Perspective Unlimited

Wednesday, July 25, 2007

The Economics of Foreign Talent / Workers

This post was first written by Aaron Ng, who posed a really difficult question: whether immigration of skilled workers (talent) lowered the wages of native skilled workers. The same question could also be asked for unskilled workers, whether the influx of unskilled workers depressed the wages of the low-skill, low-income groups.

As we know, immigration is a hot-potato issue that has burnt the fingers of politicians every where from US, Europe to Singapore. The use of economic models are not particularly instructive here because different model settings provide dramatically different answers. At the risk of losing some readers, it is actually a good exercise to try to acquaint with some basic (and not so basic) economic concepts that can help us understand the labour market impact of immigration.

Neoclassical Theories

First, let's try to answer this question with neoclassical theories. By this, we are saying that markets are competitive, work without frictions and in addition, absent of any non-tradable goods. In this setting, all workers are paid the marginal value of the product they are producing.

In a small open economy like Singapore, a large part of what we produce are traded internationally. The influx of workers regardless of types will have no impact on wages (this may come as a surprise to non-economists). The logic is elegantly simple in fact. If more skilled workers enter Singapore, the economy shifts towards the production of goods with more skill content. If more unskilled workers enter Singapore, the economy shifts towards low skilled goods. Since the final prices of goods determine wages, and that Singapore has no influence on these prices internationally, wages are completely unaffected by whichever goods Singapore produces. Immigration has no impact on native wages (this was actually a final year exam question at the LSE recently, the famous Rybczynski Theorem).

For a large country, the effects can be dramatically different since which sector that country specialises in will obviously change international prices or terms of trade. The downward pressure on blue-collar wages here could have nothing to do with immigration. Rather, it is probably because a large producer (like China) has entered that market thereby lowering prices and wages (think electronics) everywhere. Conversely, whatever China demands, prices go up. Mining, pretty much a blue-collar type of industry, is doing really well in Australia precisely because of this China effect.

Depart from the neoclassical setting however, the effects of immigration can be completely different or even messy. Suppose not all goods produced are tradable internationally. There are some goods or services that are inherently non-tradable (think Balassa-Samuelson). If cheap foreign labour enters these non internationally traded markets, price will fall, and so will wages there. Similarly, if a segment of the economy has been protected from foreign competition, the natives there will be earning economic rent. The influx of foreign talent or firms into that sector will obviously reduce that rent and incomes of natives there (think lawyers, doctors etc). These groups surely would resist letting foreign talent or firms into their sector.

Bargaining Power

Lucky Tan suggests that the availability of foreign workers have made firms reluctant to hire native Singaporeans, depressing their wages. Again, this is entirely rationalisable economically. For example, the search and matching class of models (pioneered by a LSE professor Pissarides) tells us just that. When workers and firms meet, both sides have to agree on the wage rate before they enter into a productive relationship. Relative bargaining power will then determine how this economic surplus is split. Reducing workers' bargaining power, which presumably the availability of foreign worker does, will lead to lower wages.

Let me be quick to add that the rise of various emerging economies have also reduced Singapore's bargaining power. Transnational capital, footloose by definition, goes where returns is highest. Before China and India, Singapore was one of the few investment friendly places in Asia. The game has changed dramatically since. In the US for example, labour's share of GDP has fallen in recent years while capital's share has risen. Many commentators are quick to attribute the erosion of labour's bargining power to globalisation.

New Economic Geography

Let me finish this post with a positive spin - immigration can actually increase wages of natives. This is in fact a key prediction of new economic geography models. Firms (under suitable assumptions) have incentives to cluster and agglomerate, and immigration can be part of this agglomeration process. And where they do concentrate, they drive up productivity through various mechanisms. Because of the positive externality that they derive from clustering at certain locations, no firm then have an incentive to leave since they become far less productive elsewhere. When that happens, the location becomes sticky, commanding higher rent and wages. My favourite example is London obviously.

Two Handed Economist

President Harry S. Truman once said in exasperation that he wanted an economist who was one-handed because his economic advisors would typically give him economic advice stating, "On the one hand….And on the other...." This is even more true when it comes to the economic effects of immigration as different economic settings give rather different conclusions. But being a two-handed economist is no bad thing here. It is a sign of intellectual humility to recognise the complexities of the world and not make one-dimensional arguments.

9 Comments:

  • I believe Lucky had already pointed out on a macro-level, land-owners and elites will be much better off. Lucky is a millionaire remember? Average (and below) natives are in shit.

    Besides benefits of the "trickle down economics" you are so fond of is questionable.

    Food for thought:
    Brits who cannot afford London can move lesser cities like Liverpool. Or to singapore who will welcome them like a whore.

    where can the average Tan ah Kow go?

    NoName

    By Anonymous Anonymous, at 2:32 am  

  • Noname,

    Average (and below) natives are in shit.

    Do we think that the average (and below average) Americans are better off in their own countries? Do you realize that income inequality will be a major issue at the upcoming US Presidential Elections? There's actually this interesting article by Janadas Devan today on this phenomenon, entitled "Democrats' rising economic populism".

    Welcome to the modern world and global economy.

    You are suggesting that the solution to improving the lives of the average (and below average) Singaporeans is to stop the influx of foreigners?

    Also, it might help to define this "shit". Very likely, not all of it can be cleaned up, but if we understand what exactly you think is a problem, some of it might be manageable.

    Besides benefits of the "trickle down economics" you are so fond of is questionable.

    Respectfully, the KTM disagrees. It is quite clear that there are trickle down effects with the influx of foreigners. Notice how many spas there are nowadays.

    What people need to understand is that the trickle down effects do not trickle down uniformly to EVERYONE at the bottom of the food chain. But then again, are we surprised?

    where can the average Tan ah Kow go?

