Bryan Caplan  

Coolest Macro Paper I've Seen in Years

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Check out Garett Jones' new working paper, "The O-Ring Sector and the Foolproof Sector: An Explanation for Cross-country Income Differences." His motivation: Previous research indicates that within countries, 1 point of IQ raises wages by about 1%, but across countries, 1 point of IQ raises wages by about 6%. Jones builds a compelling (if stylized) model that is perfectly consistent with this result:

I contend that the average wage within a given country is pinned down by the productivity of its best workers in a Kremer-style (1993) “O-ring” sector. In this sector, high-skilled workers perform tasks that depend on strategic complementarities in production.

Other less-skilled workers in that same country aren’t good enough to work in this “O-ring” sector–at least not without taking a massive wage cut. But in equilibrium, they can work in a conventional, diminishing-returns-to-labor “Foolproof” sector, earning only slightly less than the high-skilled workers in their own country. Importantly, high-skilled workers can move between the O-ring and Foolproof sectors. The key assumption of this model is that the wage of high-skilled workers must be equal across the two sectors, a simple invocation of the law of one price.

Under this model, within a given country, the less-skilled workers will earn only slightly less than the highly-skilled workers, since, after all, in the Foolproof sector high- and low-skilled workers are close substitutes. But across countries, a nation whose best workers are slightly lower in quality will be much less productive, since it means that workers in that nation’s “O-ring” or “weak link” sector will produce much less.

In his seminar presentation, Jones explained the implications of the model for low-IQ immigration. Long story short: Low-IQ immigrants do not reduce the productivity of high-IQ natives - any more than short immigrants reduce the height of tall natives. (See here for further discussion). IQ research has often been a rationalization for immigration restrictions, but that's largely because few psychometricians understand the principle of comparative advantage.


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COMMENTS (14 to date)

Is that cooler than this?

razib writes:

gggrrrr....who is this garret jones fellow!?!?! i guess i'll have to read the working paper and blog it to death!

tom writes:

1. If this paper validates your views on allowing more low-IQ immigrants to come to the US, doesn't it also validate third-world 'brain-drain' fears about losing a critical mass of high-IQ natives?

2. Is there any reason to think the the optimal ratio of highs to lows has been fixed over the past century, or even over the past twenty years?

http://econlog.econlib.org/archives/2008/02/coolest_macro_p.html

FC writes:

Or maybe few psychometricians like being around people dumber than they are.

Gabriel writes:

What about Lucas and Golosov from 2003?

Jason Malloy writes:

Kudos to Dr. Caplan and Dr. Jones once again. But I'll have to nag some at this post.

IQ research has often been a rationalization for immigration restrictions...

No it hasn't. Not popularly, or in any important capacity. See this paper for one, debunking some of these historical myths.

...but that's largely because few psychometricians understand the principle of comparative advantage.

No, most psychometricians say nothing about immigration or immigration restriction. Most psychometricians are leftwing, and dislike their controversial peers.

Of course, this is not to say those are bad positions, just that they do not characterize the discipline as believed. IMO, IQ tests should play a role in immigration. And I could say more fittingly that few economists seem to understand the principle of externalities.

BGC writes:

I don't really understand this argument of BC's about IQ - my guess is that he is talking about marginal changes in IQ, and presumably his argument is correct in these terms.

But I cannot see how it could be anything but economically-damaging to a country if its average IQ was to be reduced - by whatever means.

As an extreme argument (reductio ad absurdum?) - supposing the US immigration comprised 1 million peple with mental handicap per year - it seems obvious that this would impair the economy, doesn't it?

Of course most people with mental handicap are qualitatively different from the average population (gene, chromosome or brain damage). So, maybe BC is assuming that the lower IQ immigrants are qualitatively similar to the average population. That is an empirically testable assumption - but is not obviously correct.

On the contrary, accumulating genetic evidence seems to imply that there are significant genetic differences between populations around the world, and these are substantially genetic.

I think economics is currently working on an assumption that humans differ only randomly and quantitatively - when humans probably differ systematically and qualitatively.

Jason Malloy writes:

...any more than short immigrants reduce the height of tall natives

Is this true? Some economists argue that inequality and the bottom rung sink all boats:

..."I've seen a similar thing in Guatemala," Bogin says. "The rich kids are taken care of by poor maids, so they catch the same diseases. When they go out on the street, they eat the same street food. They may get antibiotics, but they're still going to get exposed."...
Inequality may be at the root of America's height problem, but it's too soon to be certain. If the poor are pulling all of us down with them, some economists say, why didn't Americans shoot up after the war on poverty, in the nineteen-sixties? Komlos isn't sure. But recently he has scoured his data for people who've bucked the national trend. He has subdivided the country's heights by race, sex, income, and education. He has looked at whites alone, at blacks alone, at people with advanced degrees and those in the highest income bracket. Somewhere in the United States, he thinks, there must be a group that's both so privileged and so socially insulated that it's growing taller. He has yet to find one.

