- Email: [email protected]
Efficiency and distributional implications of global restrictions on labour mobility
Joumai of Development Economics 14 (1984) 61- I5 North-CAland
IWFXXEN~
AM) DISTRIBUTIONAL IMI’LICAlY0XIJ’S QF GLOBAL RlZ3TIUCTIONS ON LABOITR M08~3”$y
Bob HAMILTON and John WHAU&Y t.Jni~~&Sy 0f Western Onmrio, hidon, Chrario MA 5C2,
Cwapi~
Received February 1982,linal version received Ikyzraber lP@ In tlik paper 8 prscedurefor calculating the annual efficiency gains 6aln ua&.tS alte-native ehangcs in cxistin~ dobai immigration restrictions is presented, along wk.tb m evaiuafion of impacts ofwagerate changes on non-migrating iabour. A simple method&@ uses data on U.S. dollar GNP/capita across cmmtrics to infer difkrences in the margiaal pnodwthity of labour both between countries and across major world trading areas. Two ice&&st~&nptionsused are
tbat the worldwi& labour supply is fixed and full employment occurs b tii regions. Differences oazurring in labour’s marginal product across regions are assumed to sri+%~FXX&~of barriers to inward mobility oflahour in higb wage countries. When these are MIW&, l&our reallocates and dkiency gains occur. While the calculations are based on cofUa&ws assumptions, a striking fkature is tbe size of tbe annual worldwide gains. In some cases, ~&hual gains can easily cxauJ existing worldwide GNP generated in the presence of labour Miijty ksttictions. While all gains do not accrue to LDC’s, tbe size of the gains nonetheless sug$asrs that this issue may be much more important to these countries than other issues raised thaw f&fis, the North-South debate. The losses to labour already employed in high wage countti& ira&Ntieth> incentives for labour unions in the developed world to oppose liberalization.
Much of the recent North-South debate has been cu~~~rraed with such issues as commodity price stabilization programs, debt *tite&‘&, the longterm deterioration in Southern terms of trade (which mme economists consider contentious) and protectionist trade policies in the N&h. Rcktively little has been heard abut controls on inward lab&v rrJigration to the North from the South,’ despite the widespread rzcogniGors af the potential *The calculations
on trade rted in this paper are an outgrowth of w&z (4~ B ~KI~C;C: by the Ford Foundation under their compwtkm in International support ~~atefut to EmmanueI Jimenez, a seminar prr~p dt Wcsrim Ontario. Economic Order. We and an unnamed referee for helpful comments on an earlier draft. mhakes such H lTrade theorists might argue that the factor price equalizatioa th?rcn The approach here assumes wage rate qu&&tW is to h achievd nkrnational labour Rows rather than filet mobility of goods with internationally immobile factors. Whether factor price equaliz&on *&!b hold were :tll impediments to goods trade in the world economy removed remains L c~nr tiw issue, ttlou/@
liberalization
most trade economists appear to regard factor price ~q~al~~tio~ rather than an ~rnpi~~~ proposition.
BC;a e owtkal
0304-3878/84/$3.(K)@ 1084, Elsevier Science Publishers B.V. (North-tiuolla9 J.D.E.--C
posibilh
62
quantitative
B. Hamilton and J. Whclley, lmplicntions of labour mobility restrictions
dominance
of immigration controls in the North as a source of
1,DC los8.2 This paper takes as its point of departure the (apparent) total absence of any ealcnlations of possible worldwide impacts from the removal of immigration cor$rols. A simple procedure for calculating efficiency gains from liberalized global labour migration is outlined and SOIZ speculative ‘order of magnitude’ calculations reported as to the potential worldwide efficiency gains from either removal or partial modification of immigration controls in developed countries. Alahotigh wide bounds are obtained on the estimates presented due to various adjustments to the data used, large annual worldwide efficiency gains always result from removing immigration controls. While LDCs do no: realize all of the gains from liberalized migration policies, their share is large enough to suggest that the immigration control issue may well be many orders of magnitude more important for the South than other issues discussed thus far in the North-South debate. The implication is that if Southern negotiators are interested in promoting the aggregate welfare of their (current) citizens, they should argue much more passionately than hitherto for liberalization of immigration controls in the North. A further implication is that if modest gains are made by the South in terms of a current agenda which excludes immigration policies but are accompanied by even harsher imigration controls in the North, the South may well be a ;i,4ficant net loser. Results of partial relaxation of controls emphasize that much larger gains per migrant occur with the first rather than last transferee. Evan a sma’li relaxation in existing controls is thus important since the marginal gains are so large. Since the calculations reported yield such strong policy implications, a number of qualifications are clearly stated since the assumptions used are highly simplEed and the dats are imprecise. The importance of the issue and the desirability of ballpar:: estimates motivate the exercise, rather than exactness of forecast. Perhaps the most extreme criticism of the calculations would be &at the assumptions made prir?r to the calculations dictate the conclusion, amd that alternative assumptions could be made which would make the entire efficiency gain estimate disappear. Suck an assumption would ‘be that all differences in wage rates across countries merely reflect productivity diflerentials from differing qualities of labour. In this case, removing immigration controls in the North would have no impact on ‘As long ago as 1967 Harry Johnson remarked that ’. . . immigration policies of developed countries, which generally discrkninate severely against immigrants from less deveioped countries, especially the poorly trained and educated, may be said to lie at th- core of the deve~~~rn~~tproblem’ [Johnson (1967, p. f07)3, and ITare recently Gerry Helleiner (1979, has arg that &,. , the mosl ~m~~~a~t ~‘~m~erfectiQ~‘~ in world markets is that which exists i : the ma
for labour, ~a~i~~~ar~~ ~~s~~l~ed The b :,cI~ labour market is severely segm :ntrd by the fact of ~~Irn~gratiQnrestrictions’. [ Il&er, in: Cjirle, ed. (1979, p. 363i.J
B. Hamir’mn
and J. Nhalley.
lmplicafions
c$labour
mobility
restr,ktion.r
63
iabour mobility since immigration restrictions are not binding. The recent waves of illegal immigration into the U.S. from Mexico, Haiti, and elsewhere clearly suggest that this position is too extreme, but some account must clearly be t&en of productivity differentials, A further assumption is that the worldwide labour sup& is fixed. Under this assumption, removal of Northern immigration controls results in a worldwide efficiency improving labour reallocation. If. however, a perfectly elastic (Malthusian) labour supply function were to be assumed in LDCs the effect of removing Northern immigration restrictions would be that wage rates in all regions would fall and the worldwide labour supply expand. The reader’s attention should also be drawn to a number of features neglected in the analysis. If outward migration is selective rather than general, departing residents leaving LDCs may well be the best trained and most highly &l.cated (as currentiy). The human capital transfer accompanying such selective outwarci migration may drive down wage rates of lower skilled labour remaining and worsen worldwide income distribution. Selective migration could be generated by taking relocation costs explicitly irrto account, which is not done here. Indeed, the distributional issue of who gains and who loses within the group who reside in LDCs prior to removal of controls in the North may indeed be a major reason why little is made of this issue by the Sodth. Another neglected feature ot’ the present analysis is that user fees for education services in LDCs typically do not cover the human capital loss from outmigration, inflicting further losses on those who remain. In addition there are obvious politic4 pressures for resistacoe to inward migration into the North by labour groups who will likely see wage rates driven down. This, presumably, provides the main reason why extensive liberalization will not occur. The impacts on t!lose who reside in the North before 2,; clianges are captured in the calculations reported through induced changes in wage rates &rwet n regions; lab’>ur in the North is a major loser and capital typically gains. 2. Methodology for the calcul;atiords In order to calculate the worldwide crYiciency gains from a removal of immigration c jntr&, a number t)f assumptions are made which enable the ange in the allocation of ‘abol r by region in tile world economy to be calculated for ilternative grouping.:. of countries into regions. In this section, the basic meth ldology for the calculations is outlined. To illustrate our methodology we first consider the case where production ~~~~~te~ize~ by a linear f countries cr in each of a rumbe ~~~~~~~~~1 I-ever _nepv
homogeneous
I.2 of Sd?ous SC
Jroduce; capital is fixed by region; labour is paid its margala
product in each region; ant3 the worldwide l&our sup@y is fixed. Differences in wage rates ocxw on11 because of restrictions on inward migration of Jabour into high wage artus. ‘l%e return to iclmobile capital in each region is the area under the marginali revenue product of labour -schedule iess labour CX.Mts.
