On Inequality and Labor Mobility

I wrote an article for Rationale Magazine, a publication put out by the LSE Economics Society. The article is on inequality and labor mobility and is pasted here in full after the break. Hope you enjoy.

Inequality played a pivotal role in the recent US presidential election.  The slogan, “We Are The 99 Percent,” first proclaimed by the Occupy movement, seemed to resonate with many voters, who felt that President Obama would be in a better position to crack down on excessive disparities in income and wealth than would Mitt Romney, if elected.

And indeed, narrowing the enormous gap between the haves and the have-nots seems like a worthwhile goal. According to a report published last year by the International Monetary Fund, too high inequality can be destructive to growth, leading to more frequent financial crises and political instability. The only question, then, is: What can President Obama do in his second term to reduce inequality to more sustainable levels, thereby keeping his end of the election bargain?

The answer is simple: Adopt policies that increase labor mobility.

It should be abundantly clear by now that globalization has made capital more mobile. Not only have plummeting transportation costs made global trade easier, but declining communication costs have also made it easier for the owners of capital to coordinate production on a global scale.

The problem, though, is that the increase in capital mobility has not been matched by a corresponding increase in labor mobility. While manufacturing workers have become increasingly exposed to foreign competition in recent decades, highly skilled professionals working in the US have largely been protected. For example, the lack of standardization in medical education, as well as burdensome licensing requirements, prevents foreign-born doctors from treating US patients, while various public-sector hiring laws limit the number of non-US citizens allowed to work in civil service.[1] In addition, limitations on green-card issuance provide strong incentives for US employers, especially those in technical services and in law, to not hire foreign professionals.

Such restrictions on labor mobility have served to artificially inflate the wages of the workers protected from the forces of globalization. These artificial wage imbalances, moreover, are a key driver of growing inequality.

According to a paper by Jon Bakija of Williams College, Adam Cole of the US Treasury Department, and Bradley Heim of Indiana University, nearly 30 percent of the workers with incomes placing them in the top 1 percent of the earnings distribution work in industries that are protected from overseas competition.[2] Opening up these industries to globalization, and the wages within them to global market forces, would, therefore, go a long way toward reducing incomes for top earners.

Even beyond the immediate gains of a more-equal earnings distribution, the potential gains to American consumers from more labor mobility among foreign professionals could be enormous. According to a 2007 analysis by the Congressional Research Service, on a purchasing-power-parity basis, salaries for general practitioners in the US are nearly twice as high as the average GP salary in other OECD countries. Closing this salary gap by allowing more foreign-born doctors to undercut the pay of domestic doctors would result in significantly cheaper health-care costs for US consumers – an undeniably welcome outcome, especially considering that rising health-care costs have been eating up an increasing share of US household budgets for more than 50 years.

According to Dean Baker, co-director of the Center for Economic and Policy Research, a policy think tank in Washington, DC, the gains to American consumers from more labor mobility among foreign-born physicians would total nearly $100 billion per year. In contrast, the gains to consumers from, for example, removing the steel tariffs put in place by the Bush Administration in 2002 only ranged from $3 billion to $5 billion per year. In short, if the removal of trade tariffs was previously put on high priority in Washington for the purpose of boosting economic efficiency, then an even stronger form of the same argument applies to the removal of laws restricting labor mobility.

It is worth pointing out at this point that pushing for more labor mobility means pushing for more free trade. There is no economic difference between a tariff that raises the price of an imported good and a law that raises the relative wages of a certain segment of the labor force. In each case, removing the barrier obstructing a market-determined price or wage would result in efficiency gains.

This point is important because it provides a political lever that President Obama can use in his second term to push for policies aimed at increasing labor mobility for foreign professionals. American politicians typically love packages that come wrapped with the ribbon of free trade. By making the case that more labor mobility is needed for free-market purposes, President Obama should be able appeal to House Republicans, who claim to support market-oriented policy solutions. On the other side of the aisle, Senate Democrats should be on board, too, because, again, more labor mobility means less inequality.

Finally, the issue of labor mobility is not just about election mandates. What’s also at stake is America’s image in the world. By opening up its doors to more highly skilled foreign workers, America would take a giant step toward becoming a more inclusive society, in which the gains from productivity growth are distributed more equitably.

Think of it this way: When the Soviet Union tore down the Berlin Wall, the global community cheered in support of market liberalization. While the wall inhibiting labor mobility in the US is, to be sure, much more subtle than the Berlin Wall was, tearing down the former is still likely to elicit a similar response, if for no other reason than because it’s the morally right thing to do to foster greater freedom and openness.

In his symbolic 2008 presidential campaign, President Obama ran on the theme of “change.” Well, if you seek change for America, Mr. Obama, then tear down this wall and let in the brightest minds from the developing world. They’ve been waiting on the sidelines for far too long.

[1] For example, see Executive Order 11935.

[2] These industries include medical services, law, computer and technical services, and government.

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