As is now a familiar theme, many people oppose immigration into the UK because they fear the social and cultural effects (eg, from Muslim parts of the world) more than they do for the economic impact (supposed negative/positive effects on low-skilled wage rates, effects on productivity, and so on). In general, the classical liberal “open borders” approach states that the issue, in as much as it is an issue at all, is immigration+state welfare. The problem is the state welfare.
An argument that has got an airing today in the Daily Telegraph, via Jeremy Warner, is that immigration, of the “low-skilled” sort, hits productivity. The argument goes something like this: firms have less of an incentive to invest in improved methods of producing goods and services if they can hire cheap labour instead. This is a simple issue of factors of production (labour/capital) being substituted for one another depending on the relative costs of each. Now of course we want higher productivity in the medium to long run so that the whole pie expands; but that is not just a function of increasing output per hour by some restriction on the number of people in a workforce – there is also the increase in the division of labour that one can get with a larger number of people, at least potentially. And even if people are seeing wages for low-skilled labour hold steady rather than rise, it is better that people are in work rather than sitting idle. (Again, one has to consider the welfare impact here in shaping the incentives to take or not to take certain types of job.)
In any event, the supply of people able/willing to perform types of labour is not infinite (let’s not forget that a large number of people have also emigrated from the UK). History also does not seem to back up Warner’s fears: In the 19th Century, there was a population explosion in the industrialising West, for all sorts of reasons (lower infant mortality, better nutrition, health care, and so on), and yet by the turn of the century, real wages, when adjusted for inflation were higher than it was in 1800. (That is hardly a controversial statement. Data by the likes of Jeffrey Williamson and Peter Lindert, in “English Workers’ Living Standards During the Industrial Revolution: A New Look, The Economic History Review, 1978, clearly backs up this point.)
But what Warner seems to overlook is that if an influx of immigrants can be blamed for holding down productivity, cannot the same be said if, say, a significant number of British citizens move from one part of the country to another, as indeed happened in the early parts of the Industrial Revolution when people moved from farm-based jobs to factories and offices? Warner says he favours a sort of levy on employers who use “cheap labour”:
“No free market liberal would argue the case for preventing employers from hiring foreign labour but there are other forms of state intervention that might indeed be appropriate were it not for the fact that the European Union makes them unlawful – for instance, imposing levies on use of cheap foreign labour. By making low skill employment more expensive, the levy system would provide a powerful incentive for productivity gain in construction, retail, social care and other largely domestically bound industries. These levies could then be channelled back into tax incentives for training and other forms of business investment.”
Warner is damn right that no free market liberal would touch such regulation with a bargepole. The levy idea is also foolish, in my view, since how does Warner know how high/low to set it? What is the supposed ideal rate of productivity growth that he thinks should be the target, and in any event, should there be any target at all?
Ultimately, Warner’s analysis involves an unconscious assumption that there is a “UK plc” where we are all working towards a single, or fixed, set of ends, rather than an open society in which people transact and enter voluntary exchanges with others for things/services they wish to buy and sell. Of course, that leaves open other issues surrounding the proper role, if any, of a state, of welfare, of the need to protect borders against those who would enter this territory to do its inhabitants harm. But on the economic point of view, Warner’s argument makes no sense to me. He also ignores the rather basic fact that with a larger population entering an already advanced economy, that increases the potential division of labour, which increases overall productivity. If a person can now afford to hire a cleaner for his home, a child-minder to care for the children, or a gardener, or any other “low-skilled” job, that frees up that person to do something else, and possibly, increase the whole economic pie. And of course these “low-skilled” people can get more skills, develop a track record of reliability and diligence, and become more valuable and productive themselves than they would have been had they been forced to stay in presumably less favourable places where they moved from – since why did they move in the first place?
As a response to Warner’s kind of thinking, I can recommend this article from Daniel Kuehn.
