Bryan Caplan  

Labor Quality and Multiplicative Growth

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I'm open to the possibility that variables besides policy, population, and science belong in a multiplicative growth model.  But labor quality - the variable that Clark emphasizes in A Farewell to Alms - just isn't very important.  Sure, you can't build a modern economy on chimpanzee labor.  But the average human from the poorest parts of the planet has high productivity as long as he works in the United States - a point that Clark interestingly grants:

[T]he only policy the West could pursue that will ensure gains for at least some of the poor of the Third World is to liberalize immigration from these countries.  We know a good deal about the economic consequences for migrants from the historical record of countries like Britain, the United States, Canada, Australia, and New Zealand, which had large flows of immigrants in the modern era.  That records shows that migrants, particularly those from very-low-income countries, have been able to achieve enormous income gains through migration.

It's a devastating admission: If mere relocation to the First World causes such massive increases in wages and productivity, how can the First World's superior labor quality be the key to its prosperity?



COMMENTS (18 to date)
Hyena writes:

If all iron can be wrought into engines, how can an engine be how you move a car?

Two Things writes:

Until the 1970's the "large flows of immigrants" to the listed countries were nearly all from the British Isles and N+W Europe, plus some Africans brought to the U.S. before 1808.

If we look at the descendants of those peoples today, we observe very large differences in productivity by continental origin.

All the actual evidence we have regarding the productivity of immigrants in the last 40 years shows that immigrants and their descendants from different source populations perform differently.

We have no empirical reason to believe that all possible immigrants will contribute to productivity growth in rich countries over time.

Moreover, we have reason to believe there are serious non-linearities in the problem. The general wage level in the U.S. is much higher than in very poor countries, reflecting the much higher industrial productivity of the U.S. population, utilizing, of course, the advanced capital base of the U.S..

Because of the higher general wage level, even a low-productivity immigrant will garner a much higher wage in the U.S. than at home, and because he will work with advanced capital his apparent productivity will be much higher than he could have achieved at home, but... (a) cost-of-living in the U.S. is higher so the immigrant's net gain is not as spectacular as his wage gain, and (b) any particular immigrant may not be very productive compared to the people around him-- and indeed, his productivity may be negative if he and his descendants cost too much in social services or create too much crime.

The best estimate is that some immigrants are more likely than others to contribute to continued high productivity in the U.S.. We have numerous accidental experiments showing that some groups of people can maintain and improve advanced capital plant constructed by rich-country investors and engineers, and some other groups of people quickly run said plant into the ground, if once they take control of it.

On the available data, we have every reason to think that the advanced capital base of the U.S. can only remain highly productive if operated by high-productivity labor. When the proportion of low-productivity laborers (e.g., low-IQ immigrants) in a given plant exceeds some threshold, the plant can no longer be maintained. Either it falls apart, or its operators reduce the level of technology and therefore the capital-enabled level of productivity in the plant to the point where the workforce can sustain it.

The U.S. economy can absorb (and provide a much improved standard of living) to a small number of low-quality immigrants. We have no good reason to think it can do the same with a large quantity of low-quality immigrants (indeed, steadily-falling labor productivity and per-capita income in California suggests the opposite).

Doug writes:

Could be a "phase change." A few low quality workers in a workforce can be made to conform by social pressure, but once they reach critical mass everything goes to hell. Anyone who's ever managed more than a handful of people would probably give this explanation a fairly high prior.

Two Things writes:
It's a devastating admission: If mere relocation to the First World causes such massive increases in wages and productivity, how can the First World's superior labor quality be the key to its prosperity?

From Solidarity Forever by Ralph Chaplin (IWW, 1915):

It is we who plowed the prairies; built the cities where they trade;
Dug the mines and built the workshops, endless miles of railroad laid;
Now we stand outcast and starving midst the wonders we have made...

It's very easy for the First World's superior labor quality to be the key to its prosperity: First Worlders devised and built all the plant! They're still adding to it!

It's a lot more trouble to build the plant than to work as a sweeper in said plant, which is what low-wage immigrants mostly do!

(Before any of you start ranting about Wobblies and Commies and stuff, go read Part I of The Bell Curve. A hundred years ago the general American labor force was much less stratified and plenty of high-IQ people worked in industrial jobs.)

Tracy W writes:

Until the 1970's the "large flows of immigrants" to the listed countries were nearly all from the British Isles and N+W Europe, plus some Africans brought to the U.S. before 1808.