Fig. 1 illustrates this sittuition :for the case where a “low and a high Jvage regisn are involve& For eac::hregion the linear marginal revenue product of l&our schedule reflects diminishing marginal productivity of labour in that region. In the presence of controls, the allocation of labour between the regions is 2, and &. Employment in the high wage area (2,) reflects the restrictions on the infkrw of kbour since controls produce the higher wage rate. The effect of remilavingimrtligration controls is to allow labour to flow from the low wage to the high wage region, and to equalize the wa e rate. Labour employment in the low wage region contracts from &_ to ‘EL and expands in the high wage region from & to &. The expansion of gabaIXTemployment ‘in the high wage region yields an increase in the value of product in that region. Labour use contracts in the low wage region and a prlr>ductionloss occurs. Since we assume a single output which is homogeneous across regions, the areas of gain and loss may be superimposed one on the other sin- the full employment assumption implies that the change in iabour allocation in the two regions has to bc the
High Revenue
Wage
Product
Area
Mcqinal
of Lobour?%edule
Net goin to w! Id economy from el imiw t ion of immigra tion controt!,.
Low Wage Area Flevenue *.
P:iYduct
Marginal
of Labour
Schedule
8. Namifton and .I. Whdley, fmplications of 1Lbournaobilrtyrestrictions
65
same. The area of net gain from elimir.ation of immigration controls is represented in fig. I. This diagram is similar to that use’li by Harberger (1966) in his discussion of the productive efticiency erects of distortions in the corporate tax in the U.S. If we were to use the linear marginal prcduct assumption, it would be possible to use national accounts and employment data to specify the marginal revenue product schedules in each region. A method which could be used to do this is illustrated in fig. 2. If national accounts and other data can be used to give an observation on the wage bill in region i, Bi, then from GNP accounts the return to capital iitl region i. Riy is determined. The point estimate of the elasticity of the margina revenue product schedule with is -2Ri/Bi .3 respect to Lt., evaluated at the observed labour employmer’ Rt, Li, and B, are observable, and from this data it is possible to calcalate both the rate, @, corresponding to employment of Ei, and the elasticity of the schedule. C i and Ei 9 along with the elasticity provkk all the characteristics of the linearized marginal revenue production function for each region. ‘io find the alhxation of labour between regions in the no immigration control regime an iterative search can be used. This is a relatively simple calculation to program on a computer which. even with dimensions of the number of countries in the world e:~cluding around 180 (app_+r*‘mately J.-:
\ \
cj
--
Fig. 2. Use of national accounts and employment &!a labor scb~duic
MRP Lt
Li to infer marginai revenue product Of
those tith very small populations), requires minimal amounts of execution time, In high r;timensional eases, the calculation of the gain to the world economy from removal of immigration controls proceeds as in the two country case by adding the changes in value of pro&t iti expanding and contracting regi;ons. The .method we .use to calculate the efficiency gains from liberalized migration controls dispenses with the linear’ margiinal revenue product sche&les out&& iln fig. 1 and, instead, generates these schedules directly from an aggregate production function for -each of the regions. The steps involved are outlined in table 1. For each region a CES production function is used and the substitution parameter pi is specified; This implies a value for the elasticity of factor substitution in production for each region. The employment and factor share data for each region discussed above are used along with the assumption that factors are paid their marginal products before the immigration controls are removed to determine the parameters &. This uses the first-order conditions for cost minimization and the observations on factor use and factor returns. A choice of units for the homogeneous output allows the scale parameter At to be determined in the production function in each region. These estimated production function parameters can then be used to calculate the change in Rabour allocation across regions after modification or i*ertioval of immigration controls. In the removal case, an equalized marginal revenue product of labour across regions is found, consistent with full employment of the fixed worldwide labour supply. This procedure is similar to that represented in table 1, except that the marginal revenue product schedules are no longer linear. Instead, non-linear
Step 1 Step 2 Step 3 Step 4 Step 5
Step 6
Table 1 Method of calculating gIcb$d efficiency effects of modifying immigration controls. _- For each region an aggregate CES production function is used, V;:= Ai[GiK;P’ .L(l_~i)&-PI]lI-Pt . - Extraneous valluesof p1 for each region are assumed. - From the assumlption that factors receive their marginal product in each region in the presence of existing controls, value of 6i are determint, J front the ratio of first-order conditions. - Units are assumed for ihe output produced in each region such that one unit sells for %I. The GNP ,valnefor the region, K,, L,, pi, and Si are used to solve for Ai. -- Using production function parameters, an iterative procedure is used to calculate the change in dabour aDocation after modification of immigration controls consistent with ($4,) (in the removal case) cjqualized MRP of labour in all regions; (b) full employment of the iiied labour supply. from removal of immigration controls is calculated as the cnange in the
Step 7 -
e can ‘bet,epeated for a~t~nat~ve extraneous values of the ~~~~~~~t~r~ I~8
schedules derived from production functions for each region are used in numerically d~te~i~ng (on the computer) the labour allocation by country after immigraCou controls have been modtied or removed. In cases where only partial removal of controls occurs, we allow only part of the differenca: on or ~~t~y~~ wage rate and the global mean wage rate s have the same rcentage difference between therr own wage rate the global mean removed, and a new labour allomtion is sought, c tent with both the specified partial liberahzation and full ~rnplo~~~t of the fixed labour supply. (or loss) to the world economy in either case can be calculated as The in the value of the total world product between the existing and the ch new policy mes. This procedure can be repeated for alternative extraneous values of the parameters pi in each region. 3. Data TO implement the method described aoove, data drawn from a number of different sources are used, and in the process some key assumptions are made. In the main calculations reported, data based on a 7-region countrgclassification used in a different context by Whalley (forthcoming) are adopted due to the convenience of using data already assembled. Two alternative groups o” countries are also considered to assess the effect of disaggregation by country on results. The data used by Whalley rely on 1977 GNP per capita in U.S. dollars taken from the World Bank Atlas (1970). Countries of the world are grouped into seven regions outlined in table 2; the EEC, US, Japan, other developed countries, OPEC (oil producers), new industria.lized countries and less developed countries. GNP per capita in U.S. dollars is calculated for each region. The World Bank Atlas alsib provides data on population for 1977 for each country, which are similarly aggregated to produce population by region. Table 2 indicates the large differences in 1J.S. dollar GNP per capita by region and also the concentration of popu ation in IDCs. Data on factor shares between capital an labour in each 0:’ the seven regions are taken from Whalley (n.d.); these ata rely on U _ sources. These two pieces of data provide an ob rvation on the wa bill which, in turn, directly produces an estimate of the wage rate once nr employed is known. Two different typer of catcul , referred t.0 as ‘undiusted’ and ‘adjusted’. In the unadjusted calculations data are used i with population data us
There are also problems of interpretation
with internationa.
GNP data
68
B. dhmilton- qtd J. .!fWley,
implicrrtima of hbow mobility restrdctianr
Table 2 ChWicatioa of countries into xzgions and summary fixtures of each.”
Re&ion2 (U.S.) Region3 IJapan) R&on 4 K)thm Developed)
bited States Japan Albania AWtmlia Austria Bahamas BatbrpdOS
Region 4 WPEO (oil producers) lkgion 6 (N.1.C)
Barn&a Bulgaria Canada Bahrain Brunei Indonesia Iran . Argentina Btazil Chile Costa Rica Wrus ECUdot
Fiji.
