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This annual series provides comprehensive analysis on current and emerging issues of international trade and economics.
Tentative contents include:
• Boom Towns and Ghost Countries: Geography, Agglomeration, and Population Mobility Lant Pritchett (World Bank)
• Global Wage Differences and International Worker Flows Mark Rosenzweig (Kennedy School of Government, Harvard University)
• What's Wrong with Plan B? International Migration as the Alternative to Development Devesh Kapur (University of Texas) and John Hale (Michigan State University)
• Global Labor Markets: Issues and Implications Alan Blinder (Princeton University), Michael Kremer (Harvard University), Carmen Pages (World Bank), and Isabel Sawhill (Brookings Institution)
An important feature of globalization is the increasing cross-national integration of labor markets. Yet there is little consensus on the implications of that integration, or on the costs and benefits for the many very different groups involved. While there is agreement-at least among most economists-that there are likely to be aggregate welfare gains from increased integration, it is clear that there are losers as well as winners in both developed and developing countries. For example, politically contentious debates about the effects of immigration on the wages of low-skilled workers have proliferated in the advanced industrial economies while poor developing countries have become embroiled in equally contentious debates about the effects of out-migration of skilled workers on their human capital base. Untangling the myriad effects is made even more complex by intermediate arrangements, such as the offshoring of various productive activities by developed country firms to emerging-market economies. This creates new opportunities for skilled workers in the latter, but at the same time offshoring may alter employment opportunities for skilled workers in the advanced economies, and the wage distributions in both.
This ninth issue of the Brookings Trade Forum brought together some of the foremost experts on migration, representing diverse perspectives and backgrounds. New research commissioned for each session launched an interrelated series of lively discussions during the conference, held on May 11 and 12, 2006. The objective was not to attempt to reach consensus, but to broaden and deepen our understanding of the extent and implications of the integration of global labor markets. Thus the forum addressed a wide range of topics-from the welfare effects of immigration on labor markets in both developing and developed economies, to the relationship between education systems in sending countries and labor market outcomes in recipient countries, to the merits and demerits of proposals that would drastically reduce restrictions against cross-border labor migration.
Despite the wide range of topics, a number of themes emerged from the analyses. We highlight four. Perhaps the most obvious was the difficulty in drawing general conclusions about the welfare effects of global labor market integration. Various papers and discussions highlighted some of the many critical mediating factors. These include the skill set of the particular group(s) under discussion, the labor market composition in the recipient countries, the relative returns to different types of labor in the sending and receiving countries, the nature of the contractual arrangements relevant for immigrants' work, and more general macroeconomic and financial market trends.
A second theme was that the investments that developing countries make in higher education are no guarantee of retaining their best and brightest. Indeed those very investments may increase the likelihood of out-migration, particularly when the returns to skilled labor are much lower in developing than in the advanced economies.
Third, if international labor markets were more flexible, participants stressed that cross-border labor mobility would likely skyrocket relative to current levels-even if that flexibility entailed only temporary migration. On balance, that increased mobility would have positive effects for poverty reduction worldwide, but its effects on particular nations and on recipient country labor markets would be more mixed. Finally, the discussion made quite clear that, while the economic effects of proposals to increase international labor mobility are themselves difficult enough to measure, the related questions of political rights and citizenship for temporary workers are daunting and have implications for international as well as national norms and standards.
This volume presents the revised papers, invited commentary, and general discussions from the conference. One paper in the volume explicitly examines flows of skilled migrants across countries and how such flows are affected by education investments in the sending countries and by differential returns to skilled labor across countries. Another focuses on the evolution of wage dynamics during development and how those dynamics are affected by global labor market integration. A third paper examines mobility between formal- and informal-sector jobs in emerging market and transition economies and how those trends are affected by the nature of each country's integration into the global economy. Two papers focus explicitly on the potential effects of significant reductions in international labor market mobility, from temporary work permits for migrant workers.
A final panel was asked to reflect broadly on these topics. The first panelist questioned the adequacy of the traditional Heckscher-Ohlin framework for explaining developments in a world where trade patterns do not conform to the underlying assumptions. He suggests an alternative in which productivity differentials can lead to the matching of skilled workers from advanced economies with skilled workers from developing countries-and the potential for increased inequality between skilled and unskilled workers in both. A second panelist discussed costs and benefits of international labor migration within the classic Heckscher-Olin framework and then assessed how that framework has been altered by the increase in offshoring. The final panelist explicitly addressed the effects of increasing immigration on wage inequality in the United States, as well as the broader implications for a growth model based on significant labor and capital inflow but a fragile prosperity based on high levels of indebtedness, increasing poverty and inequality, and limited mobility and opportunity. In the remainder of this introduction, we summarize the main points that emerged in each of these sessions.