Well in NZ we also had immigrants from:
- Italy
- Poland
- Greece
- India
- Overseas Chinese
- Polynesia

Judging by Melbourne, and New York, the Australians and the Americans had similarly diverse immigration.

FC writes:

Well, that explains the mighty New Zealand economy.

Two Things writes:

You know, Professor Caplan, your flip approach to this question really bugs me.

The answer to your question "...how can the First World's superior labor quality be the key to its prosperity?" may be a simple as compound interest.

Suppose one group of people achieves a certain average level of labor productivity which generates subsistence income (food, clothes, occasional drunken festivals) and just enough surplus for reproduction (assume any added population brings new land under the plow but at the same level of labor productivity, so the group grows slowly until it fills all available land). Occasionally bad weather, disease (or when no land is available, fighting) causes population to contract, so over many decades population remains fairly stable.

Now suppose some other group achieves a higher average level of labor productivity. They generate subsistence plus a bit more surplus (compared to the first group). They could use the extra surplus just to reproduce faster, but suppose the second group uses part of it to accumulate capital which (in a virtuous cycle) increases their labor productivity even more. People in the second group reset their idea of "subsistence" upward (eventually they consider 16 years of schooling, Super Slurpees, and iPods part of subsistence).

After some years, we see clearly that the higher labor productivity of the second group is "the key to its prosperity."

"So," we wonder, "what happens if some people migrate from the first group to the second?" (After the second group achieves prosperity, that is, not at time = zero.)

Obviously the first result is that the migrants get a lot richer. As members of the second group they are more productive (using the second group's accumulated capital) and enjoy higher income (consumption).

But there's a second result, if the productivity difference between members of the first and second groups is heritable, e.g., if productivity is a proxy for future-orientation (diligence) or intelligence ("IQ"). The average productivity of the second group will fall as more people from the first group migrate into it, and the second group will have less of a surplus over subsistence to invest in productivity growth. After a while, the second group (augmented by former first-group members) will produce only enough for subsistence!

Now, even after average productivity equalizes the second group's "subsistence" level may be higher than the first group's level, thanks to accumulated capital. But it needn't be growing. Just as small increments can compound into big gains, small decrements can obviate them.

We have seen that people in higher-capital environments tend to have lower fertility. It may be that transferring capital (from a high-productivity group) to a low-productivity group will raise its productivity enough that, net of declining fertility, that group can switch from mere-subsistence stagnation to a capital-accumulating regime. However, that is not proven. Many countries in recent decades have gone through the "demographic transition" without actually switching to a high-accumulation regime. And in most cases where we have observed the effect of adding many low-productivity people to a high-productivity group, the overall productivity of the second group has fallen.

Doc Merlin writes:

'If mere relocation to the First World causes such massive increases in wages and productivity, how can the First World's superior labor quality be the key to its prosperity?'

Its true, the main key to productivity (other than technology) is the institutional structure. This is also why when a multinational opens up shop in a third world country, its third-worlder employees have massive productivity gains right off the bat. This is also why "colonization" by multinationals is one of the best things that can happen to a third world country.

Mr. Econotarian writes:

Clearly the success of the West has been high levels of economic freedom enabling the maximization of labor productivity.

There may be genetic differences and cultural differences between populations, but compared to economic freedom, they are small potatoes.

And those differences can only enhance specialization, which enhances overall productivity.

Tracy W writes:

FC: Well, that explains the mighty New Zealand economy.

I think that's going a bit far. With all due respect to the ethnic variety of NZ, Australia and the USA, I think that those countries' current day prosperity has a lot to do with the legal structure. After all, Japan didn't see much immigration at all, and yet is also a lot more prosperous than third world countries. The argument is only that foreign immigrants get to developed world's productivity levels when living in a developed world country, not that immigration from a variety of countries explains the prosperity of the developed world.

Of course, if you have any evidence to support your hypothesis that immigration from a diversity of countries explains NZ's prosperity, I'd be delighted to hear it, and also I'd like to know how you respond to Japan as a counter-example.

david writes:

No, see, the way to argue with let's-compare-descendants-of-immigrants people like Two Things is to point out the relative weakness of ethnically white immigrants (or, in the case of Europe, natives) compared to ethnically Chinese immigrants.

And then you can watch them sputter when you ask why they don't, therefore, advocate massive Chinese immigration. When they oppose Hispanic/whatever immigration on those grounds. Of course, now they start arguing about selection effects and nutrition and whatever, and then you can fling those right back...