Region 7 (L.D.C)
AfJj$mistan AJgerk Ansola JWPW ?lallgtiaQtsh Bee Benin
E. Germany Finla@ Fr. Polynesia Gibraltar GreWa Gnxnland GUWl
Iraq Kuwait Libya ‘Fr. Guyana Hong Kong J,Mmaicrl Korea PRbtUlOIi
Macao Malaysia Dm Kanipuch Egypt Bl SfllYitiOr Ethiopia
{Gabon IGiambilt Ghana Grenada Bhutan Guadeloupe Bolivia Guatemala Botswana c&lines Burma Guinea-Bis Burundi Guyan: Cameroon Haiti cape- Verde Honduras ce. Africa India Chad Ivory coast chma J&di%l cOl6mbia Kenya cumoros Kiribat i COIlgO Korea Cuba Laos Fdr Djibouti : Lesothla Dominica Dominion Rp , Liberia
Israe Malta New Zealand Norway Poland Portugal Puerto Rico Nigeria Oman Qatar
Romania Samoa Spain Sweden Switzeeland U.S.S.L. Virgin Isl. Yugoslavia Saudi Arabia Un. Arab. Em. Venezuela
Martinique Mexico Neth. Ant& N. Caledonia Pa&c Islands Panama Singapore
Suriname Taiwan Trinidad Turkey UWWaY
Madagascar Malaki
Sao Tome Senegal Seychelles Sierra L8one Solomon Is. Somalia s. Africa Sri Lanka Sudan Swaziland Syrian A R Tanzania Thailand Togo Tonga Tunisia Uganda Upp Volta Vie&m Yemen A R Yemen PDR. Zaire Zambia Zimbabwe
M&Wes Mali
Mauritania Mkitius Mangolia Morocco Mozambique Namibia Nepal New Hebrides N. Guinea Nicaragua Niger Pakistan Paraguay Peru Philippines Reunion Rwanda St. Mitts St. Lucia St. Vincent
B. Hamilton and J. Whalley, Implications of labour mobility restrictions
69
Table 2 (continued) Summury
features of regions 1977 GNP/Capita i0IU.S.
Region 1 Region 2 Region 3 Region 4 countri Region 5 Region 6 oountri Region 7 countri Total
;EEC countries) U.S.)
:Japan) @herdeveloped w) ;OPEC) pewly industrialized @ :less developed s)
6283 8751 6511
1977 Population in billions
1977 GNP in $ bill. (U.S.)
::
1629 1895 737
0.1 0.5
3848 toooo.3b
0.3
?r)24 303
1306
0.4
461
2.4
773
4.2
7824
325. I 1863
‘All m used a~ *+-en from the World Bank AtIas for 2977 and grouped according to the blocs listed above. An important point is that all conversions into U.S.$ made in constructingthe World Bank Atlas are at market or official exchange rates, and there is ; widespread view that relative to a ‘purchasing power parity’ calculation this substantiaiig underestimates $GNP/capita in most LXs. The most widely quoted estimates of purchasing power parity’ p&a are in Kravis et aI. (1975). “This seemingly low figure for OPEC arises from the inclusion of Nigeria as a large population member of OPEC.
which affect the calculations, especially the divergence between odficial and purchasing power parity exchange rates highlighted by Kravis et al. (1975). This &sue motivates further adjustments to explore robustness of results to the data used. Finally, differential labour efficiency factors by region are used to allow for variations in labour productivity by region. These adjustments have a dramatic effect on estimated global efficiency gains because their effects compound. Because of their importance they are listed in table 3. Adjustments for the ratio of the size of the work-force to population assume that in rich regions (1-5) the workforce is 60% of the population but only 40% in poor regions (6 and 7). These adjustments crudely reflect demogr,aphic patterns. To adjust for differences in efficiencies of tabour across regions, labour in newly industrialized and less industrialized countrit:s is assumed to be less efftcient than labour in developed countries. Two alternative differential efficiency factors of one-half and one-third are used in adjusted calculations. Finally, in making adjustments for differences between purchasing power parity and official exchange ratas in converting GNP data into U.S. dollars, figures from Kravis et al. (1975) are used in a manner similar: i:o the correction factors used in Whalley (1980). Here correction factors b;r region are applied rather than by income level as in the earlier paper. In ca,ses where all 179 countries in table
Table 3 Adjustments made to d&la used in unad&sted case. (A) Pqmlation~wd&me Cht& colon for size, of labour force to- population. Workforce assumed to be 60(%;of pq&&n in developed country regions (l-5}, but only 4@?“/, in developing country regk~s (6 a& 7). (13)E4fickncy units Differential efkikncies of labour assumed by region. L,abour in Regions 6 and 7 {NICs and LDCs} assumed to be (a) one-ha& and (b) one-third as efficient as labout elsewhere in alternative calculations. (c) Exchange rates Crude TWIT&on for purchasing power parity premium over offkial exchange rates, using cstimata from Kravis, et al. (1975). ?remia relative to the U.S. dollar used are 1.24 for the EEC, 1.47fox Japan, 1.87 for other dleveloped, 2.32 for OFEC, 2.32 for NICs, and 3.49 for LDCs. [See Whalley (1980, p. 274}.]
2 are considerd, the same correction factors are assumed to apply to all countries within each region. In addition to diEerences between adjusted and unadjusted calculations, further vatiations occur with respect to the groups of countries used. Cafculati~ns are made not only for the equalization or partial removal of differences in wage rates between the seven regions indicated in table 2, but also across all 179 countries in table 2, and between aggregated ‘rich’ and ‘poor’ regions (regions 1 to 5 are assumed ‘rich’ and regions 6 and 7 ‘poor’). In the individual country caSe to simplify the calculation factor shares are assumed to be the same for any country within each of the seven grcs*Jps. 4%Rcsuks of cakulations
In table 4 estimates of the annual worldwide efficiency gains from free mobility of labour are reported for the unadjusted case for different values of the elasticity of substitwtion in production in all reigions. In spite of the sensitivity to the values of substitution elasticities, these results suggest large gains from the removal of global immigration controls. In most cases the gain exceeds worldwide GNP generated in the presence of the controls suggesting that immigration control are one of the (and perhaps the) most important policy issues facing the global economy. A large portion of the gain is accounted for by labour migration occurring between the aggregated rich and poor regions. Relatively little additional gain results from labour migration occurring between individuail countries beyond the gain from twmn the seven major regions. The of restrictions on clezrly an issue ~tw~en ric tries as a bloc and h: rather than ~et~~~~ individual co~l~tri~s.
B. Hamilton and .l. Whdley, implications ojldwur
mobility restrictions
71
Table 4 Estimates of annual worldwide efkiency gains from free lsbour mobility - unadjusted cases; % trillion !Q77. Elasticities of substitution in production in all regions
Removalof controls on labmr mobility between (1) All countries listed in table 2 (2) The 7 regions listed in table 2 (3) The ‘rich’ and ‘poor’ regions listed in table 2
1.5
0.75
0.25
16.02 14.46 12.23 9.26
5.80
15.41 1302
8.58
5.52
6.49 5.92
4.74
7.02
1.25
1.0
il.52
6.81
Worldwide GNP in 1977
7.52
Table 5 reports results fro m allowing partial removal of immigration controls in the unadjusted case for the seven region calculation. These calculations involve allow@ for enly partial removal of the difference between each region’s wage rate and the global mean wage rate. The most important feature of this table is the large gains arising from only smarl amounts of migration. This reflects the fact that marginal efficiency gains are larger for initial units of migrating labuur since the marginal product differences are largest in the initial phases of migratior 1. .v’i:k elasticities equal to 1.5 in each region, over 40% of the total potential gain is reaiized
Table 5 Estimates of annual worldwide efficiency gains from partial liberalization of migration restrictions unadjusted 7-region calculations ($ trillion 1977). 7; Reduction rn difference between region and global wage rates
Elasticities of substitution in production in all regions -. _I 1.25 1.0 0.75 0.5 1.5 0.74 0.61 1.52 1.23 3.12 2.50 4.59 3.1’1 5.81 4.79 6.76 5.70 9.36 8.28 11.92 10.31 13.78 I2.00
0.48 0.96 I.91 3.82
0.35 0.70 1.36 1.98
.‘:.G8 2.57 61.45 3 I!