Even the Romanians, supposedly the dregs of European Union immigration, have an employment rate that is well over 50%. That’s because truly lazy people don’t move thousands of miles to make a new life.
The worst damage state handouts and state education do: offer mediocrity and passivity as good short term lifestyle choices at the expense of productivity. A levy on the unemployed would change things fast. Perhaps a flat tax of 10% with a minimum amount of £2,000.
Surely there needs to be some methodological individualism in asking of the benefits/costs of immigration? A hypothetical Romanian software engineer, currently not permitted to work unrestricted, might bring benefits to the economy by raising productivity if he gets a job, but not an overall benefit if he were also a part-time burglar, or a successful agitator for higher taxes. You need to consider the person, not where they come from (or rather, which State has given them citizenship or whether they are connected to a person with a particular citizenship), but what they end up doing and their impact on the economy. Then you get into aggregates, where it is unlikely that a sensible answer can be reached, still less one that people could agree on, as their valuations would differ.
The law arbitrarily designates some people as permitted immigrants regardless of their personal characteristics, and prevents others, unless they can show that they have a special skill. An assessment of merit is not a consideration in all circumstances.
Open borders are a great idea in Libertopia. We don’t live in Libertopia. The government has jammed so many spanners in the works of what could have been a thriving economy that the interaction between floods of cheap overseas labour and government regulation can create severe problems.
Take my local area for example. It is one of the largest agricultural areas in Britain. A land of plenty. There should be no reason for anyone here to be out of work, and yet it is has a massive unemployment rate. Now shiftlessness and benefits dependency have a lot to answer for there, but immigration plays a part.
The Eastern European migrant workers who man the farms are paid a seemingly quite generous £7-£10 an hour. However the farm owners cream off a fee for accommodation which brings their effective rate of pay below minimum wage. Since they house them in run down static caravans, it does not in reality cost them anywhere near £3-£5 an hour to provide this accommodation. So they are effectively working for rates that would be illegal for a British person to try to compete with. The playing field is not level. The government has incentivised hiring anyone but a British person.
JV, none of that is relevant to what Warner says, that’s just a general complaint about immigration.
Personally, I’m sceptical of Warner’s argument. What he is advocating is just more state control of the market, which we have more than enough of already. Business in the UK is semi-socialized already, and now we have someone who wants the state to control even more, right down to affecting the decision whether to hire more cheap labour or invest in technology? Giving the government that sort of micro-management power, as well as it being another interference in liberty, is bound to lead to no economic good, because government levies and tariffs, etc. never do.
And also: “These levies could then be channelled back into tax incentives for training and other forms of business investment.” Really? A supposed ‘free-market liberal’ who thinks good will come of the government being given more money to run training schemes and business investment? Come on.
But SC, we need these government training schemes to produce skilled workers, they have not learnt any meaningful skills in, er, government schools.
JV: The law on accommodation offsets for the National Minimum Wage does not permit such low rates of pay. If it is occurring, it is unlawful, so I do not see how the government is facilitating it, if anything, Minimum Wage laws prevent immigrants undercutting ‘locals’.
I have been for work to a strawberry farm which used gap year Russians and Ukrainians on Agronomy degrees (how ‘Soviet’) to run the farm. They spent a year in the UK, working on the farm, gaining experience of farming, living in caravans and saving up enough hard currency to end their student days debt-free and have a deposit for a flat, so I was told.
“Open borders are a great idea in Libertopia. We don’t live in Libertopia.”
I did not say we did. (I also made the point about welfare.)
“The government has jammed so many spanners in the works of what could have been a thriving economy that the interaction between floods of cheap overseas labour and government regulation can create severe problems.”
Then get rid of the government intervention, rather than seal the borders. Come to that, on the logic of Warner’s position, he should advocate a regime that bans more than a certain fraction of people living in the UK from moving around the country, lest they “depress” wages further. Let’s ban people from Gloucestershire from moving to London, etc!