Lant Pritchett begins his stimulating paper by asking why there are such large discrepancies in wages across countries if labor and capital markets are as mobile-and policies and institutions are as similar-as most traditional models suggest. He notes that even with the increase in the number of sovereign states in the post-World War II years, there should be more economic integration than there actually is. Instead, differential productivity shocks have led to permanent divergence between countries and, in the most extreme cases, the existence of what he calls "ghost" countries and "zombies."
Pritchett argues that region-specific shocks can lead to long-run shifts in labor demand, even after other factors have adjusted. If there is population mobility, for example, between regions within a country, one should expect to see population drop sharply in the region experiencing a negative shock (hence the term ghost towns), with little variability in wages across regions over the medium to long run. However, if populations are immobile, which is typically the case across sovereign borders, the adjustment occurs via a decrease in wages. Instead of ghost countries, the results are "zombies": living dead economies, with wages and incomes falling over time-a situation that characterizes many countries in sub-SaharanAfrica. Even if policies and institutions matter a lot, which they do, geography can still also matter. Thus lack of mobility results in countries with many more people than they should otherwise have, regardless of their domestic policies and institutions.
To test his proposition, Pritchett looks at a number of episodes of labor migration and population and wage change across states, provinces, and regions within countries, and across countries-both when mobility is restricted and during an era of open borders. He finds that the variability in per capita income growth rates is spectacularly larger among countries than among regions within countries. At the same time, the variability in population growth across countries in the world is absolutely smaller than the variability across regions within countries. For example, he shows that there has been huge variability in population growth across regions in the United States. He also cites the contrasting examples of Ireland, where the population shrunk dramatically following the potato shock of 1871, and Bolivia, where the population is 90 percent higher than it was in 1972 despite huge economic shocks.
Pritchett identifies a number of countries that are hardcore geographic zombies (such as Zambia) contrasted with those that he labels as policy zombies (such as Cuba). Zambia is a classic case. He concludes that if its population had fallen in accordance with the economic shocks at the same rate that Ireland's population fell, then it would now be just 18 percent of its current level. If it had fallen at the same rate as in some U.S. regions that suffered negative shocks, then it would now be at just 25 percent of its current level.
He concludes by noting that all aid is based on the presumption that countries can increase their income levels. His analysis points to an inconvenient fact-even in fully integrated economies, there can be big changes in desired population. Without population mobility, geographic shocks create a different dynamic: one of falling wages and outputs. If labor supply cannot be elastic, it is prices that must adjust. However, aid policies focus on national development strategies, not the well-being of populations-for example, on Zambia rather than on Zambians. He concludes that a policy that dramatically increased labor mobility-perhaps through temporary work permits and strong penalties for exceeding stay limits-would do much more to reduce world poverty than millions of dollars of foreign assistance to national governments.
Both discussants found Pritchett's results on population and wage trends compelling, and his arguments and proposal thought provoking. Cliff Gaddy highlights the extent to which Pritchett's interest is in zombies-where the actual population significantly exceeds the desired one-rather than in ghosts and in spatial zombies rather than in institutional ones. He notes that spatial zombies are worse than policy zombies because policies can be fixed, while geography in most instances cannot.
Gaddy applies Pritchett's framework to Russia, where his own research is based. However, instead of geographic shocks and mobility constrained by national borders, Russia provides examples in which people are forced to live in places that geographic features make very unattractive. He compares cities in Russia with those in free economies that have similar climate and resource endowments (including distance from the market). For example, consider Perm, Russia, and Duluth, Minnesota. While the current population in Duluth is about the same as it was in 1920, Perm's population quadrupled over the same time period. Based on the relative distribution of pre-Bolshevik Russia, when the population was more concentrated in the European part of the country, Gaddy estimates that many populations in large Russian cities are now two to four times their desired size.
He concludes that Russia is a case in which policies prevent cities that should be ghosts from becoming ghosts, so they remain zombies, and where resources (oil and gas) subsidize economic activity in those zombie cities that would otherwise be defunct.