ii.99 X83 Y.91 10.92
14.99 ! 328 15.41 13.%2 1 ,.52 ---
5.25 7.1 1 7.71 8.23 R.58
0.23 0.45 0.85 ’ -“cl :.55
L.86 3.09 3.65
5.z 5.1 i 5.52 -__-
-
when only IQ% of the wagt: differential is e?iminated, and 5% of the gdin for a !i”A r&Ao~n. This suggests that small changes) in global migration restrictions are especially ir#nportantsince their mzqinal e&cts are large. Table 6 reepqts rqq!Q fr_om.&qinatian of immigration controls in the seven xqiont case with the various -adjustment factors outlined above. Since these a8djust+edt factors compound oae 9th a&#+ in. z’educing the measured wage -rate di@erentiaf on an eff&iire “&bour’ units basis, in combinlration they sharply reduce the estimate of, global efficiency gains. While El’ltis is disturbing from the viewpoint of pro$+ng firm estimates of the effects, *the k%y role of thzse adjustments is hardly surprising. Combining wart fir>rce/population, exchange rate, and labour efficiency adjustments reduces measured wage rate d,ifferentials betweeti rich and pi>or regions by an order of approximately 20 (i.e., 2 x 3.5 x 3). This highlights the need for a more acxurate assessment of these parameters in any future work if more than a broad impression of possible orders of magnitude is sought.
Table 6 EMmates of annual worldwide efficiency gains from slobal adjusted 7-region calculations ($ trillion 1977).
removal of immigration controls -
Elasticities of substitution in production ia all regions 1s
No adjustment (table 4)
1.25
1.0
0.75
15.41 13.82 11.52 8.58
0.5 5.52
AdjUStWntS
PW EX EV EV2 EV+PW EX+PW EX + EV” EX+PW+EV EX+ PIT’-!-EUT
11.04 12.11 6.59 8.83 5.09 7.69 3.29 2.07 3.29
9.93 11.08 5.91 7.94 4.56 7.03 2.96 1.84 2.96
8.36 9.80 4.99 6.70 3.82 6.24 2.58 1.6 2.58
6.36 4.30 8.09 5.46 3.84 2.68 5.14 3.55 2.93 2.04 5.24 3.7:’ 2.14 1.55 1.34 1.05 2.14 1.55
ATotation,for adjumnents $ W -Population workforce adjustment EX -Exchange rate adjustment EV -Labour efkiency usits correction using factors of 1:3
Et’2-Labour
efkiency units correction using factors of 1:2
B. fhmilton and J. Whalhy, Implicationsof labour mobility restrictions
73
Table 7 reports thy distributional impacts of liberalized migration restrictions in the unadjusted 7-region cases. Panel (A) shows both the sharp changes which occur in wage rates and the adjustments between regions. With an elasticity of substitution of 0.5, four regions gain labour and three lose; but with the higher elasticity value of 1.5 only one region gains labour while six have labour outflows+ Because only one region expands labour use in the 1.5 elasticity case, this case may be regarded as especially implausible. Wage rates rise in labour losing regions and fall in labour receiving regions. The changes in the return to capital by region in panel (Es) emphasize the feature that capital owners in labour gaining regions are ma& better off, and in labour losing regions are made worse off. The incentive for labour unions in high wage countries to oppose liberalization of immigration restrictions is thus clearly shown. Table 7 Distributional
impacts of removal of immigration controls kegion unadjusted case.
Elasticities of substitution in production in all regions Region
1.5
1.25
1.0
0.75
0.5
(A) y0 change in wage rutes to non-migratingfabour 1 2 3 4 5 6 7
23.7 - 21.9 27.2 72.0 Ii750.2 624.3 11718.4
9.6 - 36.2 12.7 52.3 1538.7 541.5 1510.6
- 12.1 - 48.8 -9.6 22.2 1214.8 414.7 1192.2
- 39.7 -64.8 - 38.0 -16.1 802.3 253.2 786.8
- 67.7 -81.2 -66.8 - 55.1 382.6 88.9 374.3
(B) T/oChange in return to capital by region ” :
- 396.3 25.7
- 526.6 13.3
695.3 22.6
760.9 99.4
659.3 184.1
3 4 5 6 7
- 24.9 -61.5 - 37.7 - 62.7 -94.3
- 14.5 - 60.0 -47.5 - 72.2 - 98.9 --___.
14.7 - 40.4 -59.1 -81.1 - 100.0
76.5 52.3 -69.1 - 84.9 - 100.)
143.2 242.7 -65.8 -61.6 -100.0
-
Fi 3 displal/s the glo al Losenz curves for the worldwide incme distribution before and after the removal of immigration controls in the 178 country unadjusted case usi elasticities of substitution of 0.5. The Lorenz curves are drawn using C capita by country and assuting that in eat ~~~~~ethis is ition of income within each co case the d a& equality
0
I6
20
30
40
!50
60
70
80
90
I00
% of globul population Fig. 3. Global distributional e-ffects of removing immigration controls: Imenz curves for 179 country unadjusted case with sulwtitution elasticities of 0.5.
clearly shows that dramatic effects on worldwide equality which are possible from modifying immigration restrictions. These effects are much larger, for instance, than those Likely fkom increases in aid flows to Lima target levels.
Although highly speculative, the calculations reported here clearly suggest large potential worldwide Akieney gains from moving toward a worldwide labour market free of immigration controls. Gains to the world economy in many of the unadjusted cases exceed existing workvide GNP; in the adjusted cases gains are smaller but still large. ‘Thus, while the main conclusion of this paper may not be surprising, it is the potential quantitative size of the effects involved that is striking. To place the results here in the dontext of current policy debates, it is *usefulto compare the results tu some of the estimates of effects from policy ~~it~at~.v~s on some of the more actively discussed issues in the N~rth-Soutb sents a 6bE1St guess’ n~rn~r~~a~ abortion of possible ~~at~v~~~ under the North-Sou ity price st~b~~~~ation,~au~~llat~o~ or rescheduling of LDC debt, e proeeelion in t,he North on LDC exports, and increased
B. Hmilton
and J. Whailey, itnpkvtions
of labour mobility ;*esfrictiom
75
aid flows. A best guess offered by Ciine is that annual gains to LDC’s from a ~&es of ‘optimistic” policy changes on these flouts could be in the range of !§40 billion/year. Cline also describes the impact of liberalized migration on developing countries as potentially *very targe’. The calculations reported here suggest that the gains from liberalized Iabour mobility are likely to dominate developing country gains from non-migration initiatives. The im@ication thus appears to be that liberalization of worldwide migration could possibly be the single most important issue in current North-South exchanges for the South. Citizens of LDCs could thus be well served if demands for removal of immigration controls in the North were more forceflrlly presented, instead of allowing the other proposals which have so far preoccupied negotiati0r.s on a new in:ernational economic order to take centre stage. El.- ., small steps towards liberalization are important because effects are large at the margin. Finally, concessions to the South in NorthSouth forums may be of little value if at the sitme time immigration restrictions in the developed world are further tightened.
References Cline, W.R., ed., 1979, Policy alternatives for a new international economic order: .In economic analysis (Praeger, New YcIrk). Harberger, A.C., 1966, Efficiency effects of taxes on income from capital, in: M. Klzyaniak, ed., Effects of the corporatton income tax (Detroit, MI). Helleiner, G.K., 1979, World market imperfections and the developing countries, in W.R. Cline, ed., Policy alternatives ‘or a new intemvtionai economic order: An economic analysis (Praeger, New York). Johnson, H-G., 1967, Economic policies toward less developed countriw (Praeger, New York). Kravis, LB., 2. Kenessey, A. Hesto I and R. Summers, 1975, A system of .intemational comparisons of gross national product and purchasing power (Johns H.#pkins Press, Baltimore, MD). Whalley, J., 1980, The worldwide income distribution: Some speculative calculations, Review of Income and Wealth, Sept., 261-275. Whalley, J., n.d., Trade liber;dization among major trading areas (MIT Press, Cambridge, hIA) forthcoming. World Bank Atlas, 1979 (Wor!d Bank, Washington, DC).
