries in which they operate—also fare very well by this criterion.

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