Simon Johnson commends Pritchett for yet another innovative paper that breaks new ground and will prompt a great deal of further investigation. He agrees with the core point motivating Pritchett's analysis. Since 1945 cross-border migrations are not only on a much-reduced scale compared with the past, they are also asymmetric. It is much easier to move into boom areas than it is to move out of bust areas. And, perhaps most important, migrations out of small, poor countries are now quite difficult. In addition, Johnson identifies a major risk that is only hinted at in the paper: economic depression may lead to deadlock and conflict, exacerbating the income decline.
Johnson finds Pritchett's analogy to ghost towns a provocative but productive way to think about some of the problems in relatively poor countries today, from Haiti (whose economy was previously based on sugar) to parts of West Africa (where commodity booms come and go). However, he notes that when people cannot leave becoming a zombie is not the only possible outcome. The inhabitants may find something else to do. Perhaps they have skills that are useful for other activities or they can attract other kinds of investment. Barbados, for example, has managed to achieve a much higher level of income than Guyana, despite the fact that both have strong heritages of sugar, slavery and other forms of forced labor, and deep ethnic divisions.
He concludes by noting that almost none of the great successes of the past fifty years (that is, rapid sustained growth, starting with weak or very weak institutions) have been based on commodity price booms. Instead, the catalyst has been figuring out how to better integrate into global manufacturing production chains. Low wages are not a sufficient solution, but they are also not necessarily an obstacle to initiating a sustained growth process.
Mark Rosenzweig empirically analyzes the cross-country migration of students. This group has received surprisingly little prior attention among researchers, despite its importance. For instance, the flow of students to the United States far outpaces flows of other immigration categories, such as skilled workers or legal unskilled workers. Using data on student visas, Rosenzweig examines the direction of migration, the returns to various skill levels, and differences across different countries. He notes that most migration models fail to account for either different skill levels of migrants or differences in returns to skills across countries. He exploits a new data set from the New Immigrant Survey to examine the flow of students to the United States, the stock of U.S. foreign-born students, and the number of U.S. foreign-born students who become permanent residents. His paper extends beyond the standard focus on the GDP of the sending countries and looks at rewards to skills across countries.
He tests two separate models of migration. One is a schooling constraint model, in which migrants come from countries with high rewards to skills but low opportunities to obtain additional schooling at home. The second is a model in which migrants acquire skills at home, where the skill price is low. However, expanded schooling opportunities at home actually increase migrant outflows because the domestic rewards to skills remain much lower than in the developed countries.
Rosenzweig first notes that the direction of migration flows is very clear. The lion's share of the world's student migration goes to the United States, followed by the United Kingdom, and then to Australia and Canada. At the same time, (purchasing power parity) PPP-adjusted earnings of high school and college graduates vary tremendously across countries. In countries such as Nigeria, college graduates earn as little as $1,000 per year; in Korea, college graduates still earn less than $10,000 per year, while in the United States, high school and college graduates earn $35,000 and $50,000 per year, respectively.
The main sending countries are in Asia. Topping the list are countries with high economic growth rates, but with low skills prices (China and India). They are also far away from the United States, have at least one university ranked in the top 200 in the world, and have very large populations. Rosenzweig finds that growth rates and per capita GDP both affect the capacity of countries to send student migrants. The number of U.S. student visas issued annually, the stock of U.S. foreign students, and the number of foreign-born students who remain permanently in the United States are all higher for countries with lower skill prices and for countries with a larger number of universities per capita.
It is interesting that Rosenzweig finds that an increase in the number of home universities increases the number of student stayers in the United States. This suggests a story of educated students coming to graduate school in the United States, seeing huge wage differentials, and thus choosing to stay. It also suggests that some kinds of developing country investments in education can exacerbate brain drain. Thus higher skill prices in the home country are negatively correlated with student outflows; when controlling for skill prices, greater domestic investment in education is associated with more out-migration. As he notes, a better understand of these linkages will be important for determining the optimal distribution of additional investments in schooling. Somewhat less surprisingly, he also shows that those migrants who have come to the United States with prior student visas and have been able to become permanent residents (that is, they acquire green cards) are much more likely to get a job and to get married. This is in part because they are more likely to meet someone while in school.
Excerpted from Brookings Trade Forum 2006 Copyright © 2006 by THE BROOKINGS INSTITUTION. Excerpted by permission.
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