Bryan Caplan  

Labor Econ Versus the World

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My 13-year-old homeschooled sons just finished my labor economics class.  I hope they take many more economics classes, but I'll be perfectly satisfied with their grasp of economics as long as they internalize what they learned this semester.  Why?  Because a good labor economics class contains everything you need to see through the central tenets of our society's secular religion.  Labor economics stands against the world.  Once you grasp its lessons, you can never again be a normal citizen.

What are these "central tenets of our secular religion" and what's wrong with them?

Tenet #1: The main reason today's workers have a decent standard of living is that government passed a bunch of laws protecting them.

Critique: High worker productivity plus competition between employers is the real reason today's workers have a decent standard of living.  In fact, "pro-worker" laws have dire negative side effects for workers, especially unemployment.

Tenet #2: Strict regulation of immigration, especially low-skilled immigration, prevents poverty and inequality.

Critique: Immigration restrictions massively increase the poverty and inequality of the world - and make the average American poorer in the process.  Specialization and trade are fountains of wealth, and immigration is just specialization and trade in labor.

Tenet #3: In the modern economy, nothing is more important than education.

Critique: After making obvious corrections for pre-existing ability, completion probability, and such, the return to education is pretty good for strong students, but mediocre or worse for weak students.

Tenet #4: The modern welfare state strikes a wise balance between compassion and efficiency.

Critique: The welfare state primarily helps the old, not the poor - and 19th-century open immigration did far more for the absolutely poor than the welfare state ever has.

Tenet #5: Increasing education levels is good for society.

Critique: Education is mostly signaling; increasing education is a recipe for credential inflation, not prosperity.

Tenet #6: Racial and gender discrimination remains a serious problem, and without government regulation, would still be rampant.

Critique: Unless government requires discrimination, market forces make it a marginal issue at most.  Large group differences persist because groups differ largely in productivity.

Tenet #7: Men have treated women poorly throughout history, and it's only thanks to feminism that anything's improved.

Critique: While women in the pre-modern era lived hard lives, so did men.  The mating market led to poor outcomes for women because men had very little to offer.   Economic growth plus competition in labor and mating markets, not feminism, is the main reason women's lives improved.

Tenet #8: Overpopulation is a terrible social problem.

Critique: The positive externalities of population - especially idea externalities - far outweigh the negative.  Reducing population to help the environment is using a sword to kill a mosquito.

Yes, I'm well-aware the most labor economics classes either neglect these points, or strive for "balance."  But as far as I'm concerned, most labor economists just aren't doing their job.  Their lingering faith in our society's secular religion clouds their judgment - and prevents them from enlightening their students and laying the groundwork for a better future.




COMMENTS (13 to date)
Phil writes:

I don't think you link conclusively argues that "The positive externalities of population - especially idea externalities - far outweigh the negative"

or rather that the relation of positive externalities to negative externalities shouldn't look more like a curve

--------

"Question: Why don’t people who complain about overpopulation move to the middle of nowhere?"

large American cities are small relative to mega cities world wide

https://en.wikipedia.org/wiki/List_of_metropolitan_areas_by_population

I don't see a lot of demand by New Yorkers moving to Mexico City, Lagos, São Paulo, or Mumbai

----------

I think your negative externalities of population undersells the negative externalities as well

I would question whether mega cities require a level of government interference in every interaction to the low trust nature of having that many people interacting with each other

small communities can work on a sort of repeated prisoners dilemma such that protections against defections don't need to be legally formalized

large mega cities provide much more opportunity for new partners in one off prisoners dilemma situations such the protections against defection need legal formalization for the community to be functional

ThomasH writes:

I think your Syllabus of Errors is quite limited. Lacking (in this post) is reference to the principles, tools, concepts that would permit making good decisions on the margin about more or less or what kind of regulation of working conditions, or immigration, or investment in education, or welfare, or attitudes toward "feminism," or population.

(Caplan): " ... immigration is just specialization and trade in labor."

Some people cross borders to work ("trade in labor"), some to wage jihad against the host country, and some to partake of welfare benefits. "Just __X__", as in the above, means "__X__ and no other important considerations".

Immigrants differ from imported cars and consumer electronics in two other significant respects: (1) cars and consumer electronics do not reproduce and (2) cars and consumer electronics do not vote. A Princeton PhD certifies sufficient intelligence to acknowledge these considerations, making "just" more than --just-- a mistake.

_NL writes:

@Malcolm Kirkpatrick- So as I see it, your objections to comparing trade in labor to trade in goods are: terrorism, welfare, reproduction, voting.