IWFXXEN~
AM) DISTRIBUTIONAL IMI’LICAlY0XIJ’S QF GLOBAL RlZ3TIUCTIONS ON LABOITR M08~3”$y
Bob HAMILTON and John WHAU&Y t.Jni~~&Sy 0f Western Onmrio, hidon, Chrario MA 5C2,
Cwapi~
Received February 1982,linal version received Ikyzraber lP@ In tlik paper 8 prscedurefor calculating the annual efficiency gains 6aln ua&.tS alte-native ehangcs in cxistin~ dobai immigration restrictions is presented, along wk.tb m evaiuafion of impacts ofwagerate changes on non-migrating iabour. A simple method&@ uses data on U.S. dollar GNP/capita across cmmtrics to infer difkrences in the margiaal pnodwthity of labour both between countries and across major world trading areas. Two ice&&st~&nptionsused are
tbat the worldwi& labour supply is fixed and full employment occurs b tii regions. Differences oazurring in labour’s marginal product across regions are assumed to sri+%~FXX&~of barriers to inward mobility oflahour in higb wage countries. When these are MIW&, l&our reallocates and dkiency gains occur. While the calculations are based on cofUa&ws assumptions, a striking fkature is tbe size of tbe annual worldwide gains. In some cases, ~&hual gains can easily cxauJ existing worldwide GNP generated in the presence of labour Miijty ksttictions. While all gains do not accrue to LDC’s, tbe size of the gains nonetheless sug$asrs that this issue may be much more important to these countries than other issues raised thaw f&fis, the North-South debate. The losses to labour already employed in high wage countti& ira&Ntieth> incentives for labour unions in the developed world to oppose liberalization.
Much of the recent North-South debate has been cu~~~rraed with such issues as commodity price stabilization programs, debt *tite&‘&, the longterm deterioration in Southern terms of trade (which mme economists consider contentious) and protectionist trade policies in the N&h. Rcktively little has been heard abut controls on inward lab&v rrJigration to the North from the South,’ despite the widespread rzcogniGors af the potential *The calculations
on trade rted in this paper are an outgrowth of w&z (4~ B ~KI~C;C: by the Ford Foundation under their compwtkm in International support ~~atefut to EmmanueI Jimenez, a seminar prr~p dt Wcsrim Ontario. Economic Order. We and an unnamed referee for helpful comments on an earlier draft. mhakes such H lTrade theorists might argue that the factor price equalizatioa th?rcn The approach here assumes wage rate qu&&tW is to h achievd nkrnational labour Rows rather than filet mobility of goods with internationally immobile factors. Whether factor price equaliz&on *&!b hold were :tll impediments to goods trade in the world economy removed remains L c~nr tiw issue, ttlou/@
liberalization
most trade economists appear to regard factor price ~q~al~~tio~ rather than an ~rnpi~~~ proposition.
BC;a e owtkal
0304-3878/84/$3.(K)@ 1084, Elsevier Science Publishers B.V. (North-tiuolla9 J.D.E.--C
posibilh
62
quantitative
B. Hamilton and J. Whclley, lmplicntions of labour mobility restrictions
dominance
of immigration controls in the North as a source of
1,DC los8.2 This paper takes as its point of departure the (apparent) total absence of any ealcnlations of possible worldwide impacts from the removal of immigration cor$rols. A simple procedure for calculating efficiency gains from liberalized global labour migration is outlined and SOIZ speculative ‘order of magnitude’ calculations reported as to the potential worldwide efficiency gains from either removal or partial modification of immigration controls in developed countries. Alahotigh wide bounds are obtained on the estimates presented due to various adjustments to the data used, large annual worldwide efficiency gains always result from removing immigration controls. While LDCs do no: realize all of the gains from liberalized migration policies, their share is large enough to suggest that the immigration control issue may well be many orders of magnitude more important for the South than other issues discussed thus far in the North-South debate. The implication is that if Southern negotiators are interested in promoting the aggregate welfare of their (current) citizens, they should argue much more passionately than hitherto for liberalization of immigration controls in the North. A further implication is that if modest gains are made by the South in terms of a current agenda which excludes immigration policies but are accompanied by even harsher imigration controls in the North, the South may well be a ;i,4ficant net loser. Results of partial relaxation of controls emphasize that much larger gains per migrant occur with the first rather than last transferee. Evan a sma’li relaxation in existing controls is thus important since the marginal gains are so large. Since the calculations reported yield such strong policy implications, a number of qualifications are clearly stated since the assumptions used are highly simplEed and the dats are imprecise. The importance of the issue and the desirability of ballpar:: estimates motivate the exercise, rather than exactness of forecast. Perhaps the most extreme criticism of the calculations would be &at the assumptions made prir?r to the calculations dictate the conclusion, amd that alternative assumptions could be made which would make the entire efficiency gain estimate disappear. Suck an assumption would ‘be that all differences in wage rates across countries merely reflect productivity diflerentials from differing qualities of labour. In this case, removing immigration controls in the North would have no impact on ‘As long ago as 1967 Harry Johnson remarked that ’. . . immigration policies of developed countries, which generally discrkninate severely against immigrants from less deveioped countries, especially the poorly trained and educated, may be said to lie at th- core of the deve~~~rn~~tproblem’ [Johnson (1967, p. f07)3, and ITare recently Gerry Helleiner (1979, has arg that &,. , the mosl ~m~~~a~t ~‘~m~erfectiQ~‘~ in world markets is that which exists i : the ma
for labour, ~a~i~~~ar~~ ~~s~~l~ed The b :,cI~ labour market is severely segm :ntrd by the fact of ~~Irn~gratiQnrestrictions’. [ Il&er, in: Cjirle, ed. (1979, p. 363i.J
B. Hamir’mn
and J. Nhalley.
lmplicafions
c$labour
mobility
restr,ktion.r
63
iabour mobility since immigration restrictions are not binding. The recent waves of illegal immigration into the U.S. from Mexico, Haiti, and elsewhere clearly suggest that this position is too extreme, but some account must clearly be t&en of productivity differentials, A further assumption is that the worldwide labour sup& is fixed. Under this assumption, removal of Northern immigration controls results in a worldwide efficiency improving labour reallocation. If. however, a perfectly elastic (Malthusian) labour supply function were to be assumed in LDCs the effect of removing Northern immigration restrictions would be that wage rates in all regions would fall and the worldwide labour supply expand. The reader’s attention should also be drawn to a number of features neglected in the analysis. If outward migration is selective rather than general, departing residents leaving LDCs may well be the best trained and most highly &l.cated (as currentiy). The human capital transfer accompanying such selective outwarci migration may drive down wage rates of lower skilled labour remaining and worsen worldwide income distribution. Selective migration could be generated by taking relocation costs explicitly irrto account, which is not done here. Indeed, the distributional issue of who gains and who loses within the group who reside in LDCs prior to removal of controls in the North may indeed be a major reason why little is made of this issue by the Sodth. Another neglected feature ot’ the present analysis is that user fees for education services in LDCs typically do not cover the human capital loss from outmigration, inflicting further losses on those who remain. In addition there are obvious politic4 pressures for resistacoe to inward migration into the North by labour groups who will likely see wage rates driven down. This, presumably, provides the main reason why extensive liberalization will not occur. The impacts on t!lose who reside in the North before 2,; clianges are captured in the calculations reported through induced changes in wage rates &rwet n regions; lab’>ur in the North is a major loser and capital typically gains. 2. Methodology for the calcul;atiords In order to calculate the worldwide crYiciency gains from a removal of immigration c jntr&, a number t)f assumptions are made which enable the ange in the allocation of ‘abol r by region in tile world economy to be calculated for ilternative grouping.:. of countries into regions. In this section, the basic meth ldology for the calculations is outlined. To illustrate our methodology we first consider the case where production ~~~~~te~ize~ by a linear f countries cr in each of a rumbe ~~~~~~~~~1 I-ever _nepv
homogeneous
I.2 of Sd?ous SC
Jroduce; capital is fixed by region; labour is paid its margala
product in each region; ant3 the worldwide l&our sup@y is fixed. Differences in wage rates ocxw on11 because of restrictions on inward migration of Jabour into high wage artus. ‘l%e return to iclmobile capital in each region is the area under the marginali revenue product of labour -schedule iess labour CX.Mts.
