Aug. 5, 2010
Countries that restrict labor movements might be missing out on a great economic development opportunity not only locally, but for the world as a whole, according to University of Iowa economist Gustavo Ventura.
Ventura's recently published research shows that lowering immigration barriers is a better way to increase global output and individual economic welfare than many other economic public policy tools, including tax reforms.
"Regulation of labor movements is one of the most severe distortions facing the world today," said Ventura, associate professor of economics in the Tippie College of Business. "Hardly any policy reform at a global scale, either drastic trade liberalization or worldwide tax reforms, would deliver comparable output gains."
Ventura used data gathered from previous periods of largely unfettered immigration, such as the United States before World War I and, more recently, in Europe, as new countries joined the European Union. He then constructed a model to see how production and economic growth fared, as well as individual welfare.
What he found was that in the presence of differences in productivity across countries, economic output increased significantly upon the removal of restrictions to labor mobility. Applying those lessons to North America, he said that a removal of labor mobility restrictions would raise aggregate output by about 10.5 percent in North America within 50 years.
"These output gains are similar to those associated with eliminating a capital income tax of between 40 and 45 percent," he said. The marginal tax rate in the United States is currently in that ballpark, he said, which suggests that open borders can only be matched by tax reforms at a global scale.
The reason, he said, is the economic law that capital follows labor. Where there are more people there are more workers, and where there are more workers, there is more investment and economic growth.
"As more capital comes to the country, there is more need for labor, and it repeats itself," he said. Barriers, he said, only slow economic growth.
"If you were to build a wall around New York, no one would say that’s a good thing for the U.S. economy," he said.
While output increases, Ventura’s research showed that most residents of the wealthier country also see an increase in welfare gains, as do the residents of the poorer country that is losing residents to the rich country, as their employment pool shrinks.
"Freer labor movement is a win for almost everyone," he said.
Ventura acknowledges there will be some economic disadvantages for younger people in the richer country that immigrants are moving to, who will have to compete for jobs within a larger employment pool and will likely see their pay depressed. But he said the overall gains to the economy make up for this disadvantage, and public policy could create laws that help the people who are affected, such as a special tax paid only by immigrants, or an "admission fee" that immigrants pay when they enter the country. Those revenues, he said, could be distributed to the native workers who are financially hurt.
Ventura's article, "Productivity differences and the dynamic effects of labor markets," was published recently in the Journal of Monetary Economics. It was co-authored by Paul Klein of the University of Western Ontario.
STORY SOURCE: University of Iowa News Services, 300 Plaza Centre One, Suite 371, Iowa City, Iowa 52242-2500