The Economics of Migration Lecture 16 – Tuesday, 8 November 2011 J A Morrison 1 The Inspection Line, Ellis Island

2 Vito Andolini Alexander HamiltonAlbert Einstein

Discussion Section Adjustment  Only 1 discussion section this Thursday: 1:30 PM  What about 3:25 section? attend the 1:30 section or Make-up: next Tuesday, 4-4:50 (my office) 3

PS 0304 Int’l Pol Econ Unit 1: Studying the Global Economy –Topic 1: Introductory –Topic 2: Perspectives on IPE –Topic 3: Explaining Foreign Economic Policy Unit 2: Trading Goods & Services –Topic 4: Trade in Theory –Topic 5: Trade in Practice Unit 3: The International Monetary System –Topic 6: The IMS in Theory –Topic 7: The IMS in Practice Unit 4: Migration –Economics of Migration –Politics of Migration Unit 5: Special Topics in IPE 4 ✔ ✔ ✔

By comparison, students find migration much less abstract than money (or even trade). This is partly because the material itself is less esoteric (“price-specie- flow,” “portfolio investment,” &c.). And partly because many of you have had personal experience with international migration! 5

The Economics of Migration I. The Basics of International Migration II. Labor as a Factor of Production III. Labor as a Special Factor IV. Remittances 6

The Economics of Migration I. The Basics of International Migration II. Labor as a Factor of Production III. Labor as a Special Factor IV. Remittances 7

What is International Migration? International Migration: the movement of people across political boundaries Duration of Stay –Temporary: tourists, students, medical patients, religious pilgrims –Permanent: immigrants, refugees, migrant workers Direction –Immigration: movement/relocation into a country –Emigration: movement/relocation from a country 8

Why do people migrate? 9

We might think in terms of “pushes” and “pulls.” But the impetus is the same: people migrate presumably because leaving is preferable to staying. 10

(But this is not to say that these “choices” are not sometimes coerced.) 11

What variables influence migration patterns? 12

Influences on Migration Economic: wages, employment level, quality of opportunities (including training) Non-Economic: war/conflict, violence, corruption, freedom, quality of services, familial ties, stability, cultural/ethnic ties Costs of Migrating: legal restraints, transport costs, dislocation/disorientation, persecution, loss of that which is left behind 13

The Economics of Migration I. The Basics of International Migration II. Labor as a Factor of Production III. Labor as a Special Factor IV. Remittances 14

II. Labor as a Factor of Production 1. The Economic Effects of Migration 2. Combining Inputs, Distributing Products 3. Have Trade and Factor Mobility been Substitutes? 15

What are the economic effects of migration? 16

Factor-Price-Equalization A High Labor Low Wages B Low Labor High Wages There are incentives for migration until wages in country A equal wages in country B. A Labor Decreases Wages Rise B Labor Increases Wages Fall Migration

Stolper-Samuelson, again SS tells us that trade helps the abundant factors but hurts the scarce factors Migration has similar effects: Initial Endowment Return on LaborReturn on Capital Labor Rich/Capital Poor RisesFalls Labor Poor/Capital Rich FallsRises

Distributional Effects of Immigrants Greatest effect for Low Skill Labor –Affect wages of high school dropouts (13% of US Natives) Effects confined to small number of industries Rising wage inequality seems to be driven more by technological advancements and trade than by immigration

II. Labor as a Factor of Production 1. The Economic Effects of Migration 2. Combining Inputs, Distributing Products Have Trade and Factor Mobility been Substitutes? 20

Broadly conceived, there are two major components to economic activity: (1) combine inputs (land, labor, capital) to produce desirable products (2) distribute those products to those who desire them 21

Of course, the inputs aren’t always gathered together nicely. Nor are the consumers necessarily close to the producers. 22

International economic exchange is a means by which factors and products can be rearranged. Migration might be considered as a relocation of labor—a factor of production. 23

Of course, there is more than one way to skin a cat. Rather than moving labor, perhaps capital and/or products could be moved. These different options might be substitutes. 24

We have two types of potential substitutes: (1) Substitutability of moving various factors (2) Substitutability of factor mobility and trade 25

