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An Economic Case Against Immigration? Durka Dur

with 3 comments

Came across this article in @TRISH00L’s twitter feed


The author, Jaideep Prabhu (who also tweets as @orsoraggiante lays out an economic case against immigration to India of unskilled labour in response to an article by Nitin Pai in the Business Standard


Jaideep Prabhu’s case can be summarised as:

  1. India suffers from massive employment, upto 15-19%
  2. India suffers from massive underemployment, 16-27%

Hence due to this massive existing unemployment and underemployment of Indians it makes no sense to give work permits to non-citizens and thereby increase the pressure on unemployed and underemployed Indians. As he puts it:

The question then becomes, if unemployment is so rampant that the GoI is spending Rs. 40,000 crore annually on NREGA, why would anyone advocate bringing in even more labourers from Bangladesh?


Let us imagine a land (bear with me) which has a remarkable facility in inventing labour saving devices e.g. computers, washing machines, tractors, lathes, automated looms, cotton gins, telephones, e-mail, driverless cars and so on ad infinitum. Let us call this land Technotopia. Then modifying slightly what Mr. Prabhu said:

The question then becomes, if unemployment is so rampant that the GoI is spending Rs. 40,000 crore annually on NREGA, why would anyone advocate bringing in even more labour saving devices from Technotopia?


Would Mr. Prabhu, given his concern for the unemployed and underemployed, reverse the trend of automation which has powered human progress for the last two centuries (and more)?

One wonders though: would curbing all immigration magically improve the lot of the unemployed and underemployed? The estimates of underemployment range from 16-27%.[1] Around 40% of the population is part of the labour force[2]. That would mean around 100 M of Indians are underemployed[3]. Estimates of “illegal” immigrants in India are around 2 – 20 M.[4] Assuming the higher number and also assuming that all 20 M of them are of working age and all of them have captured jobs that should rightfully go to Indians,[5] that implies that deporting all of them would still leave 80 M Indians underemployed or around 20%.[6] The answer for the underemployment and unemployment of Indians is not deporting all “illegal” immigrants, but adoption of policies which would simplify byzantine governmental regulations leading to more entrepreneurship and creation of jobs for all Indians.[7][8]

Does Mr. Prabhu’s rationale apply anywhere else? Let’s take a look at Maharashtra. Unemployment in Maharashtra is around 5% according to official figures.[9]. The Government of Maharashtra, spent INR 527 crore for its Employment Guarantee Scheme (EGS) in 2007-08,[10] the last year it was in effect before being subsumed in the NREGA, which was modelled on Maharashtra’s EGS.[11] One can easily say:

The question then becomes, if unemployment is so rampant that the Government of Maharashtra is spending Rs. 500 crore annually on EGS, why would anyone advocate bringing in even more labourers from Bihar and Uttar Pradesh?


The above is not hypothetical. As one Mr. Raj Thackeray has said:

“Vacancies in Maharashtra post offices should be filled by local people only. It will give justice to them and influx of outsiders can be controlled.”[12] “For getting jobs in Mumbai, one has to be a Maharashtrian by birth.”[13]


Another thing to think about is why would an employer hire an “illegal” over a citizen? There could be two reasons:

  1. The “illegal” is a better worker. In which case making the employer hire the citizen over the “illegal” is nothing more than affirmative action. My impression of Centre Right India, is that it frowns upon affirmative action.[14][15] Am I wrong?
  2. The “illegal” is a cheaper worker. In which case making the employer hire the citizen over the “illegal” is forcing up the cost of productivity leading to a decrease in the amount which can be invested in growth of the business or decrease in the consumer surplus which would manifest as lowering of consumption in other sectors or lowering of savings (again leading to decrease in investment)


The “economic” rationale offered by Mr. Prabhu is no different from the rationale offered by the candlemakers. As Bastiat memorably addressed the Chamber of Deputies:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer.[16] You wish to free him from foreign competition[17], that is, to reserve the domestic market for domestic industry.[18]


Mr. Prabhu is also travelling on a well trodden path, a path trodden for centuries. The following[19] is a letter written to a cotton mill owner in Manchester in 1812 (emphasis mine)

[1st] February 1812: Letter to Mr. Kirkby, Ancoats

Mr Kirkby
Cotton Master at
Candis his factory
Ancoats

Sir,

We begin with the Language of the Prophets of old, in saying, that your Destruction is at Hand, and why? because we the Cotton Spinners of this Town, have been the means of raising you from the Dunghill, to Independency; & now you with others, have employed so many of the Female Sex, that we, and our little ones, are starving for want of Bread; and if you are determined to persevere, you may expect something destructive immediately—

