The economics of open borders

A colleague recently sent me a paper on the economics of open borders, by John Kennan, which I hadn’t known of before, though it came out in 2013.
Kennan’s conclusion is striking

Liberal immigration policies are politically unpopular. To a large extent, this is because the beneficiaries of these policies are not allowed to vote. It is also true, however, that the enormous benefits associated with open borders have not received much attention in the economics literature.20 Economists are generally enthusiastic about free trade. But if free movement of goods is important, then surely free movement of people is even more important.
One conclusion of this paper is that open borders could yield huge welfare gains: more than $10,000 a year for a randomly selected worker from a less-developed country (including non-migrants). Another is that these gains are associated with a relatively small reduction in the real wage in developed countries, and even this effect disappears as the capital–labor ratio adjusts over time; indeed if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, there is no implied reduction in real wages.

So, is Kennan right about the benefits of open borders? And if so, is there a way of transferring some of those benefits to already-resident wage earners who would otherwise lose, or at least not gain, from expanded migration?

On the first question, I’ll offer a bold Maybe. Kennan’s core assumption is that immigrant workers with a given level of education and (I think) experience will have the same productivity as already resident workers. So a move from a low productivity country to a high productivity country produces a big increase in their effective labor capacity. That benefits those workers, but also produces a shift in global income from labor to capital since the supply of labor has increased.

There’s room to debate this assumption, and there are special cases where it clearly doesn’t apply, such as that of professionals whose qualifications aren’t recognised in their new country. But Kennan makes a good case that it isn’t far from the truth.

Moreover, in a world where more than a billion people travel internationally each year, it’s inevitable that vast numbers of people are going to have close relationships of all kinds with citizens of other countries. Restrictions on movements across borders impose costs on all those people ranging from minor to calamitous.

Supposing that Kennan is right about the economics, what can be done to spread the benefits of open (or less tightly closed) borders more broadly and thereby, potentially, get increased political support. Since owners of capital benefit from open borders, an obvious possibility would be to increase the rate of tax on capital income and redistribute the income to labor. That seems neat enough in the abstract, but there’s no obvious (to me) way of putting it together as a political package.

The other way to spread the gains would be to tax, or otherwise capture, some of the benefits gained by immigrant workers. For example, new immigrants could be obligated to make a contribution, say through a tax surcharge, to a fund representing their share of the existing infrastructure of the destination country. Again, it seems neat enough in the abstract, but there are obvious difficulties. In particular, migrants who could have entered anyway would be significantly worse off.

Still, it seems unlikely that support for the migration policy status quo, let alone an expansion of existing flows, will be an adequate response to the rise of rightwing identity politics (what I’ve previously called tribalism), in which opposition to migration is a central feature. The more people who see freer movement as benefitting them and their families, the better will be the chances of mobilising support for a diverse and tolerant society.

76 thoughts on “The economics of open borders

  1. “Open borders” is another one of those mythic constructs like “free markets”. Neither phrase makes any logical or technical sense when you analyze it. These phrases are political catchcries not firm or technical definitions in any way. These phrases make no sense in philosophy, nor in logic, nor in science, nor in economics. And I place these items in order of importance. Economics is the least important discipline of the four. If we don’t analyze matters first and properly at the philosophical, logical and scientific levels (with these disciplines informing each other) then our economics will be sheer nonsense; that is to say it will be sheer ideology.

    No market is perfectly free and no border is perfectly open. Indeed, the term “open border” is an oxymoron. If a border or boundary is perfectly open in every sense then it is not a border or boundary in any sense. It is non-existent.

    No market is perfectly free. We can easily see this. Every market exists in an institutional setting of society, culture, government, law, common law and custom. Every market is also regulated to a greater or less degree. For example, there are restrictions and even bans on trading many dangerous and illegal goods. Those categories overlap but are not identical.

    With borders, the correct way to look at such matters is to view them through the lens of complex system thinking. A nation is a system. A border is a boundary and a boundary is one of the defining characteristics of a system.

    “A system is a set of interacting or interdependent component parts forming a complex or intricate whole. Every system is delineated by its spatial and temporal boundaries, surrounded and influenced by its environment, described by its structure and purpose and expressed in its functioning.” – Wikipedia.

    To highlight the boundary issue: “Systems are a complex of interacting parts and processes which are interrelated in such a way that interactions between them sustain a boundary-maintaining entity. (Adapted from Laszlo.)

    If you fully abolished its boundaries, if that were possible, then a nation would cease to be a nation. Whether a national border is the only boundary a nation has is an interesting question. The answer is almost certainly no, but boundaries thus will be found to be implicit in many other ways. Immigration border control could be abolished while maintaining the “border of law”. You would be free to come into Australia but once you passed the border, Australian law would apply to you and indeed would apply to certain crimes committed abroad (and recognised by Australian and international law). The “open border” is thus not truly open in every sense.

    While capitalism exists, less controlled borders will favor capitalists over all other people on average and by a considerable margin. Free movement of capital clearly favors owners of capital the most. A free system, an unregulated system, always favors those with the most capacity. Just as an open buffet favours large-stomached gluttons, an unregulated capital system favors those with the most capital.

    Some poor workers can get a benefit from less controlled borders for humans, but most workers globally will be forced into a further race to the bottom under a de-regulated capitalist system. Where capital holds the whip-hand (almost everywhere now under neoliberalism), poor people moving to well-developed areas will force wages down and lift unemployment there (unless there is an absolute labor shortage there, a situation which pertains almost nowhere in the world now). There will be no concomitant increase in wages in the areas they left. The labor glut is global under conditions of advanced industrialization. Global labor arbitrage will ensure industry and jobs still move to the places with the poorest wages, the weakest regulations and the weakest environmental protections. The global average labor share of income will fall. This is the real world experience under neoliberalism or late stage capitalisism; call it what you will.

    See “The Global Decline of the Labor Share” –
    Loukas Karabarbounis
    University of Chicago and NBER
    Brent Neiman
    University of Chicago and NBER
    June 2013

    Abstract

    The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.”

    http://piketty.pse.ens.fr/files/KarabarbounisNeiman13.pdf

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