Friday, August 24, 2012

On the potential consequences of open borders and wages

A recent post made by Chris Bertram at Crooked Timber, "Open borders, wages, and economists", raises some interesting questions. There's substantial agreement on the benefits of radically liberalized immigration policies on potential migrants. What of consequences on workers in the receiving countries?
One author, Michael Clemens, raises the possibility of a doubling of global income (PDF); another, John Kennan, envisages a doubling of the incomes of the migrants. Either way, the gains are huge: put those poor people into the institutional and capital contexts of wealth countries and they would do much much better.

What there seems to be much less agreement on is the effect of open borders on the wages of the non-migrant population of the wealthy receiving countries. Clemens and Kennan generally concede the possibility of some small depressive effect but argues that it would be temporary and/or could be compensated for at a policy level by suitable taxes and transfers. This is a radically different story from that told by, for example, Ha-Joon Chang, in his book 23 Things They Don’t Tell You About Capitalism . Chang’s third “thing”, “Most people in rich countries are paid more than they should be” contains a parable of two bus drivers, Ram in India and Sven in Sweden. They do similar jobs, but if anything Ram’s requires more skill as he “has to negotiate his way almost every minute of his driving though bullock carts, rickshaws and bicyles stacked three metres high with crates.”(25) Yet Sven is paid 50 times more than Ram is (and it would be easy to find examples where the pay divergence is much larger, perhaps as much as 1000 times between unskilled labourers in poor and wealthy countries). Chang things it implausible that Sven embodies more human capital than Ram does as a result of education and training, since most of his Swedish education is irrelevant to what he does on the job.

So if Chang is right, an open border policy would have a massive depressive effect on the earnings of non-migrant workers in wealthy countries since other people would be happy to take unskilled or low-skilled jobs for much less than the current wage (but more than they could get at home).

Given the massive aggregate welfare gains from migration, perhaps supplemented by other thoughts about human rights and freedom of movement, some peope will argue that open borders is the right policy regardless of its effects on the poor citizens of wealthy countries. And they may be right about that. But clearly if we are to wage a political battle for more liberal immigration policies in Festung Europa and the United States, then the truth about the benefits or harms to the existing population is important. It is one thing to say to an electorate that free migration will probably not harm them (and may even benefit them) and quite another to say that such harms as they suffer are swamped by the benefits in a global utilitarian calculus. The first stands a chance of democratic success; the latter, realistically, has none.
The discussion in the comments is worth reading.

Wednesday, August 22, 2012

A second note on the import of statistics

My post last Monday about basic demographic figures only being indicative of possible futures, not determinative of them. This does not mean that numbers are not important.
Total Population in China, Europe and the United States of America (compared with India, Brazil and Nigeria), 1950-2100
Taken from here, this chart shows the effects of differential population change over the 1950-2100 period, using United Nations data from 2010. The site's summation merits sharing.

The population of the United States of America is projected to grow continuously for many decades to come. By the end of the century the US population will be approximately the same size as that of the 27 states that make up the European Union.

China's population, on the other hand will only slightly grow (due to its momentum effect) until around 2025. Then it will start to decline significantly until it will reach a bit more than 900 million.

For comparison: India's population will outgrow that of China by 2020 and then further increase to more than 1.7 billion around 2065. Only then it is projected to start declining.

A most dramatic demographic change is projected for the most populous country in Africa: Nigeria. While its population was only around 38 million in 1950, it has now increased to about 150 million and is projected to reach almost 750 million by the end of the century. Shortly after 2050 Nigeria's population will become larger than the (growing) population of the United States; and by 2065 Nigeria's population will outgrow the population of the 27 states of the European Union combined. In fact, around 2070 Nigeria's population will be as large as China's population in 1950.

India is another country with remarkable population growth: By 1950 India's population was almost exactly the same size as that of the 27 countries of the European Union combined. Today India has four times as many people and by around 2060, India's population will be 3.4 times that of Europe. Within about one century, India's population has outgrown Europe's population by 1.2 billion people.

These fundamental discrepancies in population growth will shift the geo-strategic weight away from Europe towards Asia and Africa.

A glance at Wikipedia's list of the populations of the countries of the world over time confirms this. In 1950, the United States' 151.9 million would have been outnumbered two-to-one by the 68.4 million of Germany, 50.1 million of the United Kingdom, 47.1 million of Italy, 42.5 million of France, and 28.1 million of Spain. Looking outside of the North Atlantic area, there were barely more Brazilians than there were Britons and Italians, war-devastated Poland's 24.8 millions comfortably outnumbered Egypt's 21.9 million inhabitants, the Netherlands had 30-40% fewer inhabitants than Canada or South Africa, Singapore had barely a million residents, and the populations of the smaller Persian Gulf states were measurable in hundreds of thousands or even tens of thousands.

Europe's populations grew absolutely, and quite substantially, but declined relative to the rest of the world as the demographic transition took hold, with greater effect owing to the superior medical technology and sharply reduced infant mortality available in our time, as opposed to a century ago. This decline manifested even relative to other high- and middle-income continents and countries. On Tuesday, Slate noted that day was "Pi Day", that shortly after 2:29 pm Eastern Standard Time United States Census Bureau's population clock hit 314 159 265--"pi times 10 to the eighth", as Slate notes--according to a press release. On that day, it should be noted, the five European countries that together outnumbered the United States two-to-one sixty-two years ago now lead the United States by just a couple million people. Soon, these five countries' lead will disappear; soon, the United States will lead.