Fig. 1 illustrates this sittuition :for the case where a “low and a high Jvage regisn are involve& For eac::hregion the linear marginal revenue product of l&our schedule reflects diminishing marginal productivity of labour in that region. In the presence of controls, the allocation of labour between the regions is 2, and &. Employment in the high wage area (2,) reflects the restrictions on the infkrw of kbour since controls produce the higher wage rate. The effect of remilavingimrtligration controls is to allow labour to flow from the low wage to the high wage region, and to equalize the wa e rate. Labour employment in the low wage region contracts from &_ to ‘EL and expands in the high wage region from & to &. The expansion of gabaIXTemployment ‘in the high wage region yields an increase in the value of product in that region. Labour use contracts in the low wage region and a prlr>ductionloss occurs. Since we assume a single output which is homogeneous across regions, the areas of gain and loss may be superimposed one on the other sin- the full employment assumption implies that the change in iabour allocation in the two regions has to bc the
High Revenue
Wage
Product
Area
Mcqinal
of Lobour?%edule
Net goin to w! Id economy from el imiw t ion of immigra tion controt!,.
Low Wage Area Flevenue *.
P:iYduct
Marginal
of Labour
Schedule
8. Namifton and .I. Whdley, fmplications of 1Lbournaobilrtyrestrictions
65
same. The area of net gain from elimir.ation of immigration controls is represented in fig. I. This diagram is similar to that use’li by Harberger (1966) in his discussion of the productive efticiency erects of distortions in the corporate tax in the U.S. If we were to use the linear marginal prcduct assumption, it would be possible to use national accounts and employment data to specify the marginal revenue product schedules in each region. A method which could be used to do this is illustrated in fig. 2. If national accounts and other data can be used to give an observation on the wage bill in region i, Bi, then from GNP accounts the return to capital iitl region i. Riy is determined. The point estimate of the elasticity of the margina revenue product schedule with is -2Ri/Bi .3 respect to Lt., evaluated at the observed labour employmer’ Rt, Li, and B, are observable, and from this data it is possible to calcalate both the rate, @, corresponding to employment of Ei, and the elasticity of the schedule. C i and Ei 9 along with the elasticity provkk all the characteristics of the linearized marginal revenue production function for each region. ‘io find the alhxation of labour between regions in the no immigration control regime an iterative search can be used. This is a relatively simple calculation to program on a computer which. even with dimensions of the number of countries in the world e:~cluding around 180 (app_+r*‘mately J.-:
\ \
cj
--
Fig. 2. Use of national accounts and employment &!a labor scb~duic
MRP Lt
Li to infer marginai revenue product Of
those tith very small populations), requires minimal amounts of execution time, In high r;timensional eases, the calculation of the gain to the world economy from removal of immigration controls proceeds as in the two country case by adding the changes in value of pro&t iti expanding and contracting regi;ons. The .method we .use to calculate the efficiency gains from liberalized migration controls dispenses with the linear’ margiinal revenue product sche&les out&& iln fig. 1 and, instead, generates these schedules directly from an aggregate production function for -each of the regions. The steps involved are outlined in table 1. For each region a CES production function is used and the substitution parameter pi is specified; This implies a value for the elasticity of factor substitution in production for each region. The employment and factor share data for each region discussed above are used along with the assumption that factors are paid their marginal products before the immigration controls are removed to determine the parameters &. This uses the first-order conditions for cost minimization and the observations on factor use and factor returns. A choice of units for the homogeneous output allows the scale parameter At to be determined in the production function in each region. These estimated production function parameters can then be used to calculate the change in Rabour allocation across regions after modification or i*ertioval of immigration controls. In the removal case, an equalized marginal revenue product of labour across regions is found, consistent with full employment of the fixed worldwide labour supply. This procedure is similar to that represented in table 1, except that the marginal revenue product schedules are no longer linear. Instead, non-linear
Step 1 Step 2 Step 3 Step 4 Step 5
Step 6
Table 1 Method of calculating gIcb$d efficiency effects of modifying immigration controls. _- For each region an aggregate CES production function is used, V;:= Ai[GiK;P’ .L(l_~i)&-PI]lI-Pt . - Extraneous valluesof p1 for each region are assumed. - From the assumlption that factors receive their marginal product in each region in the presence of existing controls, value of 6i are determint, J front the ratio of first-order conditions. - Units are assumed for ihe output produced in each region such that one unit sells for %I. The GNP ,valnefor the region, K,, L,, pi, and Si are used to solve for Ai. -- Using production function parameters, an iterative procedure is used to calculate the change in dabour aDocation after modification of immigration controls consistent with ($4,) (in the removal case) cjqualized MRP of labour in all regions; (b) full employment of the iiied labour supply. from removal of immigration controls is calculated as the cnange in the
Step 7 -
e can ‘bet,epeated for a~t~nat~ve extraneous values of the ~~~~~~~t~r~ I~8
schedules derived from production functions for each region are used in numerically d~te~i~ng (on the computer) the labour allocation by country after immigraCou controls have been modtied or removed. In cases where only partial removal of controls occurs, we allow only part of the differenca: on or ~~t~y~~ wage rate and the global mean wage rate s have the same rcentage difference between therr own wage rate the global mean removed, and a new labour allomtion is sought, c tent with both the specified partial liberahzation and full ~rnplo~~~t of the fixed labour supply. (or loss) to the world economy in either case can be calculated as The in the value of the total world product between the existing and the ch new policy mes. This procedure can be repeated for alternative extraneous values of the parameters pi in each region. 3. Data TO implement the method described aoove, data drawn from a number of different sources are used, and in the process some key assumptions are made. In the main calculations reported, data based on a 7-region countrgclassification used in a different context by Whalley (forthcoming) are adopted due to the convenience of using data already assembled. Two alternative groups o” countries are also considered to assess the effect of disaggregation by country on results. The data used by Whalley rely on 1977 GNP per capita in U.S. dollars taken from the World Bank Atlas (1970). Countries of the world are grouped into seven regions outlined in table 2; the EEC, US, Japan, other developed countries, OPEC (oil producers), new industria.lized countries and less developed countries. GNP per capita in U.S. dollars is calculated for each region. The World Bank Atlas alsib provides data on population for 1977 for each country, which are similarly aggregated to produce population by region. Table 2 indicates the large differences in 1J.S. dollar GNP per capita by region and also the concentration of popu ation in IDCs. Data on factor shares between capital an labour in each 0:’ the seven regions are taken from Whalley (n.d.); these ata rely on U _ sources. These two pieces of data provide an ob rvation on the wa bill which, in turn, directly produces an estimate of the wage rate once nr employed is known. Two different typer of catcul , referred t.0 as ‘undiusted’ and ‘adjusted’. In the unadjusted calculations data are used i with population data us
There are also problems of interpretation
with internationa.
GNP data
68
B. dhmilton- qtd J. .!fWley,
implicrrtima of hbow mobility restrdctianr
Table 2 ChWicatioa of countries into xzgions and summary fixtures of each.”
Re&ion2 (U.S.) Region3 IJapan) R&on 4 K)thm Developed)
bited States Japan Albania AWtmlia Austria Bahamas BatbrpdOS
Region 4 WPEO (oil producers) lkgion 6 (N.1.C)
Barn&a Bulgaria Canada Bahrain Brunei Indonesia Iran . Argentina Btazil Chile Costa Rica Wrus ECUdot
Fiji.
