Friday, October 18, 2013

Against (Only) High Skill Immigration?

I'd like you to think about a toy economy today. If you're put off by a lot of econo-jargon, don't worry. I will do my very best to keep it to the barest minimum. Mostly what I'd like you to do is to compare an economic argument with a corresponding moral argument and see if you can get them to square. This is an extensive post, so I'll put it below the fold.

So here's the setup. We're in a world with two countries: Mungerica is large and wealthy, Wilsostan is small and poor. Despite the disparity, the two countries enjoy fairly good trade relations, and even better, they have several treaties that guarantee each other's intellectual property rights.

Now, being a nation born from the fires of the Scottish Enlightenment, Mungerica believes in the principles of free association and trade. Its population of 400 million people and a centuries-long, steady economic growth rate of around 3.5% means that by now, the median real annual household wage is about $40,000. Wilsostan's politics haven't been so lucky. The citizens there number a mere 2 million and it was only within the last quarter century that they emerged from under the bootheel of central economic planning. All their factories are rusted-out Cold War antiques and the median real annual household wage is $12,000.

Both countries are enlightened and progressive, both understand the central importance of medical services, so both have heavily subsidized, heavily regulated medicine. In Wilsostan, the major hospitals are all still state-run. They key difference between the two nations is that Mungerican nursing wages arise from ordinary market forces, while Wilsostani wages are set by a planning board. Consequently, the median real wage premium for working as a skilled nurse in Mungerica is quite high. Let's say that the same nurse would make $60,000 in Mungerica, but only $11,000 in Wilsostan.

Let's also agree that nursing is a normal good: the wealthier you are, the more you consume. And let's also assume that nursing is a scarce local good. That is to say that unlike, oh, empirical particle physics research, an RN can't do his job from halfway around the world. He has to be at the patient's bedside to provide care (and yes, I know that with tele monitors some of this work can be done overseas, but hold that thought for now). For the purposes of illustration, let's also assume that the demographics and sickness profiles are identical between our two model countries. We'll also start off with zero migration and RN concentration in parity at one nurse per 10000 capita in each country. This implies that Mungerica has 40,000 registered nurses working and Wilsostan has 200.

Now then, let's say that the median Mungerican voter decides that it's now morally acceptable to allow high-skilled labor but only high-skilled labor to immigrate. What's the marginal effect? The first-order effects are easy enough to estimate. In the short run, the pool of nursing labor is fixed (it takes roughly five years to mint a new competent RN from scratch), so losses to Wilsostan are not immediately replaced. One nurse moving to Mungerica changes the [M] ratio to 1.000025 per 10,000 and the [W] ratio to 9.950005 per 10,000.

Keep on this way, and the short run nurse-to-patient ratio looks a little like this (the x-axis is number of migrants and the y-axis is the number of nurses per 10,000 population):

The "mr" series is the ratio of nurses to patients in Mungerica for 0 to 50 migrants. If you look really closely, you can see that it increases from 1 in 10,000 all the way up to 1.00125 in 10,000 and that in Wilsostan it starts at 1 and drops down to 0.750019. Patient outcomes in Wilsostan suffer while patient outcomes in Mungerica are only imperceptibly improved.

Of course, people are not automatons, and part of the economic way of thinking is to discipline the analyst to think of second-order effects and beyond. Obviously, under a regime that permits nurses to migrate to somewhere they can make a better living for themselves, it will induce more Wilsostanis to study nursing. Part of the supply side increase will end up remaining at home thanks to unexpected family obligations or other frictions (and even the ones that move abroad often send back substantial remittance payments), so the slope of the "wr" curve won't be nearly so steep in the longer run, but that all depends on wage elasticity and stuff. Even reasonable microeconomists can disagree about the specifics of a general equilibrium here, but those disagreements do not alter the basic observation that I've set up a scenario where ordinary price factor equalization need not apply. By assumption, nursing wages in Wilsonstan do not respond to market conditions and nursing wages in Mungerica won't much respond since the market conditions haven't changed all that much. Furthermore, Wilsostani patients can't seek care in Mungerica thanks to other immigration restrictions.

Any one of my exogenous policies makes this particular labor market exchange non-euvoluntary.

Now let's move a step away from the toy economy and think about which particular policy is likely to catch the brunt of the blame in the moral web of the typical pedestrian citizen. If you guess that it's the marginally liberal immigration policy, I think you'd be right. People all around the world really seem to like the idea of universal medicine, which by now means some version of state provision. Folks also seem to be generally nationalistic and vaguely economically illiterate. In Mungerica, wage controls to equalize with Wilsonistan will be as wildly unpopular as open borders for all, regardless of skill level. In Wilsonistan, the idea that nursing wages should respond to market signals is similarly offensive, so you might expect the Wilsonistani ambassador to petition Mungerica for stricter immigration controls. Intervention breeds more intervention. An already non-euvoluntary situation is worsened.

Now, there's always a question of how useful a model is in its application to the real world in which we live. In our actual real-deal world, we've got the Philippines, where much of the factor equalization actually happens. Nurses are over-produced there and then exported (it's actually a bit more complicated than that, but something like 20% of California nurses are Filipino) to the US. They also often have Bachelor's degrees, which exceeds the requirements for RNs in the US, and it seems as if the migration considerations are part of the initial decision calculus. And the residents of the Philippines that stay put enjoy the fruits brought by remittances. So even if the US were to liberalize nursing immigration, it's not clear that the small former Soviet states (for example) would necessarily be drained of their clinical expertise. Or at least that doesn't seem to have been the case for EU accession to the best of my knowledge. Then again, that's not a fair comparison, since to the best of my knowledge, Western Europe doesn't have the same weird issue with medical wages that the US labors under.

At any rate, part of the euvoluntary exchange calculus asks you to look at external harms. By liberalizing skilled labor immigration only could it be possible that for some professions and with certain interventions that changes to immigration policy might generate external harms? If so, what should we as good euvoluntary exchangeurs do about it? Is the trunk weaker or stronger than the roots?

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Do you have suggestions on where we could find more examples of this phenomenon?