Thursday, May 04, 2006

How more, not less, globalization can be beneficial for low skilled workers

In Indonesia as in many parts in the world, May Day was celebrated by or with the support of the anti-globalization movement. In the US, more than about any other issues, the last May Day is almost exclusively about the issue of immigration. Sylvia Tiwon at Indoprogess saw what happened earlier this week in the streets of major US cities as evidence of "the irony of globalization" and she argues that "it is time for the laborers in the recognize that poverty is an integral part of globalization".

I agree with the first statement that there is indeed this irony: on one hand the US government is trying to curb the flow of undocumented immigrants, while on the other hand, US businesses and households are taking advantage of these (illegal) immigrants. But I can't disagree more with her second statement - the globalization-poverty nexus. If anything, loosening immigration, thereby implying more globalization in the form of increasing labor mobility may be the fastest way to equalize the wages for unskilled workers between Mexico and the US. By doing so, it also has the enormous potential to help reduce poverty south of the border. I am more sympathetic with Rizal's view:
"...if what we mean by globalization is a free mobility of factor of production, how can we simply put aside the labor movement --itself a very significant, if not the most crucial, factors of production beside capital and goods?"
Like Rizal, I also tend to believe that more globalization, not less, in the form of high mobility of labor can be beneficial for the low-skilled workers from poor countries.

To drive this point further, an article by Stephan Faris at Salon is worth discussing. While he was living in Nairobi as a journalist for Time, he employed in his household the following: a nanny, a maid, a gardener, and a watchman, all for a combined daily wages less than the cost of the main course when he went out for dinner. All that was possible because he "drew Western salary and paid African wages" (a situation many expats in Indonesia may have no problem relating to). But he is smart enough to leave his troubled conscience behind and wrote:
"...Those who squirm at the idea of having servants should consider that there's little moral difference between me and my maid, and those who buy a washing machine whose low cost depends on other people's deflated wages. We've globalized capital, but not labor. A washing machine manufacturer can cash in on China's low wages, but the Chinese factory worker is barred from taking a boat to seek better pay. He's forced to sell his labor at much lower than the global market value. Both my maid and the factory worker would prefer to work for Western wages. But they can't because of immigration restrictions..."
Indeed. The main reason why people emigrate to other countries is to take advantage of the differences in potential earnings (Massive Movement of Refugees and IDPs and Chronic and Sustained Human Flight notwithstanding). Why wage discrepancies for the same skill level exist and why they persist are obviously determined by various things (e.g. endowment, technology, institution etc., see this for a simple yet powerful exposition). But perhaps one of the most important things that prevent these discrepancies to disappear is the set of immigration restrictions. Even with restrictions in place, the potential emigrants may internalize the cost and still view that the wage discrepancies are still worth taking the risks for.

Sounding like an economist, Faris then argues that:
"...From the standpoint of economic theory, liberalizing the flow of labor is no different from liberalizing trade. Both redistribute a nation's wealth, with a net positive effect. The difference is that liberalizing trade disproportionately benefits richer countries, while easing immigration restrictions would help the world's poor..."*)
Moreover, in most if not all countries, immigration restrictions disproportionally hold back the movement of low-skilled labors. A PhD in molecular science would be in better position to come to the US than a high school graduate (it is tempting to talk about brain drain and some misconceptions about it at this point but let's not). On the other hand, or rather because of it, the potential gains for unskilled workers are likely to be greater because the factor market for these unskilled workers is not as integrated as the one for highly-skilled labors. By loosening the immigration restrictions for low-skilled workers the dreams of better lives for them may be realized sooner. Even if it means that we need more globalization.

*) Some may be put off by any statement that begins with "From the standpoint of economic theory". But even the accidental darling of anti-globalization movement, Joseph Stiglitz, has the following message buried in his powerpoint file (see page 45) about the state of development in Latin America:
" The successful countries have actually followed models which are more in accord with economic theory than the Washington consensus "
(Hat tip to Martin for the link to the file)
Tyler Cowen of the Marginal Revolution fame and DanielRothschild wrote an op-ed in LA Times (via, what else, Marginal Revolution), addressing the same debate. Here's a quote:
"A key question for economists has been whether the influx raises or lowers"native" American wages. UC Berkeley's David Card, who studied patterns in different U.S. cities, concludes that immigration has not lowered wages for American workers. George Borjas of Harvard counters that immigration reduced the wages of high school dropouts by 7.4% between 1980 and 2000.