So we conclude with a Reform or Death

The same has also been recd by
Mr Pollard
“—Jas Kennedy
“—McConnoll & Co


During the Depression Era United States (emphasis mine):

Even “Negro jobs” — jobs traditionally held by blacks, such as busboys, elevator operators, garbage men, porters, maids, and cooks — were sought by desperate unemployed whites. In Atlanta, Georgia, a Klan-like group called the Black Shirts paraded carrying signs that read, “No jobs for niggers until every white man has a job.” In other cities, people shouted “Niggers back to the cotton fields. City jobs are for white men.” And in Mississippi, where blacks traditionally held certain jobs on trains, several unemployed white men, seeking train jobs, ambushed and killed the black workers.[20]


One truly wonders if Mr. Prabhu is a fellow traveller of 19th Century Luddites, the Atlanta Black Shirts and Raj Thackeray.

One other statement by Mr. Prabhu also caught my attention

There should be no opposition to skilled labour coming to India (if it can be attracted!) … but the class of workers coming across the border from Bangladesh, illegally, is the unskilled manual labour class


It is taken as unquestionable wisdom that importation of skilled labour is always better than importation of unskilled labour. But is that really so? This reminds me of something Bryan Caplan blogged about some months ago (apologies for such a large quote but it was not easy to summarise):

Moderate immigration reformers usually argue in favor of more skilled immigrants. As a matter of economic efficiency, are they correct?

Suppose skilled immigrants earn $30,000 at home and $100,000 here; unskilled immigrants earn $1000 at home and $25,000 here. Then the efficiency case in favor of skilled immigration seems airtight. If we admit one skilled immigrant, the wealth of the world rises by $70,000. If we admit one unskilled immigrant, the wealth of the world rises by a mere $24,000.

Since this conclusion matches almost everyone’s intuition, few question it. But doesn’t it contradict the basic economics of trade? According to standard trade models, trade increases efficiency by eliminating relative prices disparities. The bigger the price ratio in country A to country B, the greater the gains to trade. Indeed, in a simple model, the deadweight loss of trade barriers (or taxes) increases quadratically with the relative price disparity: Double the disparity, quadruple the inefficiency.

Which intuition is right? Both. If a country is going to admit a fixed number of human beings, then the most efficient choice is to admit the worker with the largest absolute income gain. That person will normally, though not inevitably, be skilled.

However, if a country is going to admit a fixed dollar value of human capital, the most efficient choice is to admit the workers who face the largest price disparity. Returning to the previous example, imagine that a country decides to admit $1,000,000 worth of human capital, valued at the country of destination. If it admits skilled workers, $1M of human capital equals 10 immigrants ($1M/$100k=10), with an efficiency gain of $700,000 (10*[$100k-$30k]). If it admits unskilled workers, however, $1M of human capital equals 40 immigrants ($1M/$25k=40), with an efficiency gain of $960,000 (40*($25k-$1k]).


The clear cut distinction between skilled and unskilled labour is not so clear cut after all.

There is simply no economic case against immigration. Economics cares about productivity, not race, sex, ethnicity or national origin.

Not so cryptic headline reference (with apologies to South Park):


Footnotes


[1] Using the figures provided by Mr. Prabhu

[2] Bino Paul G. D., et al, India Labour Market Report 2008, p. 32 Table 2.1

[3] Unemployed + Underemployed = 25% of 40% of 1B (Rounding the populationto the nearest billion) = 100 M. Note that unemployed are being included as underemployed. The official figures are quite low and if the true number is higher it does not really affect the calculation (maybe even makes my point stronger)

[4] There are no exact numbersso I am using the numbers most in favour for the arguments made by restrictionists.

[5] A heroic assumption indeed to assume 100% employment of all illegal immigrants (since the number also includes families with children, unemployed adults)

[6] 80 M of the labour force of 400 M = 20%

[7] Needless to say the calculations are quick and dirty, only the orders of magnitude are relevant.

[8] One final point regarding the numbers. One can say that the unemployment caused by the immigrants would lead to pressure on the social safety net e.g. NREGA. Assuming the Rs. 40,000 crore is being spent on the 80 M underemployed, that works out to Rs. 5,000 per person per year. 20 M more works out to an extra Rs. 10,000 crore a year. Given that the CAG has calculated that Rs 180,000 crore was lost in the 2G scam the government of India can afford this extra social safety net. Of course this also does not include the surplus due to the cheaper/better (higher productivity) labour of the “illegal” immigrant (why else would anyone hire an “illegal” immigrant or any immigrant for that matter?)

