Labor Markets: The Unexploited Frontier of Globalization

Indian software engineers in Silicon Valley, illegal Mexicans in New York sweatshops, poorly treated Filipina maids in the Persian Gulf countries, or disgruntled North Africans in Europe.

Labor markets are much more segmented internationally than any other market. This extreme segmentation, and the huge wage gaps it gives rise to, induces illegal migrants from low-income countries to take serious risks and endure extreme hardships in the hope of improving their incomes and the living standards of their families back home. The average Jamaican worker who moves to the United States would increase his earnings by at least two-fold, a Bolivian or Indian by at least three-fold and a Nigerian by more than eight-fold.

The reason such large wage gaps persist is not difficult to fathom. The visa policies of rich countries allow limited numbers of workers from poor countries to move in legally and take up jobs in their economies. Moreover, these restrictions tend to favor, increasingly, the skilled and well-educated workers from abroad.

If the leaders of the advanced nations were serious about boosting incomes around the world and in doing so equitably, they would focus single-mindedly on reforming the rules that govern international labor mobility. Nothing else on their agenda — not Doha, not global financial regulation, not even expanding foreign aid — comes even close in terms of potential impact on enlarging the global pie.

I am not talking about total liberalization. A complete, or even significant, reduction in visa restrictions in the advanced countries would be too disruptive. It would set off a mass migration that would throw labor markets and social policies in the advanced nations into disarray. But a small-scale program of expanded labor mobility would be manageable, and still generate very large economic gains for the migrant workers and their home economies.

Here is what I have in mind: Rich nations would commit to a temporary work visa scheme that would expand their total labor force by no more than 3%. Under the scheme, a mix of skilled and unskilled workers from poor nations would be allowed to fill jobs in the rich countries for a period of up to five years. To ensure that the workers return home at the end of their contracts, the programs would be supported by a range of carrots and sticks applied by both home and host countries. As the original migrants return home, a new wave of workers from the same countries would replace them.

Such a system would produce an estimated gain of $360 billion annually for the world economy, a sum considerably greater than what an agreement to remove all remaining tariffs and subsidies in global trade in goods could deliver. The bulk of this increase in income would accrue directly to citizens of developing nations — the poorest workers in the world. We wouldn’t have to wait for the benefits to trickle down to them as is the case for trade and financial liberalization.

Equally important, these numbers underestimate the overall gains since they do not account for the additional economic benefits that returnees would generate for their home countries. Workers who have accumulated know-how, skills, networks and savings in rich countries could be true agents of change for their societies upon return. Their experience and investments would spark positive economic and social dynamics. The powerful contribution that former émigrés have made in getting software and other skill-intensive industries off the ground in India and Taiwan indicates the potential benefits of this plan.

The sizable benefits of a temporary work visa program have to be considered against the backdrop of a series of objections. Many of these objections — arguments that the program would create a new underclass or that it would close the path to full citizenship for hardworking immigrants — are incomplete at best. They ignore the benefits to the migrants’ home economies of maintaining a revolving door that would diffuse the gains more widely.

They also overlook that the likely alternative to a temporary worker program is not greater immigration but sharply curtailed immigration. And they fail to recognize that workers from developing nations would queue up in droves for temporary jobs abroad, given their alternatives. However, two of the objections deserve closer scrutiny.

The first is that it will be difficult, if not impossible, to enforce the return of foreign workers to their home countries after their permits expire. This is a legitimate concern since many “guest worker” programs have in practice produced permanent immigrants, sometimes creating a large underclass of foreign-born residents left in ambiguous status (as in Germany and many other countries of Europe).

On the other hand, past programs typically have offered few incentives for “temporary” workers to return, relying on little more than their willingness to abide by the terms of their visa. It comes as no surprise that many do not go home, given the huge wage gaps between home and host countries.

A workable temporary work visa program will need to offer clear carrots and sticks. To have a chance, these incentives will also need to apply to all parties — workers, employees and home and host governments. One idea is to impose penalties for home governments whose nationals failed to comply with the return requirement. For example, sending countries’ worker quotas could be reduced in proportion to the numbers that fail to return: The larger the number of workers who overstay their visa, the fewer the number of temporary visas allotted in the next round.

The second objection is that foreign workers would compete with the local workforce and drive wages down in the advanced economies. The degree to which immigrant labor displaces domestic labor remains a hotly contested issue among economists. Many analysts have concluded from the available evidence that immigration has negligible or even positive effects on wages. I will not enter that debate here, but simply grant the possibility that there may be negative effects. Even so, the kind of limited program I am advocating would depress domestic wages by a very small amount — by no more than 1% at most.

Today, the global labor regime looks like the international trade regime in 1950 — full of high barriers that prevent the world’s economies from reaping substantial benefits. The transformation that the trade regime has undergone since that time gives hope that something similar might happen in the area of immigration as well. This will require an honest and clear-sighted political debate that allows advocates to make the case for expanded labor mobility.

Economists could play an important role in shaping that debate. They can explain the substantial benefits for rich and poor nations alike, and clarify that the gains from worker mobility are low-hanging fruit compared to the mere crumbs from further liberalization in trade and finance.

This article was adapted from Dani Rodrik’s book, The Globalization Paradox: Democracy and the Future of the World Economy, which was published in February 2011 by W.W. Norton & Company. The book is available in hardcover and e-book format from Amazon.com and W.W. Norton & Company.

Text copyright 2011 by Dani Rodrik. Published with the permission of the author.