Two Things writes:

I didn't think the misdirection about New Zealand was worth answering, but now I see that people are accepting/repeating it. As late as the 1996 census New Zealand was ~80% white and many of the remainding fraction were Maori. Significant non-white immigration to NZ is a very recent phenomenon.

NZ is a strange case anyway. It has a very small population and for decades was a bucolic stock-herding preserve from which technically-ambitious people emigrated and those who remained (including the merely politically-ambitious-- who found scope for their intrigues in NZ government) were coddled/stifled by non-totalitarian socialism and corporatism.

Only with the final collapse of British trade preferences in the early 1970's did NZ look for new economic opportunities. As the NZ economy shrank under typical reactionary-socialist anti-growth policies, Kiwis realized that they were becoming quite poor compared to the Australians, Canadians, and even Englishmen they used to consider their peers. In 1984 Kiwis elected a new NZ government to implement serious economic liberalization.

The liberalization policy worked quite well (every economic road has a few bumps), but NZ's 1984-2000 growth cannot be attributed to an influx of non-white immigrants, since no large number of immigrants arrived until the 2000's, well after NZ demonstrated the economic growth its new policy had fostered.

Caplan often gets the timing or causal arrow of immigration wrong. Adding immigrants to a weak economy doesn't make it strong (unless highly-productive immigrants come to dominate it, e.g., Europeans colonizing Africa), au contraire strong economies attract immigrants (for obvious reasons).

Steve Sailer writes:

Bryan,

Do you ever go outside and look around? Or do you just spend your time looking up what Julian Simon had to say 20 years ago?

Evan writes:

@ Steve Sailer,

I'm sure Bryan knows that looking around is pointless because no one human being is capable of gathering enough data to learn anything using that method. Not to mention the fact that firsthand observation is bound to be biased. Anyone who used that method, rather than looking at hard statistical data, would be an absolute total failure as a scientist.

I can say from my own experience that Hispanic neighborhoods in the USA look a heck of a lot better than ones in Latin America. So if I was forced to generalize from that tiny observation, I would say that Bryan is essentially correct, Hispanics produce more in America.

If "looking around" is the method nativists usually use, however, I can see why they're always so spectacularly wrong. If a nativist had the bad luck of coming across a bad neighborhood that had some Hispanics in it, they would immediately generalize from that statistically insignificant sample size and wouldn't let any real data convince them. After all, who needs statistical surveys when you could "just go out and look around."

@Two Things

But there's a second result, if the productivity difference between members of the first and second groups is heritable, e.g., if productivity is a proxy for future-orientation (diligence) or intelligence ("IQ"). The average productivity of the second group will fall as more people from the first group migrate into it, and the second group will have less of a surplus over subsistence to invest in productivity growth. After a while, the second group (augmented by former first-group members) will produce only enough for subsistence!

That shows a serious lack of understanding of the laws of comparative advantage. All that would happen is that both group's efficiencies would increase because the low IQ group would do low IQ jobs that the high IQ people had previously been forced to do.

If you're arguing that the groups would interbreed, that also makes no sense because in the modern world people don't mate randomly, we select mates who resemble us and share common interest. High-IQ people from each group would pair off, and low-IQ people from each group would pair off. Ultimately we'd have a high-IQ wealthy class and a low-IQ poor class, just like we do today, only both classes would be somewhat better off in terms of absolute wealth.

Jacob Oost writes:

Dr. K, don't be so quick to dismiss labor quality. Thomas Sowell has done a lot of writing about culture, ethnicity, race, and how they pertain to work ethic. It has changed my thinking on economics. I think The Economics And Politics of Race is a good place to start.

Tracy W writes:

Two things: for decades was a bucolic stock-herding preserve from which technically-ambitious people emigrated

Appyling the world bucolic to my granddad's farm, in NZ, makes me giggle. And of course, farming is entirely compatible with technical ambition. NZ farming has seen sturdy improvements in productivity because of the application of technology to farming. See for example this study comparing Australian and NZ productivity, particularly page 5).
(My grandfather was a dairy farmer and in the forefront of adopting new scientific research in NZ on how to improve productivity, one of my uncles is a large animal vet, a close uni friend's parents were crop farmers, my grandpa was a NZ scientist specialising in chemistry).