Region 7 (L.D.C)
AfJj$mistan AJgerk Ansola JWPW ?lallgtiaQtsh Bee Benin
E. Germany Finla@ Fr. Polynesia Gibraltar GreWa Gnxnland GUWl
Iraq Kuwait Libya ‘Fr. Guyana Hong Kong J,Mmaicrl Korea PRbtUlOIi
Macao Malaysia Dm Kanipuch Egypt Bl SfllYitiOr Ethiopia
{Gabon IGiambilt Ghana Grenada Bhutan Guadeloupe Bolivia Guatemala Botswana c&lines Burma Guinea-Bis Burundi Guyan: Cameroon Haiti cape- Verde Honduras ce. Africa India Chad Ivory coast chma J&di%l cOl6mbia Kenya cumoros Kiribat i COIlgO Korea Cuba Laos Fdr Djibouti : Lesothla Dominica Dominion Rp , Liberia
Israe Malta New Zealand Norway Poland Portugal Puerto Rico Nigeria Oman Qatar
Romania Samoa Spain Sweden Switzeeland U.S.S.L. Virgin Isl. Yugoslavia Saudi Arabia Un. Arab. Em. Venezuela
Martinique Mexico Neth. Ant& N. Caledonia Pa&c Islands Panama Singapore
Suriname Taiwan Trinidad Turkey UWWaY
Madagascar Malaki
Sao Tome Senegal Seychelles Sierra L8one Solomon Is. Somalia s. Africa Sri Lanka Sudan Swaziland Syrian A R Tanzania Thailand Togo Tonga Tunisia Uganda Upp Volta Vie&m Yemen A R Yemen PDR. Zaire Zambia Zimbabwe
M&Wes Mali
Mauritania Mkitius Mangolia Morocco Mozambique Namibia Nepal New Hebrides N. Guinea Nicaragua Niger Pakistan Paraguay Peru Philippines Reunion Rwanda St. Mitts St. Lucia St. Vincent
B. Hamilton and J. Whalley, Implications of labour mobility restrictions
69
Table 2 (continued) Summury
features of regions 1977 GNP/Capita i0IU.S.
Region 1 Region 2 Region 3 Region 4 countri Region 5 Region 6 oountri Region 7 countri Total
;EEC countries) U.S.)
:Japan) @herdeveloped w) ;OPEC) pewly industrialized @ :less developed s)
6283 8751 6511
1977 Population in billions
1977 GNP in $ bill. (U.S.)
::
1629 1895 737
0.1 0.5
3848 toooo.3b
0.3
?r)24 303
1306
0.4
461
2.4
773
4.2
7824
325. I 1863
‘All m used a~ *+-en from the World Bank AtIas for 2977 and grouped according to the blocs listed above. An important point is that all conversions into U.S.$ made in constructingthe World Bank Atlas are at market or official exchange rates, and there is ; widespread view that relative to a ‘purchasing power parity’ calculation this substantiaiig underestimates $GNP/capita in most LXs. The most widely quoted estimates of purchasing power parity’ p&a are in Kravis et aI. (1975). “This seemingly low figure for OPEC arises from the inclusion of Nigeria as a large population member of OPEC.
which affect the calculations, especially the divergence between odficial and purchasing power parity exchange rates highlighted by Kravis et al. (1975). This &sue motivates further adjustments to explore robustness of results to the data used. Finally, differential labour efficiency factors by region are used to allow for variations in labour productivity by region. These adjustments have a dramatic effect on estimated global efficiency gains because their effects compound. Because of their importance they are listed in table 3. Adjustments for the ratio of the size of the work-force to population assume that in rich regions (1-5) the workforce is 60% of the population but only 40% in poor regions (6 and 7). These adjustments crudely reflect demogr,aphic patterns. To adjust for differences in efficiencies of tabour across regions, labour in newly industrialized and less industrialized countrit:s is assumed to be less efftcient than labour in developed countries. Two alternative differential efficiency factors of one-half and one-third are used in adjusted calculations. Finally, in making adjustments for differences between purchasing power parity and official exchange ratas in converting GNP data into U.S. dollars, figures from Kravis et al. (1975) are used in a manner similar: i:o the correction factors used in Whalley (1980). Here correction factors b;r region are applied rather than by income level as in the earlier paper. In ca,ses where all 179 countries in table
Table 3 Adjustments made to d&la used in unad&sted case. (A) Pqmlation~wd&me Cht& colon for size, of labour force to- population. Workforce assumed to be 60(%;of pq&&n in developed country regions (l-5}, but only 4@?“/, in developing country regk~s (6 a& 7). (13)E4fickncy units Differential efkikncies of labour assumed by region. L,abour in Regions 6 and 7 {NICs and LDCs} assumed to be (a) one-ha& and (b) one-third as efficient as labout elsewhere in alternative calculations. (c) Exchange rates Crude TWIT&on for purchasing power parity premium over offkial exchange rates, using cstimata from Kravis, et al. (1975). ?remia relative to the U.S. dollar used are 1.24 for the EEC, 1.47fox Japan, 1.87 for other dleveloped, 2.32 for OFEC, 2.32 for NICs, and 3.49 for LDCs. [See Whalley (1980, p. 274}.]
2 are considerd, the same correction factors are assumed to apply to all countries within each region. In addition to diEerences between adjusted and unadjusted calculations, further vatiations occur with respect to the groups of countries used. Cafculati~ns are made not only for the equalization or partial removal of differences in wage rates between the seven regions indicated in table 2, but also across all 179 countries in table 2, and between aggregated ‘rich’ and ‘poor’ regions (regions 1 to 5 are assumed ‘rich’ and regions 6 and 7 ‘poor’). In the individual country caSe to simplify the calculation factor shares are assumed to be the same for any country within each of the seven grcs*Jps. 4%Rcsuks of cakulations
In table 4 estimates of the annual worldwide efficiency gains from free mobility of labour are reported for the unadjusted case for different values of the elasticity of substitwtion in production in all reigions. In spite of the sensitivity to the values of substitution elasticities, these results suggest large gains from the removal of global immigration controls. In most cases the gain exceeds worldwide GNP generated in the presence of the controls suggesting that immigration control are one of the (and perhaps the) most important policy issues facing the global economy. A large portion of the gain is accounted for by labour migration occurring between the aggregated rich and poor regions. Relatively little additional gain results from labour migration occurring between individuail countries beyond the gain from twmn the seven major regions. The of restrictions on clezrly an issue ~tw~en ric tries as a bloc and h: rather than ~et~~~~ individual co~l~tri~s.
B. Hamilton and .l. Whdley, implications ojldwur
mobility restrictions
71
Table 4 Estimates of annual worldwide efkiency gains from free lsbour mobility - unadjusted cases; % trillion !Q77. Elasticities of substitution in production in all regions
Removalof controls on labmr mobility between (1) All countries listed in table 2 (2) The 7 regions listed in table 2 (3) The ‘rich’ and ‘poor’ regions listed in table 2
1.5
0.75
0.25
16.02 14.46 12.23 9.26
5.80
15.41 1302
8.58
5.52
6.49 5.92
4.74
7.02
1.25
1.0
il.52
6.81
Worldwide GNP in 1977
7.52
Table 5 reports results fro m allowing partial removal of immigration controls in the unadjusted case for the seven region calculation. These calculations involve allow@ for enly partial removal of the difference between each region’s wage rate and the global mean wage rate. The most important feature of this table is the large gains arising from only smarl amounts of migration. This reflects the fact that marginal efficiency gains are larger for initial units of migrating labuur since the marginal product differences are largest in the initial phases of migratior 1. .v’i:k elasticities equal to 1.5 in each region, over 40% of the total potential gain is reaiized
Table 5 Estimates of annual worldwide efficiency gains from partial liberalization of migration restrictions unadjusted 7-region calculations ($ trillion 1977). 7; Reduction rn difference between region and global wage rates
Elasticities of substitution in production in all regions -. _I 1.25 1.0 0.75 0.5 1.5 0.74 0.61 1.52 1.23 3.12 2.50 4.59 3.1’1 5.81 4.79 6.76 5.70 9.36 8.28 11.92 10.31 13.78 I2.00
0.48 0.96 I.91 3.82
0.35 0.70 1.36 1.98
.‘:.G8 2.57 61.45 3 I!