(1) Moving Factors as Substitutes Assume: Inputs are disparately located Scenario 1: Bring Capital to Workers –Capital is exported and invested in country with workers –Production occurs in workers’ home country Scenario 2: Bring Workers to Capital –Workers migrate to country with capital –Production occurs where capital lies 26

(2) Factor Mobility and Trade as Substitutes Assume: producers are located away from consumers Scenario 1: Factor Mobility with No Trade –Inputs are relocated to country with consumers –Products are produced within borders; trade is unnecessary Scenario 2: Trade with Factor Immobility –Inputs remain –Products produced outside of consuming country –Products traded to consuming country 27

II. Labor as a Factor of Production 1. The Economic Effects of Migration 2. Combining Inputs, Distributing Products 3. Have Trade and Factor Mobility been Substitutes? 28

The notion here is that moving labor should have the same effects as moving other inputs and/or trading finished goods & services. Does this empirically hold true? 29

Collins, O’Rourke, & Williamson (1999) empirically examine the substitutability of factor mobility and trade across time. 30  They find convincingly that factor mobility and trade were not substitutes. And policymakers never considered them as such.

Why weren’t these things substitutes? 31  Because labor isn’t just another factor. People are special.

The Economics of Migration I. The Basics of International Migration II. Labor as a Factor of Production III. Labor as a Special Factor IV. Remittances 32

Even considered strictly as a factor of production, labor works differently from other factors. 33

Labor is more mobile than land. But it is far less mobile than capital and than most goods and services. 34

Of the things that can be transported, labor is the hardest to move—even when treated with utter disregard. 35 A slave ship.

Migrants also affect the BoP through remittances (sending money back home). And migrants frequently move as “bundles” (as families). 36

Fiscal Implications of Migration Immigrants –Need more schooling, health care, & unemployment assistance –Support social security, work more hours, pay considerable taxes Emigrants: how to make them pay income tax? –All US citizens must pay income tax no matter where they reside or earn income  Overall fiscal effect is unclear but most likely positive effect for host countries 37

The Economics of Migration I. The Basics of International Migration II. Labor as a Factor of Production III. Labor as a Special Factor IV. Remittances 38

A remittance is the transfer of money across space, often internationally. 39

IV. Remittances 1. Background on Remittances 2. The Political Economy of Remittances 40

Remittances: Then & Now Originally developed to finance overseas purchases and investments Remittances have become a major means by which individuals support families abroad Remittances for everyone –Wealthy: British “remittance man” supported by family –Poor: Migrant workers supporting family back home 41

Extraordinary Growth Recently Kapur & McHale: –1980: $17.7bn –1990: $30.6bn –2002: $80bn World Bank 2008 remittances: $305bn (nearly 2% of GDP for developing countries) –Philippines alone had $16.3bn! Recent financial crisis: down to $290bn for

Top Sources of Remittances 43

Top Receivers of Remittances 44

Remittances dwarf foreign aid. 2001: remittances were twice the value of foreign aid. 45

So, we know that the remittances that follow from migration has huge economic effects. But migrants might also influence patterns of foreign investment more broadly... 46

David Leblang has just published an article in the Amer Pol Sci Review showing that “migrant networks…promote both portfolio and FDI.” (Leblang, 2010) 46

How might we explain this effect? 47 Leblang: migrants mitigate cross-border information asymmetries. You invest overseas where friends & family can provide on- the-ground intel.

IV. Remittances 1. Background on Remittances 2. The Political Economy of Remittances 48

So, remittances matter. In thinking about their effects, we might consider a number of issues… 49

(1) Should remittance-sending nations consider remittances as a substitute for foreign aid? Should we allow more migration and more capital flows so as to encourage these processes? 50

(2) Should remittance-receiving nations consider remittances as a substitute industry and/or relief measure? (e.g. Some states in the southern US used to distribute “welfare” in the form of one-way bus tickets to Chicago and Detroit.) 51

(3) How should governments regulate and tax remittances? Can and should they use capital restrictions? Or should we create a new regime to perform this function? 52

(4) What are the implications of remittances for security? Does this money go to fund terrorists and/or militants? 53

Next time, we’ll consider the politics of international migration… 54