Most economists have sided with Card."
In the op-ed, Cowen and Rothschild also label Borjas as "the favorite economist of immigration restrictionists", an assertion I suspect many economists would also not find difficulties to side with.


  1. hi guys,

    i have a question not emigration related as that is probably less relevant for Indonesia, no?

    well, the question is, which is more important in the current context, more employment or higher wages?

    any references in this neighborhood would be nice :D

  2. Treespotter, more employment is good and so are higher wages. Alas, in reality they sometimes -- many times -- constitute tradeoff. Economists, at least we here, believe, higher wage should come with higher marginal productivity. Or put it another way, higher productivity should be compensated by higher wage. You see, the size of employment now becomes less relevant. Yet, it can be a consequence of the other two (higher productivity and higher wage) that eventually create an incentive for employers to hire more labor and an incentive for workers to supply their labor.

    Ujang can supply better argument and references, I believe. This is his department :-)

  3. okaaaay... ;D i think i sort of understand that, though if i understand correctly that still don't answer the question right?
    I mean, for a country like Indonesia at the moment now, can the government legitimately argue that employment is more important?

    well... just curious, i appreciate the comment anyway. any good references? I'd appreciate that. thanks!!

  4. To me there is little question as far as policies and regulations are concerned; what is desirable is to create more employment, and let wages be determined by labor productivity.

    Policies that affect wages directly (i.e. minimum wages policy) are always controversial. Mainstream economists have always argued that minimum wages will create unemployment but the far-from-ending debate has always been about the magnitude and importance of this unemployment effects. It depends on a lot of things, for example on what kind of firms the law is actually binding, the characteristics of labor at the margin (around the minimum wage), the cost structure of the firms, et cetera.

    Not many studies have been done on the effects of minimum wages in the context of Indonesia, but we can learn from the existing few such as this where the authors find a significant disemployment impact on women, youth, and lower skilled workers, this where the authors do not find employment effects on larger firms, and this where the study shows how minimum wage is unlikely to be succesful as an effective policy to reduce household poverty. And here's a paper I still find useful to read from a "big picture" kind of perspective. Hopefully these references are helpful enough :)

    As to the issue of Indonesian emigrants, some think this is a very underappreciated issue. To quote a number from this paper, it was estimated that around 1997/98 there were 2 millions of unregistered migrants in Thailand and Malaysia from within the regions (think Indonesia, the Phillippines), compared to 3 millions of illegal immigrants in Europe from around the globe at the time.

  5. And this paper too. They conclude, among others, in Indonesia, there is no strong empirical evidence showing negative relationship between the level of minimum wage and the level of employment; and despite sharp increase of minimum wage during 1985-97, business profitability was not affected --watch the period carefully, 1985-97 only. I don't know in the period afterward.

    Ujang, do you have any info on this? Some observers, and businesses, of course, say that the minimum wage destroy business profitability after the crisis. Do they, or you, have numbers on it?

  6. Rizal, thanks, I forgot about that paper.

    I don't know of any papers linking profitability and minimum wages post-crisis. I would imagine a study like that would have to take into account plants/establishments that exited the market either because of the crisis and/or minimum wages. Otherwise you might mistakenly find little or no effects on profitability which might only be true for the survivors but not necessarily true for those driven out of business (a non-random selection/attrition problem) .

  7. thanks a lot guys. will try to digest this stuff first before making any further comment. Rizal, that paper sounds very interesting, i heard somewhere about that paper, too... can't place exactly where now.

  8. Ujang, on the addendum, has anyone looked at the impact of immigration in US on the wage GAP between skilled and non-skilled labour? Or in other words, bringing the debate into the issue of income inequality and distribution.

  9. agree ... more globalization can be beneficial for less developed country and surprisingly for high income countries as well, but the benefit is the lowest for middle income countries like Indonesia (i.e. middle income trap)

    "We find that when people can choose between wage work and managerial work, the output gains are U-shaped: A worldwide labor market raises output by more in the rich and the poor countries, and by less in the middle-income countries"