Your “unlevel playing field” argument comes up over and over, and I have heard versions of it. It goes like this: We don’t have a free market, so we should shut down what remaining freedoms there are, and stop defending the remaining ones because of the distortions they cause. People also use this “unlevel” playing field to justify tariffs, subsidies and the rest. There comes a point where you need to push back the nonsense, not add to it.
We tend to ignore an important point that goes beyond economics: a state that allows immigration and emigration effectively puts a limit on how tyrannical and stupid that state can be, since if people vote with their feet, that is usually a pretty solid indicator of the attractiveness or not of such a place.
I’ll start to get really worried when people of all types stop wanting to live here.
Well indeed Jonathan, but the point I was making was that the open doors immigration policy of the last few years, in the absence of other market reforms, has produced all sort of problems.
I’m not advocating in favour of anything in particular (least of all increasing the power of the state), simply making an observation.
Mr. Ed, your right I overstated the case. The government website on offsets does however list several scenarios where it would be legal to pay people less than minimum wage, but not by more than 50-60p an hour. Even so, there would be ways to utilise this allowance to make importing labour from across the continent cheaper than hiring someone local.
Open Borders is the one issue that makes most of us Libertarian – somethings, rather than the real thing, as it’s the one issue that has to be reality checked. I agree that it makes perfect economic sense to welcome immigrants and the problem is what government does with benefits, minimum wage legislation etc. etc. to bugger things up. However, this is the reality of the situation and it has to be fixed first, otherwise the country will surely collapse under the weight of the people who are unemployed, or underemployed and therefore absorbing wealth rather than creating it. The same argument can be made about culture. You have to accept that with the society (and government) we have, significant numbers of people bring their culture in with them and maintain it (sometimes they become even more devoted to it) rather than assimilate. This may cause friction with the indigenous population and other immigrant groups, and depending what culture we are talking about, can potentially harm or limit what we enjoy of our own way of living. People are right to worry about this. Worse still, it may create incentives for even more of the stuff we don’t like from government. And before anyone suggest otherwise, this isn’t just some sort of dig at people from far flung places who don’t look like ‘us’; look at what is happening in the US, where people migrating from California to Colorado and Arizona are now voting for the same mental policies that destroyed the golden state, and that they were escaping from in the first place! This country would have to be a lot uglier than it is now to make it unattractive to much of the rest of the world, so there will always be plenty of takers for our opportunities, even if former Soviet Union undergraduate fruit pickers turn their nose up at us. If you want a libertarian paradise, then you first need to create one, and only then maybe we can go for open borders. Doing otherwise risks going backwards, both economically and socially, and I really don’t want to imagine that…
I am not in favor of open borders given the current political environment (generous welfare benefits, etc.), but that is not what this post is about. Leaving aside all those issues to address Warner’s specific idea, he is attempting to make an economic argument for limitations on immigration. Unfortunately, that argument fails.
His claim is that low-wage immigration stifles productivity increases, apparently in the belief that only capital investment in technology can improve productivity. That is obviously untrue, since other non-capital factors (improvements in processes, designs, formulations, etc.) can all have the same effect, but even within the narrow confines of technological advance his argument misses the mark.
Investment in technology makes economic sense only when the net present value of that investment is greater than the savings from not making it, in other words, when the cost of that investment is less (in the long run) than the cost of achieving the equivalent result through maintaining the status quo. Wagner would put his thumb on the scales by artificially increasing the cost of labor, thus making technology relatively more attractive. Leaving aside the obvious problems with such governmental intervention, some of which have already been discussed here and which will likely be severe (and also ignoring the possibility that in any given industry there simply is no useful improvement to be made in technology), this completely ignores Bastiat’s “seen and unseen” point. A capital investment which otherwise would have been uneconomic is now rendered so by government intervention. This necessarily drives up costs, which in the long run will increase prices to the firm’s customers. It also diverts resources in ways which (by definition) are economically sub-optimal, thus leaving the macro-economy relatively worse off. It is essentially no different than the broken window fallacy.