[9] A Report On ‘Employment & Unemployment’ Based On Data Collected In State Sample Of 64th Round Of National Sample Survey (July, 2007 – June, 2008) Vol.I, p. 7, Table 6

[10] Economic Survey of Maharashtra, p.176.

[11] Gaiha, R., The Maharashtra Employment Guarantee Scheme, Overseas Development Institute, 2006, p. 4.

[12] Give priority to locals in post office jobs: Raj Thackeray

[13] Give jobs only to those born in Maha: Raj Thackeray

[14] The Warped Minority Debate

[15] RTE – The Death Knell for the Indian Education “government cannot legislate how a “private” enterprise should run itself (this can be extended to job reservations in corporates …)

[16] What is the labourer, if not the producer of labour?

[17] Read immigration

[18] Indian Jobs for Indian workers, Marathi jobs for Marathi workers etc.

[19] Binfield, K.,(ed.) Writings of the Luddites, Johns Hopkins Press, 2004, p. 168-9.

[20] The Rise and Fall of Jim Crow, The Great Depression (1929-39).

3 Responses

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  1. Response by Mr. Prabhu

    Here is an excellent rebuttal to this post:
    https://polevaulterdonkeyman.w

    Anonymous raises some points that are quite old in the whole debate on unemployment. That doesn’t mean they are necessarily wrong or not valid, and so the response:

    1. The first issue raised is of unemployment caused by increased mechanisation. I remember this debate raging in India in the early 1990s just as the IT revolution was about to take off. The fact is, mechanisation does cause some unemployment for those unable to adapt or those who do not have the opportunity to adapt. However, bringing in a new machine, for example, also creates jobs – learning how to use the machine, teaching how to use the machine, repairing the machine, etc. It is also the case that advanced economies invest in re-education and updating worker skills. Do we have these in India? So when 20M Indian workers are displaced because of illegal immigrants, where should they apply for all these wonderful mechanisms of advanced economies? Oh wait…India is NOT one of those economies.

    2. The second point is that curbing illegal immigration will not eliminate unemployment in India. That is absolutely true, but if you expect any ONE policy to cure all ills, we need to have a different kind of talk. The figures Anon uses (I understand these are rough estimates) show the number of unemployed falling 20% if illegal immigration curbed completely. I may not be an economics expert, but that is HUGE!

    3. A third point raised is on why folks would hire illegals, to which Anon. gives two reasons: the first is that the illegal might be a better worker, and the second is that the illegal is probably cheaper. The problem with this reasoning is that we don not know if the illegal IS a better worker until s/he illegally enters the country and starts work. neither the employer nor the government has any say in the matter. As for the second point, that illegal labour is cheaper, it sure is – because the worker is residing illegally! That is the case with Mexicans in the US, Africans in Italy, and perhaps Bangladeshis in India. Of course, do not expect this advantage to last if they are legalised with a work permit.

    4. Sadly, the fourth point (Bryan Caplan quote) merely serves to obfuscate. Firstly, the issue is not about wage disparity but about labour done – making three T-shirts may take $3 in Bangladesh and $5 in India. But who gains? The worker, illegal in this case, and not the country. It would be cheaper to import the T-shirts than pay the workers more here! The other issue is that trade is always subservient to the state – many things that make narrow economic sense may not in a larger setting. If immigrants do come to India (and are paid more), the probability is that they have displaced someone else assuming demand is the same). If so, does that not merit some consideration in cost calculations? The problem with such economics is that it prioritises the company bottom line over all else, which is bogus because that is the same argument that can be used to remove all regulations against pollution (it is economically cheaper for a company to dump waste into a nearby river than process it). States have grater responsibilities than companies, and state economies have to factor those in too.

    5. I do not know if the South Park thing was a point – I do not watch that show for a reason, and I see no need to put up with it now.

    Polevaulter Donkeyman

    August 6, 2012 at 19:35

    • Thanks for the gracious reply.

      1a.

      “However, bringing in a new machine, for example, also creates jobs – learning how to use the machine, teaching how to use the machine, repairing the machine,”

      By luck the BBC had the following item up yesterday The decline of US manufacturing jobs and living standards

      For decades America’s vibrant manufacturing sector provided poorly educated workers a bridge to the middle class. But today’s plants need highly skilled workers who know their way around ultra-high tech machinery. …

      Manufacturing in the US is undergoing the same technological revolution that sent workers from agriculture to industry at the end of the 19th Century, says Lou Glazer of consulting group Michigan Future Inc.

      In the ’50s, he says, factory work was a third of the work in America; now it’s below 10%.

      Although manufacturing employment has ticked up in recent months, adding 30,000 jobs since March, the gains pale in comparison to the losses of the past decade.

