Economics of International Wage Differentials and Migration

Lant Pritchett and Farah Hani | July 2020 | Oxford Research Encyclopedia of Economics and Finance

The key question for the economics of international migration is whether observed real wage differentials across countries for workers with identical intrinsic productivity represent an economic inefficiency sustained by legal barriers to labor mobility between geographies. A simple comparison of the real wages of workers with the same level of formal schooling or performing similar occupations across countries shows massive gaps between rich and poorer countries. These gaps persist after adjusting for observed and unobserved human capital characteristics, suggesting a “place premium”—or space- specific wage differentials that are not due to intrinsic worker productivity but rather are due to a misallocation of labor. If wage gaps are not due to intrinsic worker productivity, then the incentive for workers to move to richer countries is high. The idea of a place premium is corroborated by macroeconomic evidence. National accounts data show large cross-country output per worker differences, driven by the divergence of total factor productivity. The lack of convergence in total factor productivity and corresponding spatial productivity differentials create differences in the marginal product of factors, and hence persistent gaps in the wages of equal productivity workers. These differentials can equalize with factor flows; however their persistence and large magnitude in the case of labor, suggest legal barriers to migration restricting labor flows are in fact constraining significant return on human capital, and leaving billions in unrealized gains to the world’s workers and global economy. A relaxation of these barriers would generate worker welfare gains that dwarf gold-standard poverty reduction programs.

The New Economic Case for Migration Restrictions: An Assessment

Michael A. Clemens and Lant Pritchett | May 2019 | Journal of Development Economics

Migration barriers tend to reduce global production by impeding efficient spatial reallocation of labor. Recent research argues for a countervailing effect of barriers, tending to raise global production by preventing the spread of impoverishing institutions from poor to rich countries. While evidence of this mechanism is scarce, it is theoretically plausible at high migration rates. We propose and calibrate a simple model of dynamically efficient migration when migrants spread economic institutions between countries. The net effect of migration depends on three parameters: transmission, the degree to which origin-country total factor productivity is embodied in migrants; assimilation, the degree to which migrants’ productivity determinants become like natives’ over time in the host country; and congestion, the degree to which transmission and assimilation change at higher migrant stocks. On current evidence about the magnitudes of these parameters, dynamically efficient policy would not imply open borders but would imply relaxation of current restrictions.

The Place Premium: Bounding the Price Equivalent of Migration Barriers

Michael A. Clemens, Claudio E. Montenegro, and Lant Pritchett | May 2019 | The Review of Economics and Statistics, MIT Press Journals

Large international differences in the price of labor can be sustained by differences between workers or by natural and policy barriers to worker mobility.

We use migrant selection theory and evidence to place lower bounds on the ad valorem equivalent of labor mobility barriers to the United States, with unique nationally representative microdata on both U.S. immigrant workers and workers in their 42 home countries.

The average price equivalent of migration barriers in this setting for low-skill men is greater than $13,700 per worker per year. Natural and policy barriers may each create annual global losses of trillions of dollars.

Alleviating Global Poverty: Labor Mobility, Direct Assistance, and Economic Growth

Lant Pritchett | March 2018 | Center for Global Development (CGD)

Decades of programmatic experimentation by development NGOs combined with the latest empirical techniques for estimating program impact have shown that a well-designed, well-implemented, multi-faceted intervention can in fact have an apparently sustained impact on the incomes of the poor (Banerjee et al 2015). The magnitude of the income gains of the “best you can do” via direct interventions to raise the income of the poor in situ is about 40 times smaller than the income gain from allowing people from those same poor countries to work in a high productivity country like the USA. Simply allowing more labor mobility holds vastly more promise for reducing poverty than anything else on the development agenda. That said, the magnitude of the gains from large growth accelerations (and losses from large decelerations) are also many-fold larger than the potential gains from directed individual interventions and the poverty reduction gains from large, extended periods of rapid growth are larger than from targeted interventions and also hold promise (and have delivered) for reducing global poverty.

Is There a Goldilocks Solution? “Just Right” Promotion of Labor Mobility

Lant Pritchett and Rebekah Smith | November 2016 | Center for Global Development (CGD)

Relaxations of rich country restrictions on the mobility of low-skilled labor is far and away the single most potent policy change to raise incomes of people now living in poor countries. But this just isn’t on the post-2015 Sustainable Development Goals agenda or the agenda of any development actor. The reason why is seemingly obvious: rich country voters don’t want it. In this policy essay we take issue with that explanation in two ways. First, a naïve explanation of the global agenda as determined by the “polled opinion of the median voters” (of whatever countries) is an empirically poor model. Second, we take the lessons of recent successful global advocacy and propose their application to a “goldilocks” approach to the promotion of reduction of barriers to movement of low skilled workers. The “just right” approach looks to avoid either “too hard”—expecting countries to make legally binding commitments to a global protocol—or “too soft”—no global mechanisms for reducing restrictions on labor mobility. We propose a “bundled” organization that works with existing bilateral labor agreements and partners as part of an organization capable of analysis and advocacy.

Let Their People Come: Breaking the Gridlock on Global Labor Mobility

Lant Pritchett | September 2006 | Center for Global Development (CGD)

In an increasingly liberalized and integrated global economy, with more open capital and goods and services markets, the highly restricted and heavily regulated markets for global labor are an oddity. In this controversial book, CGD non-resident fellow Lant Pritchett examines the potentials and perils of greater cross-border mobility of unskilled labor—within poor world regions and between poor and rich countries. Pritchett argues that irresistible demographic forces for greater international labor mobility are being checked by immovable anti-immigration ideas of rich-country citizens. He highlights the difficult political and ethical issues that the movement of people across national borders presents to the current system and proposes breaking the gridlock through policies that support development while also being politically acceptable in rich countries. These include greater use of temporary worker permits, permit rationing, reliance on bilateral rather than multilateral agreements, and protection of migrants’ fundamental human rights. Pritchett’s discussion of ways to break the deadlock is a provocative contribution to the growing debate on one of the most important and difficult issues of the 21st century.