Looking at the simple crude metric of total population says nothing about other, arguably more important factors, like (say) age composition. (To name a single example, Nigeria is going to be so much younger than China in 2050.) By themselves, these population totals don't mean anything. It's imaginable that Nigerian economic weight wouldn't equal its demographic weight, arguably likely given its problems and current leadership. But having a population on the order of China's and Europe's, and younger than either, makes the chances of such growth that much more likely.

Monday, August 13, 2012

On demographics as only one starting point

I've intended for some time comment upon Cam Hui's Seeking Alpha "America's 'Trente Glorieuses'"?. It makes a fairly common argument: the United States, by virtue of its particular demographic structure, enjoys a significant advantage over its various peers and competitors.

In the post-war period starting from 1945, France and much of Western Europe experienced a virtual cycle of rapid economic growth lasting thirty years called les trente glorieuses. Economic growth was driven by the combination of rising working age population, incomes and standards of living. This is known as a "demographic dividend".
America may be on the verge of its own trente glorieuses as it experiences its own demographic dividend, driven by the combination of a rising working age population as the children of the post-war Baby Boomers grow up and enter the work force and immigration.
The American age demographic profile is substantially better than its major trading partners. Despite the angst over dependency ratios, or the ratio of workers to retirees, the expected increase in American workers means that American dependency ratios are likely to stabilize in the decades to come, whereas those of many other countries continue to decline – which will strain the pension system and national finances.
America's relative youthfulness compared to trading partners isn't just a product of its higher birthrate, it is also a function if its willingness to accept immigration. The United States and Canada are in the minority of major industrialized countries that openly accept immigrants.
Indeed, BBVA research (via Business Insider) titled 'Immigrants rejuvenate the United States' show that without the influx of Mexican immigrants, the demographic of the U.S. would be much, much older[.]
One of the graphics used to illustrate the article is this one, showing projected growth in the 15-to-64 working age demographic in the half-century to 2050.

Labour force growth, 2000-2050

My main quibble with this graphic in that it doesn't break "Europe" down into more meaningful national units--Britain is not France is not Germany is not Spain is not Poland, continent-wide convergence in demographic trends being far from complete--but otherwise, yes, I buy the points being made. The United States does stand out among high- and middle-income countries for its demographic profile, characterized by high rates of natural increase and substantial net migration in a population that's already young. If most of the United States' peers and competitors have populations aging much more rapidly than the United States, with obvious consequences for the relative availability of labour and costs for supporting non-economically productive populations, the United States has a decided advantage. Overall, as the Economist noted, fertility in Europe has fallen after a brief recovery in the past decade. The other countries cited by Hui as major competitors--China, Korea, Japan--all seem to be on track for ultra-low fertility, while many other economic competitors are on track for, at best, replacement-level fertility.

(Parenthetically, it should be noted that the United States is not completely unique. For instance, Behind the Numbers' Carl Haub notes that American fertility has fallen slightly recently in response to the recession, the Economistadding by noting that TFRs in France and England have been rising for some time and are now higher than the United States' figure. These two exceptions don't change the overall picture that much.)

What's my problem with Hui's analysis? It's two-fold.

On one level, I find his use of the term Trente Glorieuses to be misleading in reference to the sorts of demographic changes described. In France at least, the Trente Glorieuses saw a thorough transformation of the structure of France's population, the low growth that characterized the Third Republic being transformed by the combined effects of the strong baby boom and high levels of immigration and intensified rural-to-urban migration. The basic trends afoot with France's demographic structure changed completely, in other words. Hui, in contrast, is describing a situation where the basic underlying trends of the United States' demographic structure remain unchanged, where there the only transformation lies outside the United States, specifically in other countries' developing more disadvantageous demographic structures.

My deeper problem with Hui's analysis is that it takes simple numbers to mean too much. Hui is quite right to point out that the continued growth in the United States' population of working age has the potential to offer it a significant advantage over other upper- and middle-income countries, but will this potential necessarily be realized? "Demography matters" is the name of this blog, yes, but no one posting here has ever argued that the demographic structure of a population determines everything about a given population's economic future. Governments can craft policies to take advantage of demographic sweet spots or not, can craft policies which deal which deal successfully with particular demographic issues or not.

* The rapid transition of China over the past generation from high to below-replacement fertility rates did give China significant economic advantages in the context of the pro-market policies of Deng Xiaopeng and his successors, for instance, but was the embrace of these pro-market policies solely determined by China's demographic transition? Clearly, no. China could have enacted the one-child policy but not enacted pro-market policies, for instance.

* Is it imaginable that, in the future, the United States might fail to take advantage of its continued demographic advantages while its peers and competitors might make better use of their more limited resources? Clearly, yes. Most of the countries of the Soviet bloc squandered, for reasons of ideology and power politics, their own demographic sweet spots.

* For that matter, could these population projections be off? It's conceivable. In the longer term, fertility rates could change significantly and lead to slow change--they could fall in the United States and rise in Germany, as norms and policies changed. In the shorter term, immigration could induce significant changes, as the experience of Spain over the past decade suggests. (How likely might these shifts be? They're in the realm of the possible, at least.)

Demographics can only ever be a starting point, only one element in a complex array of variables which all interact with each other. It's an important element, yes, but it shouldn't be read as the determinative one.