Is Free Mobility of Labor Good for Inequality?
Written by Juan Fernando Gomez, Program Associate for International Replicas
Imagine a world where people are able to find jobs, across borders, with no restrictions. Basic economic theory suggests that free mobility of labor would increase global output by allowing people to relocate depending on their wages and skills. It is true that for several decades countries have become more open to integration, global extreme poverty is falling, and the world is experiencing economic growth as never before. Yet, the gap between the rich and the poor keeps widening. Approaching this new frontier, without historical evidence and its implications, it’s difficult to predict whether globalization will reverse or sustain this trend.
Intrigued by this dilemma, in 2016, the World Bank developed a study to understand the effects of lifting labor mobility restrictions on global wealth. Under the assumptions that the working population has a constant annual growth and that labor needs would be covered by immigration, their research suggests that free mobility could increase the world’s GDP by 1.19 percent in a 24-year-period. News regarding inequality is also optimistic, with suggestions that income in developing countries would increase by 1.8 percent as compared to 0.4 percent in developed countries. In theory, it seems that changes in labor policies would have a positive effect on economic growth and that countries would converge. However, mobility restriction is not the only factor to consider.
When attempting to address inequality, should policies focus on apparent economic gaps across countries? Dani Rodrick, Professor at the Harvard Kennedy School of Government, had this question in mind when working on his paper, “Is Global Equality the Enemy of National Equality,” in which he suggests that relaxing labor mobility policies could reduce world inequality, however this could occur at the expense of the working class in developed countries. Free mobility could distort labor markets in developed economies by creating instability, encouraging social dumping and increasing national inequality. To mitigate the effects of this tension, Rodrick proposes creating temporary visa programs that enable foreigners to contribute their skills for a predetermined period of time and then bring back their acquired experience to their home countries. He also advocates for practices that could raise productivity in developing countries, like stimulating aggregate demand for labor, designing industrial policies to increase productivity, international commitment to transparency to prevent tax evasion, and cooperation in support of the environment and other public goods. Yet, in the twenty-first century policies seeking to reduce inequality need to keep another factor into consideration.
The Digital Revolution has also transformed the way people think of labor. Nowadays, a person can work for a foreign company from home or a company can locate part of its supply chain in another country. Thomas Friedman was well aware of this situation when he introduced the term “Globalization 3.0”. In his book, The World is Flat, Friedman describes a new age of integration led by the personal computer, rather than the previous versions led by multinational corporations and governments. People now can easily interact with others and have increased access to information, even from the most remote places in the world, resulting in a fairer system between developed and developing countries. According to Friedman, through offshoring and international outsourcing, specialization and efficiency also come into play to provide equal opportunities and promote economic growth. This democratic system sounds utopian; however, some economists have been skeptical about its practical implications.
While the renowned scholar doesn’t disregard the benefits of globalization, Joseph Stiglitz is not convinced by the idea that integration creates a fair system for developed and developing countries. Stiglitz asserts that globalization, per se, is not the problem, but rather the way it has been managed. In his book, The Price of Inequality, he argues that the current approach to liberalization has reduced the bargaining power of workers, resulting in lower wages and unemployment. With this logic, it is the result of high capital mobility and low tariffs which have benefited large corporations at the expense of unskilled workers.
This is the case for offshoring and international outsourcing, which has forced unskilled workers to choose between lower wages or losing their jobs. An optimist could view this as an opportunity to acquire more skills, however for Stiglitz this is short-sighted. He argues that, globalization has destroyed more jobs than it has created because it has been approached as a game in which large corporations are the winners and the working class is the perpetual loser. Noting the injustice, Stiglitz suggests a different approach to globalization, in which the winners reinvest in society, through taxation or further investment to create more jobs.
Now more than ever before, the world is experiencing economic growth, extreme poverty is being reduced, and yet inequality still persist and expands. In theory, fewer restrictions on cross-country labor mobility could increase global GDP and reduce inequality between countries, however the question remains: shouldn’t international policy also prioritize equality within countries? Ultimately, if free mobility of labor affects developed economies, world productivity could also be affected. Technology also presents another challenge since it contributes to efficiency and democratizes the system, yet, considering again the samples of offshoring and international outsourcing, it can also distort labor markets and contribute to inequality within countries. While there is a natural inclination to fantasize about a world where people are free to find jobs across borders, it is clear that equality demands a political framework that prevents globalization from dividing society into winners and losers.
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Sources
World Bank (2006). Global Economic Prospects: Economic Implications of Remittances and Migration. Washington, DC: World Bank.
Friedman, T. L. (2005). The world is flat: A brief history of the twenty-first century. New York: Farrar, Straus and Giroux.
Stiglitz, J. E. (2012). The price of inequality: How today’s divided society endangers our future. New York: W.W. Norton & Co.
Rodrik, Dani, Is Global Equality the Enemy of National Equality? (January 1, 2017). HKS Working Paper No. RWP17–003. Available at SSRN: https://ssrn.com/abstract=2910603 or http://dx.doi.org/10.2139/ssrn.2910603