Your description of NZ as a place where technically ambitious people emmigrated also strikes me as unusual more generally. What is your source data for this statement? How does the rate of technically-ambitious emmigration compare with that of the artistically ambitious? I did a degree in electrical engineering in NZ, and I don't recall anyone mentioning this, not merely at the time I did my degree, but also amongst my bosses for work experience and the like, most of whom had trained at the same university engineering school I had attended (the university did have a bias against hiring professors who had never studied outside NZ). I'm not saying that you're definitely wrong, I don't know of any evidence that directly conflicts your assertion, just that I'm curious about where your assertion comes from.

Caplan often gets the timing or causal arrow of immigration wrong. Adding immigrants to a weak economy doesn't make it strong (unless highly-productive immigrants come to dominate it, e.g., Europeans colonizing Africa), au contraire strong economies attract immigrants (for obvious reasons).

When did Caplan argue the opposite? The argument is that people moving from poor countries to rich ones get a sharp increase in productivity, not that immigration per se causes a strong economy.

Tom writes:

"I can say from my own experience that Hispanic neighborhoods in the USA look a heck of a lot better than ones in Latin America. So if I was forced to generalize from that tiny observation, I would say that Bryan is essentially correct, Hispanics produce more in America."

My parents, just a few years ago, were dismayed when they visited the section in NYC they had lived in the 60's, now largely Hispanic. It has not held up well with the new occupants.

I guess what matters is what you care about. Do you care about the people who have immigrated, or how they have effected their new country?

Re Bryan's last paragraph:"It's a devastating admission: If mere relocation to the First World causes such massive increases in wages and productivity, how can the First World's superior labor quality be the key to its prosperity?"

I see no admission, just a non-sequitur.
The immigrant's gains do not reflect on the native's labor quality, just on the difference between our and their economic frameworks.

Two Things writes:
That shows a serious lack of understanding of the laws of comparative advantage. All that would happen is that both group's efficiencies would increase because the low IQ group would do low IQ jobs that the high IQ people had previously been forced to do.

If you're arguing that the groups would interbreed, that also makes no sense because in the modern world people don't mate randomly, we select mates who resemble us and share common interest. High-IQ people from each group would pair off, and low-IQ people from each group would pair off. Ultimately we'd have a high-IQ wealthy class and a low-IQ poor class, just like we do today, only both classes would be somewhat better off in terms of absolute wealth.

Someone has a serious lack of understanding of the word "average" (though perhaps I should have written "arithmetic mean"). Adding low-productivity workers to a high-productivity population will drag down average productivity.

I can't prove it here (and I doubt you could prove the opposite here) but I can adduce a lot of evidence for the proposition that average productivity (not the mere presence of some highly-productive people) is what determines whether a country stays on the path of economic growth or not.

Heck, Clark's thesis (which Caplan's partly disputing above) is that the Industrial Revolution started in England partly because the genetic character of the English became adapted to highly-productive work.

Garett Jones showed that source-country IQ strongly predicts an immigrant's wages (strong proxy for productivity) in the USA independent of educational attainment, so there's hardly any doubt that people from different places have different productivity even in similar industrial environments, and precious little doubt that productivity is substantially determined by heritable factors.

Your "comparative advantage" argument is oft-rehearsed but lacks empirical support. First, there's little demand in the USA for low-productivity workers-- low wages and high (unskilled) unemployment proves that. Second, for whatever reasons (altruism, fear of crime, who knows?) the USA spends more on low-productivity residents in welfare and "social program" costs than said residents actually generate in marginal product even when they work. As a strict matter of fact, in the USA low-productivity people are a net drain on high-productivity people even though "comparative advantage theory" predicts the opposite.

(Perhaps a sufficiently selfish, Ayn-Randian society (which I am NOT advocating) would reveal comparative advantage "working.")

None of this is to contradict the fact that low-productivity workers earn more in advanced countries. Of course they do. For each worker, migration from a poor country to a rich one is very rewarding. Even picking fruit in America pays more than fruit-picking in, say, Botswana.

However, Caplan suggested that the fact a low-productivity worker could earn more in a rich country proved that the wealth of the destination country owed nothing to high-productivity workers. That's nonsense. Virtually none of the fruit pickers could genetically-engineer the plants they tend even if they were given 20+ years of subsidized education. The low-productivity people do not advance civilization. They may not even be able to maintain it statically at a high level.

Caplan seems to be assuming that all workers are equally productive given the same capital base. He's empirically, utterly wrong about that.

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