This is merely the age-old Law of Unintended Consequences rearing its ugly head once again. Funny how there’s no escaping it.
Surely this post is really about open borders. While I agree that his (Warner’s) prescription of a levy wouldn’t fly and have the consequencies mentioned here, it’s his attempt to deal with the reality that if there were sufficient low skill workers available to make it more cost effective for an employer to hire more people, rather than invest in capital improvements to provide machinery or similar to increase production, then those low wages would be subsidised by the rest of in the form of financial assistance to the workers, either directly in reduced taxes, or in benefits such as housing, or whatever. Therefore, if you want to allow as many low skilled workers in as wish to come (ie. open borders) so that we can see which is best – labour or machinery, then you have to first remove all the distorting welfare arrangements we have in place. You can’t discuss any economic issues without addressing this in the first place and it’s unfair to suggest that Warner is too dim to realise the consequencies of what for me, is a proposal that starts from the premise that there’s a welfare state and everyone knows it and so takes it from there.
Anti-immigration analysis is one sided in that it focuses on the costs and benefits to the incumbent population. If you took into account the benefits to immigrants of immigrating then the numbers would tell you a different story.
As has been discussed before on this website the problem is an excess of goods that suffer from the ‘tragedy of the commons’ problem, i.e. goods that are scarce, or the quality of which reduces the more use is made of it (e.g. public parks), and for which there exists no way of restricting access (i.e. are public).
Many and maybe all of these goods could be turned into private goods. Parks and roads could require membership and might be run by friendly type associations, no public health system or schools (or restrict it to people with a minimum of x number of years of residency).
A good way of increasing buy-in from the incumbent population for a liberal immigration policy, would be to distribute shares or memberships in these public goods*. (Selling off council housing is an obvious idea.) The incumbent population would then benefit financially from increased immigration. It would also be more expensive to live as an immigrant.
While I have some reservations in living in a country with no ‘commons’, where you are always beholden to somebody else, I’m not sure how much it would matter in practice.
*Alternatively residency permits could be auctioned off (an idea proposed by Gary Becker). Personally I’m not keen on this as it keeps the state in the loop and no doubt the money would get used for some crazy project or another rather than paying off the debt. One might of course say that this approach has already been taken by New Labour, with payments received in votes.
Surely this post is really about open borders. While I agree that his (Warner’s) prescription of a levy wouldn’t fly and have the consequencies mentioned here, it’s his attempt to deal with the reality that if there were sufficient low skill workers available to make it more cost effective for an employer to hire more people, rather than invest in capital improvements to provide machinery or similar to increase production, then those low wages would be subsidised by the rest of in the form of financial assistance to the workers, either directly in reduced taxes, or in benefits such as housing, or whatever.
I disagree. We already have an attempt to curb low-wage labour in the form of the statutory minimum wage – which I oppose – so employers do not, even with immigration, have an unfettered ability to hire people at whatever rate would clear such a market. (Alas) And that means that, given the level of welfare and the “tax trap” associated with low paid jobs, it means that unemployment is higher than otherwise would be the case even if you had more controls on immigration. And that unemployment means higher welfare costs and all the rest of it. The focus, first and foremost, should be to make work pay, which means drastic cuts in taxes on the low-paid, including indirect taxes that are regressive in effect, and far tighter rules on qualification for welfare.
As for Warner’s levy point, how on earth does Warner know how high to set it to achieve its supposed result? It is like the old, doomed attempt by Medieval theologans to define a “just” price for something. One might as well pluck a figure from the air. And then of course, given the reality of how things things work, once the levy is imposed on employers of “cheap” labour, does anyone see it being repealed if the economy changes? I doubt it.
Employers are taxed already, of course, and face all manner of costs on employment, such as national insurance and everything else. It almost beggars belief that Warner does not direct his fire at such issues, which are need of reform, rather than call for yet another levy that plays more to fear of foreigners, based on some highly dubious economics (as Laird says), than anything else.