Welfare and voting could be largely satisfied by legal rules short of prohibition on the trade in labor. With regard to welfare, one might argue that levels of international trade and economic disruption promote higher levels of political support for TAA spending - i.e. that imports increase welfare costs. One might also content that imports and foreign trade can skew voting patterns. I'm not presenting these conclusions, but merely saying they are arguable, so I don't think they are a good way to distinguish goods from labor.

The risk of terrorism applies to trade in goods, which is why one of the big government funding targets after 9/11 was "port security" and checking cargo for bombs. More than a few people have suggested that reducing our imports will make us safer for this reason.

Reproduction only has a clear value sign (positive or negative) if you've already assigned one. If my car gave birth to little mopeds or my television gave birth to mini tablets, that'd be good. If productive people give birth to more people who eventually become productive, that'd also be good. You're assuming that the ideal immigrant is a docile eunuch worker, but to the extent that more people loosely correlates to greater wealth, a fertile worker is better than a neutered one.

You're making a lot of implicit assumptions that the risks and costs of immigrants are high, but the risks and costs of free trade are low. I'm not sure these distinctions are so clear as you suggest.

_NL writes:

@Phil: "I don't see a lot of demand by New Yorkers moving to Mexico City, Lagos, São Paulo, or Mumbai"

Crossing international borders to go to a place with a different dominant language and a lower median standard of living is throwing a lot of variables into the mix that skew the point. It's not enough to simply say "there are lots of other large, dense cities that are not so desirable."

A better question is why people moving within states and within countries tend to travel to denser areas or the suburbs around them, rather than spreading into the many small towns or rural areas?

I know a lot of small Midwestern towns that are slowly emptying and have lots of cheap housing stock, yet the current residents tend to leave and few people are clamoring to move in. I've seen a lot of this country's empty quarter out west and yet people aren't all rushing to fill it in.

The movement in the US over the last couple centuries is toward cities, or their suburbs, rather than to small towns and rural areas. People mostly prefer to live in comparatively denser places, which is more or less the opposite we'd expect if people place a very high value on population sparsity.

If most people strongly preferred sparsity, then we'd expect population movement to look like osmosis - filling up the space it inhabits and leveling out until each county had the same average density as the country (or world) overall. But instead people tend to move into loose clusters of varying sizes and densities, leaving some relatively empty space around those clusters.

Over 40 million people live in the top 10 most populated US counties. So 1 in every 8 US residents live in counties with less than 0.89% of the land area. This doesn't factor in the added human density from tourism and business travel, or from commuter swells, which these top 10 places (Kings County, Cook County, etc.) get in relatively large numbers.

Maybe most people would prefer quiet living with fewer people, but clearly they're willing to compromise and accept density for its other advantages.

LD Bottorff writes:

Tenet # 8: Unions are effective at representing their members. If unions support policy X then policy X is good for working families.
Critique: Labor union leaders are elected and face incentives similar to politicians; positions that sound good are more important than positions that actually produce better outcomes for their members. Leaders will take positions that increase the power of the union leadership without regard to what actually helps the members.

Mark V Anderson writes:
Critique: After making obvious corrections for pre-existing ability, completion probability, and such, the return to education is pretty good for strong students, but mediocre or worse for weak students.

I agree with this in regard to college education, and maybe even high school. But the three R's are beneficial to everyone that can learn them, for occupational and survival in modern society. Ensuring that all can read and do figures is good for individuals and for society.

Jon Murphy writes:
(2) cars and consumer electronics do not vote.

This is a pretty weak argument against immigration. 1st off, not all immigrants vote. Only those that nationalize do. And there is nothing inherently wrong with voting.

Second, labor does not vote. The sellers of labor votes. Likewise, cars and electronics don't vote. The makers of cars and electronics vote.

In short, this objection does not apply to immigration because the conditions apply equally to cars and electronics.

Conscience of a Citizen writes:

Too bad your critique of tenet #2: "immigration restrictions massively increase the poverty and inequality of the world - and make the average American poorer in the process. Specialization and trade are fountains of wealth, and immigration is just specialization and trade in labor" is false.

Immigration restrictions have almost no effect on the poverty "of the world" because across all countries globally the determinant of income per worker is industrial capital per worker; the relationship is effectively linear. Massive migration by poor people into a rich country simply reduces the average income per worker in that (formerly) rich country (shifting the destination country's dot on the graph down to the left) as its capital-to-labor ratio falls.* Global income remains the same or declines slightly because the externalities of immigrants (redistribution, crime, etc.) reduce productivity in the destination country.** Only capital accumulation, not migration, can improve world poverty. (Mass migration can reduce "inequality of the world" only by redistribution-- migrants' gains are natives' losses. Furthermore, the transaction costs and deadweight losses of redistribution reduce capital accumulation, leading to a poorer future world.)

