Wednesday, 29 June 2016

Does migration reduce inequality?

In his defence of the EU the Oxford economist Simon Wren-Lewis recently made a number of interesting claims that directly relate to the general debate on the benefits, or otherwise, of immigration, globalisation and free trade. One that stands out is this in response to Kate Hoey's claim that migration has been used to suppress the wages of the low paid:

"She seems to be arguing that free movement in the EU is a means of keeping down the wages of the low paid. The first point to make is if labour mobility keeps wages down in the destination country, it should increase wages and/or reduce unemployment in the country the migrant came from. As migrants move from lower to higher wage countries, then migration tends to equalise incomes. This should normally count as a plus from a left wing perspective."

Well it is certainly true that migration reduces unemployment in the country of origin. It is also true that migrants tend to repatriate a portion of their earnings to their country of origin and so help to  increase its GDP per capita and thus increase its overall prosperity. In theory this should help to close the gap in inequality between rich countries and poor ones, and thereby "equalise incomes".
 One could also then argue that once the poorer countries have attained a sufficient level of income, they will also be able to trade with richer countries as equals, in effect increasing the size of the market accessible to firms in both countries. This is the essence of current globalisation policy and is one reason for the EU's policy of continued expansion. It is therefore certainly true that it could be claimed to be "a plus from a left wing perspective" in that it raises living standards and reduces inequality in the poorer country. As such it probably does the same globally as well. The problem is that it doesn't do so in the richer country.

In the richer country most of the immigration will be into low paid jobs, and much of the earned income that results will leave the country. This will have two negative effects on aggregate demand in the rich country. Firstly, it will force down wages of the low paid through increased competition; secondly, the additional economic activity that results from the immigrant workers will be exported and so will not be used to stimulate extra demand (a multiplier effect) to replace that lost through job losses and earnings reductions of the existing low paid workers. On top of that the population will have increased so GDP per capita will be reduced.

Now it is probably true that once the economies of the two countries have equalised both countries will benefit fully and equally from the larger market available to them.  The question, though, is how long will this take? As Keynes famously put it, "In the long run we are all dead." The point he was making when he said it was that time is not infinite and people are not immortal. After a recession or depression the economy will inevitably recover eventually. The argument of classical economists is that, if the economy is going to recover anyway, then it doesn't need any government intervention to help it along. The argument Keynes was making was that ordinary people can't wait that long and therefore the recovery needs to be brought about as soon as possible through active interventionism, rather than arriving at some unspecified later date because of passive liberalism. That same statement can also be applied to the effect of immigration on the poor in developed countries. How long must they wait for the benefits of migration to bear fruit? Until after they are all dead?

The reality is migration is just another manifestation of globalisation policy and both have been exploited and abused to suppress wages in developed countries because that is how western governments have managed to deliver economies that simultaneously have low inflation and low interest rates. That is why living standards in most developed countries have stagnated for the bottom 50% over the last 30 years. In which case I would argue that Kate Hoey is correct in her viewpoint and Professor Wren-Lewis is wrong. Moreover, I would argue that an economic policy is only beneficial and equitable if those that sacrifice the most in the short term also benefit the most in the long term. That after all is one reason why most on the left reject austerity. But if migration hurts the poor in the UK and benefits the rich, how is this "a plus from a left wing perspective"? And of course the adverse side effect of all this of course is massive wage inequality in the rich countries, excess savings by the rich, low investment and asset price booms. Ultimately that is why we are in the mess we are in now.

But the above is not the only point of contention I find with the views of Professor Wren-Lewis. In the same blog post he then went on to say:

"Migrants tend to be young, healthy and working. They provide more in terms of resources than they take out by using public services. I remember having a conversation about this with someone who lived in Spain. He said if anyone should be angry about free movement it is Spain, in having to take lots [of] non-productive British pensioners who will be a burden on Spain’s health service."

This argument also contains a number of major flaws in its reasoning. Firstly, it neglects to take into account the fact that most of the UK pensioners that have moved to Spain have done so on large pensions. These pensions are paid out in the UK by insurance companies and the government but spent in Spain. Therefore not only does this constitute a massive export of capital from this country, it also leads to an equally massive loss of both consumption and taxation in the UK. This loss of government revenue far exceeds any burden those pensioners would place on the NHS if they were to return to the UK. The UK therefore loses from this arrangement and Spain gains.

Secondly, the argument fails to take account of my previous point, that migrants tend to repatriate a large portion of their earnings to their country of origin. As a result any increase in economic activity that results from the immigrant workers will be exported and so will not be used to generate extra demand in the UK. In short there will be no multiplier effect that would create additional jobs to compensate for the immediate effects of immigration.

What this shows is that it is not just inward migration that can hurt the UK economy, but also outward migration. Both have negative effects on our budget deficit and our trade deficit. And as I have argued previously, both therefore represent an existential threat to the solvency of the national government and therefore ultimately to the democracy of the UK, because if a Labour government cannot fund its programmes, then there can be no Labour government. In short we end up like Greece.

But if you still think unlimited immigration is a good thing then consider this from Social Democracy for the 21st Century:

"Corbyn is also delusional if he thinks effective Keynesian fiscal policy will be possible in Britain with an open border policy, for the more prosperous a country becomes, the more it will simply become a magnet for mass immigration from Europe, which in the process will defeat the whole purpose of fiscal policies to create full employment."

In other words full employment is impossible if you have an open borders policy. And what is the point of a Labour Party that doesn't believe in full employment?

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