Artificial Intelligence is about to sunder the link between economic growth and jobs and the relatively inexhaustible supply of ever cheaper computing power will have profound effects upon the order of society; certainly within the lifetime of our children.
The word “machine” covers a whole host of devices. Currently an enormous part of our life is now controlled by mathematical algorithms once set in motion, chunter on until they reach their conclusion. These systems and devices remove whole swathes of functions completely.
Several years ago I attended the Turing Lecture given by Professor Christopher Bishop under the auspices of the IET/BCS in London. It concerned recent developments in probabilistic modelling; the greatly expanded variety and scale of machine learning applications, and the future potential for this technology. Just about every industry was present except the people whom AI will affect the most: those of government and trade unions.
These technologies and proto-technologies are already in place here, now. Advances in computing, quantum computing, materials, nanotechnology, biotechnology and cognitive science will change the world in ways we cannot hope to predict.
We as a country can no longer afford to view the future as a place that can look after itself: if we do then the future will devour us.
TPH, I was following your argument just fine until I got to the last paragraph, which frankly I don’t understand and which doesn’t seem to follow logically from what came before. There, you seem to be arguing for some sort of planning (presumably state planning) since the future is incapable of “looking after itself”, yet in the immediately preceding sentence you pointed out that the effect of technological change is inherently unpredictable, which obviously in inconsistent with any sort of planning. Please explain.
Libertarian thought has different systems within it. I advocate minarchistic solutions, and these minarchies could have closed, or controlled, borders. Here in Australia, for instance, we try to attract skilled immigrants, and keep out people likely to end up on our dole queues. Are we an evil dictatorship because of that?
Nick Gray: Yes, to a lot of libertarians, you are a nasty statist lot for allowing the state that much power over your borders. To a lot of economists, you are also stupid because you’re ‘leaving money on the table’ if you restrict labour movement at ANY level.
http://www.independent.org/newsroom/article.asp?id=1727
So sure, let a million low-skilled workers enter the UK (or Australia). It’ll boost your economy lots, raise your GDP. Heck, why stop at a million? Let it be a hundred million! It’s gonna be awesome! They’re gonna keep coming until the wages in the UK (or Australia) are the same as that in their native countries – that’ll be great for the locals too!
:p
@Laird. To boil it all down to basics. How do we create good jobs for the stupid when automation is wiping them out at a rate of knots. Is it wise to increase an already large pool of the uneducated and unemployable through mass migration? If the Agricultural and Industrial revolutions are anything to go by then we can look forward to massive social displacement. How will we deal with this? Because it is likely to be extremely traumatic. I was not implying state planning but the state does have a small number of core competencies and I submit that not piling fuel on an already raging fire is one of them.
tph- Years ago, Fiat automated their factories, and found that they needed human staff even more, to help them customise their products. Also, we have more products being made now, so we’ll continue to need more workers. A further point- this may allow the flowering of human minds in unprecedented ways! Why should I have mass-produced wall-paper? Why not have all my walls painted by local artists, or hire the best from other countries? I wouldn’t value robot-made products, but human skills and craftsmanship will always be valued- and there are more sports and crafts now than in earlier times. So I have some confidence that human ingenuity will solve this ‘problem’.
TPH, you’re discussing immigration policy in general, not the specific economic aspect of it addressed in the original post. That’s fine; now I know where you’re going. And I don’t entirely disagree given the current economic climate (i.e., a massive welfare state which subsidizes indolence). Given that, I agree that a nation needs to control its borders, such as the policy Nick (nice-guy) Gray asserts that Australia pursues.