ii.99 X83 Y.91 10.92
14.99 ! 328 15.41 13.%2 1 ,.52 ---
5.25 7.1 1 7.71 8.23 R.58
0.23 0.45 0.85 ’ -“cl :.55
L.86 3.09 3.65
5.z 5.1 i 5.52 -__-
-
when only IQ% of the wagt: differential is e?iminated, and 5% of the gdin for a !i”A r&Ao~n. This suggests that small changes) in global migration restrictions are especially ir#nportantsince their mzqinal e&cts are large. Table 6 reepqts rqq!Q fr_om.&qinatian of immigration controls in the seven xqiont case with the various -adjustment factors outlined above. Since these a8djust+edt factors compound oae 9th a&#+ in. z’educing the measured wage -rate di@erentiaf on an eff&iire “&bour’ units basis, in combinlration they sharply reduce the estimate of, global efficiency gains. While El’ltis is disturbing from the viewpoint of pro$+ng firm estimates of the effects, *the k%y role of thzse adjustments is hardly surprising. Combining wart fir>rce/population, exchange rate, and labour efficiency adjustments reduces measured wage rate d,ifferentials betweeti rich and pi>or regions by an order of approximately 20 (i.e., 2 x 3.5 x 3). This highlights the need for a more acxurate assessment of these parameters in any future work if more than a broad impression of possible orders of magnitude is sought.
Table 6 EMmates of annual worldwide efficiency gains from slobal adjusted 7-region calculations ($ trillion 1977).
removal of immigration controls -
Elasticities of substitution in production ia all regions 1s
No adjustment (table 4)
1.25
1.0
0.75
15.41 13.82 11.52 8.58
0.5 5.52
AdjUStWntS
PW EX EV EV2 EV+PW EX+PW EX + EV” EX+PW+EV EX+ PIT’-!-EUT
11.04 12.11 6.59 8.83 5.09 7.69 3.29 2.07 3.29
9.93 11.08 5.91 7.94 4.56 7.03 2.96 1.84 2.96
8.36 9.80 4.99 6.70 3.82 6.24 2.58 1.6 2.58
6.36 4.30 8.09 5.46 3.84 2.68 5.14 3.55 2.93 2.04 5.24 3.7:’ 2.14 1.55 1.34 1.05 2.14 1.55
ATotation,for adjumnents $ W -Population workforce adjustment EX -Exchange rate adjustment EV -Labour efkiency usits correction using factors of 1:3
Et’2-Labour
efkiency units correction using factors of 1:2
B. fhmilton and J. Whalhy, Implicationsof labour mobility restrictions
73
Table 7 reports thy distributional impacts of liberalized migration restrictions in the unadjusted 7-region cases. Panel (A) shows both the sharp changes which occur in wage rates and the adjustments between regions. With an elasticity of substitution of 0.5, four regions gain labour and three lose; but with the higher elasticity value of 1.5 only one region gains labour while six have labour outflows+ Because only one region expands labour use in the 1.5 elasticity case, this case may be regarded as especially implausible. Wage rates rise in labour losing regions and fall in labour receiving regions. The changes in the return to capital by region in panel (Es) emphasize the feature that capital owners in labour gaining regions are ma& better off, and in labour losing regions are made worse off. The incentive for labour unions in high wage countries to oppose liberalization of immigration restrictions is thus clearly shown. Table 7 Distributional
impacts of removal of immigration controls kegion unadjusted case.
Elasticities of substitution in production in all regions Region
1.5
1.25
1.0
0.75
0.5
(A) y0 change in wage rutes to non-migratingfabour 1 2 3 4 5 6 7
23.7 - 21.9 27.2 72.0 Ii750.2 624.3 11718.4
9.6 - 36.2 12.7 52.3 1538.7 541.5 1510.6
- 12.1 - 48.8 -9.6 22.2 1214.8 414.7 1192.2
- 39.7 -64.8 - 38.0 -16.1 802.3 253.2 786.8
- 67.7 -81.2 -66.8 - 55.1 382.6 88.9 374.3
(B) T/oChange in return to capital by region ” :
- 396.3 25.7
- 526.6 13.3
695.3 22.6
760.9 99.4
659.3 184.1
3 4 5 6 7
- 24.9 -61.5 - 37.7 - 62.7 -94.3
- 14.5 - 60.0 -47.5 - 72.2 - 98.9 --___.
14.7 - 40.4 -59.1 -81.1 - 100.0
76.5 52.3 -69.1 - 84.9 - 100.)
143.2 242.7 -65.8 -61.6 -100.0
-
Fi 3 displal/s the glo al Losenz curves for the worldwide incme distribution before and after the removal of immigration controls in the 178 country unadjusted case usi elasticities of substitution of 0.5. The Lorenz curves are drawn using C capita by country and assuting that in eat ~~~~~ethis is ition of income within each co case the d a& equality
0
I6
20
30
40
!50
60
70
80
90
I00
% of globul population Fig. 3. Global distributional e-ffects of removing immigration controls: Imenz curves for 179 country unadjusted case with sulwtitution elasticities of 0.5.
clearly shows that dramatic effects on worldwide equality which are possible from modifying immigration restrictions. These effects are much larger, for instance, than those Likely fkom increases in aid flows to Lima target levels.
Although highly speculative, the calculations reported here clearly suggest large potential worldwide Akieney gains from moving toward a worldwide labour market free of immigration controls. Gains to the world economy in many of the unadjusted cases exceed existing workvide GNP; in the adjusted cases gains are smaller but still large. ‘Thus, while the main conclusion of this paper may not be surprising, it is the potential quantitative size of the effects involved that is striking. To place the results here in the dontext of current policy debates, it is *usefulto compare the results tu some of the estimates of effects from policy ~~it~at~.v~s on some of the more actively discussed issues in the N~rth-Soutb sents a 6bE1St guess’ n~rn~r~~a~ abortion of possible ~~at~v~~~ under the North-Sou ity price st~b~~~~ation,~au~~llat~o~ or rescheduling of LDC debt, e proeeelion in t,he North on LDC exports, and increased
B. Hmilton
and J. Whailey, itnpkvtions
of labour mobility ;*esfrictiom
75
aid flows. A best guess offered by Ciine is that annual gains to LDC’s from a ~&es of ‘optimistic” policy changes on these flouts could be in the range of !§40 billion/year. Cline also describes the impact of liberalized migration on developing countries as potentially *very targe’. The calculations reported here suggest that the gains from liberalized Iabour mobility are likely to dominate developing country gains from non-migration initiatives. The im@ication thus appears to be that liberalization of worldwide migration could possibly be the single most important issue in current North-South exchanges for the South. Citizens of LDCs could thus be well served if demands for removal of immigration controls in the North were more forceflrlly presented, instead of allowing the other proposals which have so far preoccupied negotiati0r.s on a new in:ernational economic order to take centre stage. El.- ., small steps towards liberalization are important because effects are large at the margin. Finally, concessions to the South in NorthSouth forums may be of little value if at the sitme time immigration restrictions in the developed world are further tightened.
References Cline, W.R., ed., 1979, Policy alternatives for a new international economic order: .In economic analysis (Praeger, New YcIrk). Harberger, A.C., 1966, Efficiency effects of taxes on income from capital, in: M. Klzyaniak, ed., Effects of the corporatton income tax (Detroit, MI). Helleiner, G.K., 1979, World market imperfections and the developing countries, in W.R. Cline, ed., Policy alternatives ‘or a new intemvtionai economic order: An economic analysis (Praeger, New York). Johnson, H-G., 1967, Economic policies toward less developed countriw (Praeger, New York). Kravis, LB., 2. Kenessey, A. Hesto I and R. Summers, 1975, A system of .intemational comparisons of gross national product and purchasing power (Johns H.#pkins Press, Baltimore, MD). Whalley, J., 1980, The worldwide income distribution: Some speculative calculations, Review of Income and Wealth, Sept., 261-275. Whalley, J., n.d., Trade liber;dization among major trading areas (MIT Press, Cambridge, hIA) forthcoming. World Bank Atlas, 1979 (Wor!d Bank, Washington, DC).