In this post, I’m going to ridiculously plagiarize a book by famed I’m-not-a-free-market-economist Ha-Joon Chang. The book is called “23 Things They Don’t Tell You About Capitalism” – and everyone should read it*.
*Which is not to say that he has it right – some of his data is a bit loosely interpreted. But he’s a rebel from Cambridge – and who doesn’t love a rebel?
One of his big themes is the argument that Free Markets are just regulated markets where we’ve become blind to the regulation (and/or we accept it implicitly). And then he brings up Immigration Control…
Having grown up in a Greek community, I’ve developed a well-hardened ear to the woes of immigrants in the Motherland, especially the Albanians and the gypsies travellers, who are stealing over the border into Greece and stealing things and generally spoiling the pristineness that would be Greece were it not for them*.
Prejudice Patriotism is such a lovely, rational thing.
Which is obviously the reason to be in favour of Immigration Control.
But if forced to think about it, I’d have to recognise that Immigration Control is actually to the Labour Market what Capital Controls are to the Capital Market.
In general, economists decompose the process of economic growth into changes in three factors: the labour market, the capital market, and the factors of production*. The first world has spent the last 40 years fighting for the freedom of capital flows (the capital market), whilst continuing to ratchet up controls over the labour market. Which seems like a strange position to have – because if we’re serious about globalization, then you need to free up everything.
*Which is the economic euphemism for “everything else”.
But this does answer the question of: “why is a bus driver in Sweden paid fifty times more than a bus driver in India?”*
*This is the start of the plagiarized example.
The answer that’s often given for the discrepancies in wages is “productivity”: as though first world workers are significantly more productive than their third world counterparts. And maybe this could be an explanation when it comes to factory workers and miners and those jobs where there is a grey area with regard to skill.
But when it comes to bus drivers, there is hardly a difference in the skills required. Certainly, we cannot say that the Swedish bus driver is fifty times better at driving than Mr. India. If anything, the Indian bus driver is likely to be more skilled: he, after all, spends his day avoiding potholes, cows, and families of six travelling by scooter.
So then, if the answer is not productivity, we need to turn to some other explanation.
In normal circumstances, this discrepancy in wage rates would cause some action in these economic agents. The higher wage rates would attract the Indian bus driver to move to Sweden, and get a job as a bus-driver there. And he would be prepared to take a wage that was lower than the Swede’s, as long as it’s sufficiently higher than his original paycheck back in India. This would lower the Swedish wage rate, causing the two wage rates to start converging.
The real obstacle in this process is Swedish Immigration Control. Which is highly protectionist: because it means that the Swedes collectively are forced to have a higher cost of living as a result of their higher cost of labour.
Meanwhile in India, the lower cost of labour makes it a highly attractive destination for investment of those free capital flows. Oh – and outsourcing.
It’s the problem with being protectionist about immigration and not protectionist about capital flows – you have to be protectionist all the way, or you end up fueling the economic growth of other countries to the detriment of your own.
And also: your salary is a general function of immigration control.
Just remember that if you’re prone to preening about success.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Rohan Atrawalkar November 30, 2017 at 09:20
The question that I think would be more appropriate to ask is, ‘Is the Swede overpaid or the India underpaid?’ Other things being equal( which they are not, India’s HDI is among the least appealing ones) your argument that it’s entirely a product of immigration control would hold, but I would say that the Swede is not facing the sort of unnatural competition that the Indian faces because of an relatively high fertility rate in India, and a very large workforce. Our benchmark for which country is paying it’s people fairly needs to be that one where the other Economic indicators are more favorable to a healthy life. The Swedish HDI for instance, is remarkable and should serve as a model.Reply
Aside from the fact that the Swede pays extremely high taxes, In the hypothetical situation that Sweden abolished its immigration controls, Indians would flock there until a point it becomes unsustainable for the Swedes culturally and economically, is all this going to help bring down the fertility rates in India? I think not because the differences in cultural identity would still hold and rural Indians would keep making babies.
I think the Swede is being paid exactly what he deserves. To sum up, the possibility of free competition in the labor market should always be preempted by immigration control if it means that the cultural fabric and Human development factors are going to be compromised for the natives. Think about the huge burden on the natives tax money to support immigrants. Besides it doesn’t give any kind of a permanent solution to the problem of poor human resource growth in the immigrant’s country.
The Swede’s wage rate could get lowered if an Indian driver just as productive as him enters the Swedish scene, but that would mean a compromise on the Swede’s HDI and no improvements in the Immigrant’s country.
Also remember that there are cultural differences in productivity, A Chinese worker puts in a lot more work per day than a counterpart in India. So it would be a false equivalence, to extend this analogy to the Industrial and Agricultural sectors, and even within the service sector itself.