      Three and half million manufacturing jobs have vanished in 10 years, bringing the current total to just under 12 million.

      As employment has plummeted, productivity has soared. Not for nothing does the US National Association of Manufacturers boast that American factory workers are “the most productive in the world”.

      (emphasis mine)

      Not all employees made redundant by a machine get rehired in teaching others how to use the machine, or repair the machine. (and of course another reason for the increased unemployment is due to free trade, since the productivity is higher (and labour costs cheaper) abroad.

      1b. As for “illegal” immigrants (remember that the argument made by Mr. Prabhu is just as applicable to “legal” immigrants) being leeches one forgets that they too contribute to the economy by trading and exchanging with the local populace. For example they too need to buy essentials like food and thus give income to the food seller. One needs to keep in mind these second order effects (as Bastiat memorably put it in http://bastiat.org/en/twisatwins.html

      2. We can curb unemployment even more by outlawing the employment of, say, women. Lets pass a law that says women should stay at home and be housewifes like our grandmothers. Would Mr. Prabhu agree to such a policy?

      3a.

      “The problem with this reasoning is that we don not know if the illegal IS a better worker until s/he illegally enters the country and starts work.”

      And if s/he is not a better worker then s/he will not get a job and thus not lead to the unemployment of a “son of the soil” (Note that this entire post and thread is in response to the point that illegal immigration is economically bad because it leads to unemployment).

      This point in fact strongly supports Nitin Pai’s original assertion (linked in the main post above) for providing work permits. An employer would have a better capability to assess an immigrant’s ability if the employer can invest in resources to test such ability, knowing that such investment will not go to waste since s/he will be able to hire the immigrant if found to be able (without work permits why would an employer go to the trouble of testing such immigrants?)

      3b.

      As for the second point, that illegal labour is cheaper, it sure is – because the worker is residing illegally! That is the case with Mexicans in the US, Africans in Italy, and perhaps Bangladeshis in India. Of course, do not expect this advantage to last if they are legalised with a work permit.

      How does a worker’s residing “illegally” make his/her labour cheaper? They too have to have some roof over their head, they too have to eat. How does their “illegal” residence lower the cost of their labour compared to those residing “legally”?

      One reason could governmental policies such as payroll tax in the US. Then the answer is to change such policies. Moreover if an employer can lower his/her labour costs by employing an “illegal” immigrant and paying them under the table, then the same can be done with a “legal” resident. The “legality” or “illegality” of residence has no relevance to the labour costs involved.

      Of course, do not expect this advantage to last if they are legalised with a work permit.

      Again (since unemployment caused by “illegal” immigration is the central question here) isn’t this an argument in favour of Nitin Pai’s original argument for issuing work permits?

      4a.

      Firstly, the issue is not about wage disparity but about labour done – making three T-shirts may take $3 in Bangladesh and $5 in India. But who gains? The worker, illegal in this case, and not the country

      Again this shows a lack of appreciation of the importance of the consumer in economics. What about the gain to the consumer? The consumer gets those T-shirts at a cheaper price. The consumer saves money which s/he can save (thus increasing the amount available for investment leading to lower interest rates) or spend on some other products (thus providing income to other producers and workers). Since the consumer makes up the country, thus the country to gains.

      4b.

      The other issue is that trade is always subservient to the state – many things that make narrow economic sense may not in a larger setting.

      Trade always subservient to the state? This is no different from the “commanding heights” formulation in Lenin’s New Economic Policy

      What is the plan or idea or essence of NEP?
      (α) Retention of the land in the hands of the state;
      (β) the same for all commanding heights in the sphere of means of production (transport, etc.);
      (γ) freedom of trade in the sphere of petty production;
      (δ) state capitalism in the sense of attracting private capital (both concessions and mixed companies).

      (emphasis mine)
      which was adopted by Nehru and the Congress:

      Lenin had said that “communism equals Soviet power plus electrification.” Nehru offered a variant in his formula for India’s development — “heavy engineering and machine-making industry, scientific research institutes, and electric power.” He certainly shared in the Attlee consensus. His adoption of the themes and ideas of the Labor Party was evident in his recurrent evocation of the commanding heights, the mixed economy, and the need for planning. But he was also much impressed with the Soviet model, and embraced Five-Year Plans and central planning. While troubled by what communism did to freedom, he wrote during his last term in prison that “the Soviet Revolution had advanced human society by a great leap and had lit a bright flame which could not be smothered and that it laid the foundation for a new civilization toward which the world could advance.” Private property, yes, but it was to be subordinate to the state in the building of the Indian economy.

      (Emphasis mine)

      Is Centre Right India a proponent of Nehruvian Socialism?