    Batam? How about KL or Penang?

    How do you realistically expect the Government to solve this problem anyhow? Annex Johor? :-P

    By Blogger kwayteowman, at 7:47 am  

  • I believe Aaron's original assertion that if you import skilled workers, the wages of local skilled income workers will go down & if you unskilled workers, the wages of unskilled workers will go down to be generally true. There is some consensus among economists on this, if you bring in workers whose skill overlap with local labor, their wages will go down. Here's a good report from Washington Post on such effects which says the effects are also 'messy':

    http://www.washingtonpost.com/wp-
    dyn/content/article/2006/04/14/AR20
    06041401686.html

    :::: large part of what we produce are traded internationally. The influx of workers regardless of types will have no impact on wages (this may come as a surprise to non-economists).::::

    You know China produces 5M graduates a year that on average earn less than our ITE/poly graduates when they finish school. In the long run, we are all dead so are Americans!!! Our entire workforce can be displaced by a single batch of chinese university graduates.

    When they say "no impact on wages", I guess that is when we are at equilibrium. If you can get cheaper labor from china, all you have to do is shut your plant in Singapore and move to china. So there is no difference whether the labor is imported or factories leave for China. However, business don't come here due to wages alone - infrastructure, supporting industries, transport, EDB deals etc that should keep them here for a while. However, when you import labor you instant increase the downward pressure on wages.

    Nobody is saying shut the doors to foreign labor. An inward looking society with an ageing population is staring at a guaranteed decline ...and we will end up losing the more dynamic members of our society who will certainly go. But between shutting our doors and bringing in 1 million Chinese/Indian/Vietnamese a year - there has to be a balance in terms of numbers. Where is this balance?

    Where this balance is depends on whose interest/benefits is being maximised. If we are interested in maximising the benefits for our citizens, we should import enough to retain businesses without downward pressure on Singaporean wages. If we want to maximise the profits of GLCs/businesses, we want wages to be as low as possible. Last year, as the wages for the bottom 30% of Singaporeans fell, profits as a % of GDP is at the highest. In the beginning of the Foreign Talent policy, the PAP said its intention is to attract top talents to create jobs for Singaporeans - it was sold to Singaporeans as a TOP Foreign Talent Policy. Yesterday, I went to eat at FOOD REPUBLIC, most of the stalls are now manned by foreigners. So multi million$ businesses like KopiTiam will leave Singapore and abandon their profits because they can't get foreign labor and have to pay higher wages to singaporeans?...THe cheap labor only helps to enhance profits and allow GLCs to increase its own rent at the expense of singaporeans.

    A foreign talent policy should be openly debated so that the benefits to ordinary citizens can be clearly articulated and tracked....otherwise there will just be endless suspicion with regards to what the govt plans to do and its intentions. The PAP govt is an extraordinary govt who works for the good of Singaporeans, it should have not problems explaining what it is doing and how it will benefit Singaporeans.

    By Blogger LuckySingaporean, at 1:30 am  

  • Lucky,

    I will try to explain by way of example. Imagine the factory employs semi-skilled workers to make DVD players, each priced at $200. Part of it will be costs, the rest wages and profits.

    Now, if semi-skilled workers enter Singapore, production goes up. If each player still costs $200 (assuming Singapore's production does not change the price of DVD players worldwide), there will be no impact of wages. Unless the entry of semi-skilled workers into Singapore results in so much production that price of DVD players collapse, it is difficult to conclude that influx of semi-skilled workers causes wages to fall.

    Of course, price-wage will fall if say China starts producing DVD players and floods the global market. You don't even require immigration into Singapore to do that.

    Finally, I used DVD players as an example because it is conveniently a internationally traded good. If immigrants enter Singapore into the non-traded sector, the conclusion will be rather different.

    By Blogger Bart JP, at 9:41 am  

  • NoName,

    I understand what you say actually. Someone wrote in another blog that a American can quit New York and still be American. Singaporeans does not have this luxury, it is true.

    By Blogger Bart JP, at 9:42 am  

  • Bart,

    Thanks for your SIMPLE example. If only life & economics were that simple.

    Price of DVD is the same = wages stays constant?

    DVD makers would come to Singapore because they can make a profit after deducting the total cost of producing & shipping the DVDs. Wages is only one component of cost. The others include rent, utilities, transport etc many of which are controlled by govt linked monopolies. By importing workers in large numbers, they keep wages down or under pressure so that the other cost components can go up benefiting those govt linked companies. If wages go up, the rentals etc would have to fall to entice the investors to come.

    By Blogger LuckySingaporean, at 1:24 pm  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 1:59 pm  

  • Lucky,

    You are right. I stated clearly in the post that this conclusion that immigration has no impact on native wages depends on certain conditions to hold. Real world is "messy" indeed since neoclassical assumptions do not always hold.

    By Blogger Bart JP, at 2:33 am  

  • Bart,

    The KTM will have to agree with Lucky on this one. While the price of the DVD may remain the same, there are surpluses from the lower wages that will go to employers.

    What seems to be the issue here has not quite as simple as what your example suggests. As Lucky highlighted, wages in China and India are cheaper, so lower labour costs may help a firm compete by allowing it to sell its goods cheaper (or as cheaply as the foreign firms?).

    As for Lucky's example on the Kopitiam, life's not so simple either. There are jobs that Singaporeans don't seem to want to do and what Lucky is seems to be saying is that we should simply increase the wages enough so that Singaporeans will want to do those jobs.

    Do people expect Kopitiam owners to pay more? The KTM doesn't think so, they will simply pass the extra costs to the consumers, meaning that it's going to cost $5 and not $3 per plate of KT. Is that what people want?

    By Blogger kwayteowman, at 1:59 pm  

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