However, if we (any western nation) were to get our welfare policies under control (limiting it to short-term assistance to the truly needy, denying it to anyone not in the country legally for a minimum number of years, etc.) I would be in favor of much more open borders (excluding only criminals, psychopaths, those with communicable diseases, etc.). I do object to your formulation of the question “how do we create good jobs”; it’s not “our” (read: the nation’s) responsibility to create jobs, but rather to provide a political and economic environment conducive to job creation by the private sector. Given such an environment the problem takes care of itself; in fact, there is no “problem” to begin with. Either there will be few unskilled immigrants coming or they will quickly gain skills. We all benefit from that.
Yes, technological advancement brings disruption (Schumpeter’s “creative destruction”) and social change, but people will adapt naturally; given the right incentives (or, more precisely, the absence of disincentives) we always do. Unless the government finds ways to mess things up (which, I submit, is truly one of its “core competencies”) the future will indeed take care of itself. In the end it has to anyway, and to think we can wisely direct it is hubris.
@nick. I did not suggest there are no solutions. As for automation: I am a professional automation engineer. The factory in which I did my apprenticeship once employed 4000 people. I designed a production line for them some years ago. I counted 25 people on the production floor: there were far more in the design office. And cognitive science is now targeting traditionally middle class occupations. I don’t think many people realise the magnitude of the disruption that is going to be involved.
Hang on, not all specialisation is equal. There is a distinction to be made between smithian and ricardian specialisation; where the former describes the depth or dispersion of specialisation within the economy, and the latter the measures the extent to which a sector in an economy captures the total international trade for that good or service and therefore the comparative advantage for that country and that sector. Each entails different a model of growth, the smithian kind endogenous growth that comes from facilitating economies of scale, the ricardian kind exogenous growth from increasing output through technological specialisation and innovation. It is not sufficient to say that throwing cheap labour into the economy will necessarily lead to growth, because Warner is right to the extent that for a developed country such as ours there is an opportunity cost in choosing between broad, across the board, smithian specialisation and narrow, sector specific technological specialisation.
I make no claims which would be better for us economically, both are problematic for growth theorists in that neither adequately explain the Solow Residual, only that it is not self-evidently true that smithian specialisation of the sort you describe were people are freed to train for higher value labour is the optimal model for growing the economy.
“Hang on, not all specialisation is equal.”
I know; and that is not my assertion. The point is that the more of it you have, then, the better.
And in any event, I challenge anyone to provide me with a clear test of what is the “optimal” model for “growing the economy”. There is no one single thing out there called “the economy”, just a network of people exchanging goods and services (labour, etc) at prices mutually agreeable to both sides (well, that is how it should be in a free market). I take no view as to what is supposed to be a “Smithian” or “Ricardian” specialisation. In fact, if you take Ricardo’s law of comparative advantage, all sides benefit over the medium term even if low-skilled people enter a workforce, just as countries benefit if a low-cost country A sells its goods to high-cost country B. (As we know, protectionists try to demand a “level playing field” in which the low-cost advantages of A are removed.)
“I disagree. We already have an attempt to curb low-wage labour in the form of the statutory minimum wage – which I oppose – so employers do not, even with immigration, have an unfettered ability to hire people at whatever rate would clear such a market”
Of course. That’s why I said “subsidised by the rest of in the form of financial assistance to the workers, either directly in reduced taxes, or in benefits such as housing, or whatever”. Minimum wage legislation is just one more of the many subsidies.
There’s so many mechanisms out there today to distort the comparison between labour and technology that it’s simply impossible to model the outcome. So, while you can criticise his approach, you have to accept that he’s taking it on the basis that all these distortions exist, not that he doesn’t realise it, or is a fool or knave to try and address a particular issue he is interested in with his own distortion method.
As to open borders, it’s a laudable aim but irrespective of any cultural issues, the society we have created now can’t exist without significant ‘safety net’ provisions that would inevitably make it impossible to achieve. Although of course I agree we should at least try and dismantle some of the obvious excesses. Even then, conditions here would have to be brutal before it wasn’t worth someone’s while to buy a seat in a mini bus crossing Europe, let alone passage from places outside the EU.