      The other point to note would be is: what is trade but the voluntary exchange of goods and services by willing parties and individuals? To say that trade is always subservient to the state is no different from saying that the State’s interests come before the interest of the parties and individuals who want to voluntarily engage in exchange. This was the rationale behind the Licence Raj. Is the State the Master of the people? Or is the State the servant/agent/enabler of the people?

      4c.

      If immigrants do come to India (and are paid more), the probability is that they have displaced someone else assuming demand is the same). If so, does that not merit some consideration in cost calculations?

      The displacement as pointed out above is the same when machinery and automation are assumed. The basic premise is that demand would remain the same, The question then is why would demand for labour remain the same? Since the labour cost will go down (due to higher productivity) why should demand remain the same? More projects can now be carried out which were uneconomical earlier due to high labour costs.

      4d.

      The problem with such economics is that it prioritises the company bottom line over all else, which is bogus because that is the same argument that can be used to remove all regulations against pollution (it is economically cheaper for a company to dump waste into a nearby river than process it).

      There are externalities and externalities. Not all externalities are negative. Sure pollution is a a negative externality. And not all negative externalities should give us pause. E.g. if A and B go for a job interview and B gets hired then A is suffering from a negative externality. Should B or his employer be taxed their surplus with the surplus given to A?

      The hiring of blacks had an externality on the whites who were not hired. During the Great Depression the Atlanta Black Shirts protested: “Niggers back to the cotton fields. City jobs are for white men.” (also referenced in the main post). What is the solution of this externality? Fire all the blacks?

      5.

      I do not know if the South Park thing was a point – I do not watch that show for a reason, and I see no need to put up with it now.

      Pity. South Park is a very concise distillation of all that goes wrong with statist policies.

      6. I note that Mr. Prabhu has not addressed the unemployment caused by the hiring of women and blacks. I wonder why.

      7, For anyone wanting to read more on Comparative Advantage this is a wonderful primer.

      Polevaulter Donkeyman

      August 8, 2012 at 18:03

      • Mr. Prabhu’s response

        To https://polevaulterdonkeyman.w… I respond:

        1a. Agreed, but I suspect that is one reason there are labour laws, tax incentives on retraining, etc.
        .
        1b. Legal immigrants enter the country with permission – their skills are wanted, they have a letter from an employer. And on a side not, not sure why illegal is in quotes…it is not a foreign word, at least not in recent history.
        .
        2. In philosophy, we have a fallacy called excluded middle. In reverse, let me say that perhaps what is really being advocated is that nation-states be abolished and there is a free-for-all movement of peoples, no borders. Extreme? Yeah, thought so too.
        .
        3a. The problem is that if an illegal comes over and is not capable of quality labour, s/he hardly goes back. Secondly, India does issue work visas already. The people coming over are clearly not of the organised sector economy and hence there is no way to verify that they are indeed better.
        .
        3b. Mexicans in the US and Africans in Italy are paid less because employers leverage the fact that their employees are illegal. In order not to turn them in, they would have to work for lower wages. That is why they are cheaper – fear of being caught and deported. I’d be quite amused to hear an argument now that Indian companies are somehow kinder than their US or European counterparts.
        .
        4a. The consumer is quite important to the country’s economy, granted. However, that consumer is important only in a framework. The consumer is also a wage earner, and if that little part of the system is shaken, then consumer ain’t gonna be consuming too much.
        .
        4b. Pretty much EVERYTHING is subservient to the state in the modern world order because the state is the ultimate guarantor of rights (if you are lucky!). Does this mean that the world is a totalitarian order? Some people do think that, but they are in the minority. Without the state to enforce laws (which protect the corporation as well as the employee and consumer), there is no system. Anti-trust laws are an example; eminent domain, though not entirely relevant to the topic at hand, still shows the primacy of the state. If that is Nehruvian socialism, there are going to be a lot of finance ministers worldwide who will be shocked!
        .
        4c. Labour costs are not so high that illegal immigrants are required to drive costs down
        .
        5. it may be that South Park is “a very concise distillation of all that goes wrong with statist policies.” It is also too grating on my senses…perhaps an episode of Yes, Prime Minister would illustrate the matter…
        .
        6. There was a quotation, not a question. If there was a veiled question, it was missed. Nonetheless, I think I answered that this time in point 2.
        .
        7. I do believe we covered that in Econ 100. Ironically, it was my economics professor who warned us that economics (and most other things too, I assume) is really a matter of framework and if we get too besotted with the trees, we’ll miss the forest.

        Polevaulter Donkeyman

        August 8, 2012 at 20:06


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