BGC writes:

When I wrote: "On the contrary, accumulating genetic evidence seems to imply that there are significant genetic differences between populations around the world, and these are substantially genetic." - I intended to write that there are significant *cognitive* differences between populations round the world, and that these are substantially genetic.

My point is that economic reasoning contains an implicit model of human nature - and if human nature (eg IQ, or enduring personality traits) turns out to be significantly different between populations and for genetic reasons - then economic reasoning would only apply within sufficiently homogeneous genetic populations.

At a trivial level this can be seen in the different models need to explain behaviour of humans at different ages, and differences between men and women. These variables often need to be controlled in economic analyses (either by stratification as when sexes are analyzed separately; or by multipe regression methods). Future economists will likely have to introduce similar controls based on genetics.

Horatio writes:
But I cannot see how it could be anything but economically-damaging to a country if its average IQ was to be reduced - by whatever means.

Imagine a small business with 10 stores each making profits equal to 5% of revenue per year. If it opens another store that makes 4% profits, average profitability drops but the business is still better off than before. A country would be worse off if its average IQ dropped because all of its citizens suddenly became dumber, but not if it imported new residents who were dumber than the average.

BGC writes:

Thanks for the clarification Horatio.

But of course IQ is substantially hereditary, so immigration is just the beginning of a process - not the end.

BGC writes:

Sorry to keep harping on about this... but my feeling is that BC may be letting his libertarian ethics (e.g. in favor of unrestricted immigration) interfere with his economics (e.g. optimizing economic variables such as per capita growth or GDP).

IQ improves performance in pretty much all jobs - the more complex the job, the more benefit IQ gives and of course some jobs can only be done by people above a certain IQ threshold.

So high IQ immigrants are better for the economy than low because high IQ people can do almost anything, and are more productive.

While an argument (based on comparative advantage?) can be made that adding most kinds of resources to a country (whether these resources are people, or cattle, or coal) benefits that country - some resources are more valuable than others.

And some human resources are certainly more valuable than others.

And some resources are the opposite of valuable - they are harmful - toxic waste, perhaps. Is it possible that adding some types of human resources are also harmful? Yes - of course. Psychopaths for instance - it would be harmful to add them to any population or nation.

But what about people who are poorly adapted to modern life - a low IQ or violent or feckless underclass. Is is economically-valuable to add 'underclass' resources to a country? I don't suppose it is, because it is not clear what useful *economic* function such people could perform since they may be net consumers of resources (in supervising them). I can imagine this situation of importing an underclass could potentially happen in certain circumstances.

And low IQ, violent and feckless behavior are all significantly inherited by offspring. Also, under modern conditions low IQ, violent and feckless people have higher 'reproductive success' (in the biological sense) than the opposite kind of people.

My point is that BC *seems* to be arguing that all immigration is economically beneficial (so governments should not discriminate or be selective wrt IQ or anything else) - at least that is what I think he is saying. However, I would argue even if it was true that all immigration is economically beneficial, some types of immigration is certainly a lot more beneficial than other types.

Why not use this knowledge of the effect of IQ among immigrants to *enhance* the economy - in the same way BC advocates using other types of knowledge to increase per capita GDP or other measure of economic success?

But actually I don't believe it is true in principle that all immigration is inevitably economically beneficial. Maybe it usually is, but surely not always.

In principle there are many type of immigration which would be a drain (in the short term and in the long term) on a nation - surely?

Horatio writes:
But actually I don't believe it is true in principle that all immigration is inevitably economically beneficial. Maybe it usually is, but surely not always.

Controlling for the immigrant group, I would expect a strong relation between welfare benefits and the value of that immigrant group e.g. Mexicans are more valuable to the US than to France. Under the utopia us libertarians would like to see, it's hard to imagine a realistic scenario under which any immigrant group would have negative value, but it's easy to see how that could happen in the real world. The question is, is it happening to us now?

Zed writes:

"IQ improves performance in pretty much all jobs - the more complex the job, the more benefit IQ gives and of course some jobs can only be done by people above a certain IQ threshold."

Correction: some jobs, such as designing nano-machines or genetic engineering, can only be done by groups of people above a certain IQ threshold. Those groups are less likely to form into a critical mass if high IQ people are too busy hand holding less and less favorable ratios of people with low IQs. Positive externalities are lost in an opportunity cost as a result.

The short answer: look at Latin America. Latin America has countries with various mixes of diversity. The results there are far less inspiring than the results found in America (Latin Americans are more likely to migrate to America than the reverse). The more "diversity" you get, the less inspiring the results become. Compare (mostly white) Chile with (mostly mixed) Mexico with (mostly Amerindian) Bolivia (which has lots of valuable natural resources, by the way).

The different outcomes between America and Latin America is not mostly a matter of legal institutions. Mexico once had a constitution that looked very much like the Constitution of the United States. The 19th Century demographics of Mexico just didn't produce the goods that the 19th Century demographics of the United States did. With continued immigration from Mexico, the demographics of America will look more like the demographics of 19th Century Mexico than 19th Century America.

Bottom line: buy stock in companies that develop gated communities. There are certain (limited) locations in Mexico worth living in. May of them are behind bars.

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