On a related point, "the process" of mass migration (not restrictions on it) actually makes the "average American" you told your sons about "poorer." "[T]he massive immigration of unskilled Hispanic workers [to the USA] inflated the ranks of the poor. From 1990 to 2007, the entire increase in official poverty was among Hispanics." If the USA ceased to import poor people then the "average American" would be better off!

Immigration is not about specialization, and if you want to analyze it as trade you should count the externalities. Trade in goods and services produces modest externalities like air pollution from ships which could be managed by Pigouvian taxes or [insert magical mechanism here] Coasean bargaining. Mass immigration produces massive externalities: low-wage immigrants increase redistribution and associated transaction costs and deadweight losses (claims to the contrary are empirically false); increase costs of crime (second and later generations); damage "institutions"; and reduce native wages and employment. Only 3/5 of immigrants to the USA work (a fraction which will fall as the immigrants age). Those with low skills (i.e., most) don't do specialized work. The average working immigrant earns about $16/hour, but that average conceals the fact that a few immigrants earn a lot more while most earn less. The actual provision of health care in the USA costs about $12 per hour-worked, so most immigrants don't earn enough to pay for their own health care in America. Of course, all studies agree that poor immigrants and their offspring absorb more in social spending than they pay in taxes.

Finally, note well that the current rate of immigration to the USA produces all the bad effects noted. Speeding up immigration would increase the harm (even after netting-out migrants' gains!) much faster than a linear extrapolation. Surely if you are teaching your sons economics you have told them about decreasing marginal returns!

*The average IQ in a country seems to matter a lot and is expressed (more or less) in the industrial capital base a country can generate and sustain.

**A Pakistani who murders an American does more than $9 million dollars worth of harm. If he stayed home and murdered a fellow Pakistani instead he would do less than $1 million in harm (2011).

Rick Bohan writes:

Do you have sources for these "tenets"? I've never heard or read anyone put them just they way you do here. For example, I've never heard anyone say that the main reason workers have a decent standard of living is government laws. Nor have I ever heard that only feminism has created improvement in women's lives. Maybe I've just missed it.

Muhammad Rashid writes:

Thanks for the Pakistani example... looking here the mirror being both a Pakistani and American, I should take care to keep both of my selves alive and be $10 million richer. Although $10 million as the value for my human capital is quite low ! well I guess its not bad for starters, think big ! 1% of my endowment is definitely not going to cut it.

Robi Rahman writes:

@ Conscience of a Citizen

On a related point, "the process" of mass migration (not restrictions on it) actually makes the "average American" you told your sons about "poorer." "[T]he massive immigration of unskilled Hispanic workers [to the USA] inflated the ranks of the poor. From 1990 to 2007, the entire increase in official poverty was among Hispanics." If the USA ceased to import poor people then the "average American" would be better off!

I think you misunderstood what was meant by the statement you're disagreeing with.

You're saying that the addition of new poor immigrants reduces the average wealth of a society, which is true.

I believe the statement meant that adding those immigrants to a society increases the average wealth of the people who were already living there.

Conscience of a Citizen writes:

@Robi Rahman

Caplan claimed that immigration restrictions "make the average American poorer." I say the reverse (details above).

You suggest leaving the immigrants themselves out of the calculation, and looking at wealth instead of income. Shall we count in the estimated present value of future income, or just current assets?

Either way we encounter the question of whether arithmetic mean is the right measure. If a few wealthy industrialists capture the surplus from a bunch of low-wage immigrant labor while everyone else suffers some diminution of income, arithmetic mean wealth or income could rise even as a large majority of Americans recorded losses.

Consider the following set of numbers {3, 3, 3, 3, 3, 3, 10}; the mean is 4. Now consider this set {2, 2, 2, 2, 2, 2, 19}. The mean is 4.4. Suppose those are personal incomes or measurements of wealth. Note how easy it is to make one person richer and all the rest poorer even while increasing mean income or wealth.

Wealth in America is extremely skewed already (worse than my second numerical example above!) and immigration increases that (since the primary effect of increased labor supply is to drive down wages while increasing returns to capital*).

It may be that if you leave the immigrants themselves out of the sample, mass immigration increases mean personal wealth in America (I'm not certain because I haven't tried to calculate that). But the median (and modal) American gets poorer. All the textbooks agree that when just a few samples in a set drive the mean away from the central tendency, the median is a better way to characterize the set.

The "average" American does not benefit from mass immigration.

*Mass immigration also reduces natives' consumption of luxuries and amenities.

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