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Lifting the floor to living standards by exploiting the gains from international migration

A recent paper with Michael Lokshin, “Market for Work Permits,” (with many updates to the earlier draft) proposed the creation of a market for work permits. This would allow citizens to rent out their right-to-work (RTW) for a period of their choice. On the other side of the market, foreigners can purchase time-bound work permits (WPs). This would help tap into the (potentially huge) unexploited gains from restrictions on international migration. Yet host countries would retain control over the flow of migrants and total employment. There are many gains to the host country, as discussed in the paper.

There is one aspect of the policy proposal that is worth considering. Under certain conditions, this policy will create a new binding floor to labor earnings in the host country—a new lower bound, above the current floor. The only estimate of the level of the income floor in America (averaged over reported incomes of the poor, with higher weight on poorer people) puts the floor at about $5 per person per day (Jolliffe et al., 2019). Allowing for (say) one dependent, this implies an income of $10 a day. It would be reasonable to assume that this is lower than the equilibrium price of a WP in our proposal. Indeed, $10 a day is lower than the minimum wage rate in the US for an eight hour day.

Workers in the host country will sell their RTW if they earn less than the going price in this new market (and some earning more than it will also do so if they experience a disutility of work). Similarly, foreign workers will only take up migration under this scheme if they earn something more than the going price  of WPs (sufficiently higher to cover costs of moving and any tax levied). This holds for all contracted time periods of the WPs. Thus, creating a market in WPs along the lines Lokshin and I suggest can be thought of as a new way of providing a guaranteed minimum income for each time period. And it is self-financing.

To better understand this argument, we can posit a first-best distribution in the host country that maximizes some weighted aggregate of utilities, with the weights reflecting the government’s social preferences. The first-best distribution of income is bounded below by some value, lets call it y^min. However, in the absence of this policy, the first-best is not implementable given other constraints (notably on information and administrative capabilities). Thus, the observed distribution has incomes below y^min due to uninsured shocks or longer-term disadvantage. With the policy in place, the host government can now solve for the tax rate on WPs required to assure y^min (as explained in the new version of the paper). Thus, the market for WPs now makes it feasible to implement the host country’s socially optimal minimum income.

There is another control available to the host country, namely its power over eligibility to purchase WPs, or sell the RTW. For example, the US might (initially at least) choose to make the market only available to citizens of (say) Mexico. Restricting migrant eligibility, or expanding eligibility to sell the RTW among citizens of the host country, will reduce the equilibrium price.

The big difference between these two policy instruments—the tax on WPs and eligibility conditions—is that the tax instrument can raise revenue, albeit at the expense of both citizens selling their RTW and foreigners buying WPs. It is reasonable to assume that the (positive) partial equilibrium effect of a higher tax rate on revenue dominates the (negative) effect stemming from the deterrent effect of a higher tax on migration. Then the host government faces a trade-off between the level of the income floor and the extra revenue generated by a higher tax on WPs.

Under certain conditions (explained in the paper) one can solve for the host government’s optimal tax on the new WPs, obtained by balancing its desire for revenue against its desire to implement its first-best level of the floor to living standards.

Jolliffe, Dean, Juan Margitic, and Martin Ravallion, 2019, “Food Stamps and America’s Poorest,” NBER WP 26025.

Social protection in rich countries: How to do better than a UBI (while also reaping the gains from international migration)

A Universal Basic Income (UBI) gives everyone the same transfer amount. Of course, the net benefit may not be uniform after the extra taxes, or spending cuts, used to finance the UBI. However, the question here is whether it is feasible to do better than a UBI—to assure that more goes to poor people who clearly need it more. There are many ways in practice of doing that—or at least trying to do so. The solutions proposed, or found in practice, vary greatly in their efficacy. Information and incentive constraints are known to loom large. (Incentive effects may well be less of a concern than information.)

In a new paper, “The Missing Market for Work Permits,” Michael Lokshin and I have argued that creating  a two-sided market in work permits would provide both pro-poor social protection in high-wage economies and new options for migration from low-wage economies. (A revised version is found here, with a fuller treatment of the literature.)

The idea is to create a market that helps capture the gains from international economic migration, while keeping the host government in control of domestic employment. An anonymous market exchange would allow workers to rent out their right-to-work (RTW). There is clearly much they could then do, including financing education or training, homecare of loved ones, or taking a long vacation. Simultaneously, someone else pays for a work permit (WP) and is then free to take up any job offer in that country.

A competitive market mechanism can be implemented (such as through a computerized double auction) to determine the market prices of these new WPs, conditional on the stipulated length of time and start date. Once that period ends, the seller gets back her RTW. The marketable WP is fully disembodied from the person selling it, and also independent of who is buying it. The market is anonymous.

Transaction costs would probably be low—almost certainly lower than for immigrant sponsorship schemes. The WPs could be taxed to finance the scheme’s costs, and (if desired) support other objectives. Development agencies and financial institutions could help applicants from developing countries, including in financing the costs of the WPs.

The currently missing market would no longer be missing. This can be seen as a social protection policy as well as an efficient policy for managing immigration, while capturing at least some of the (seemingly huge) economic gains from freer international migration. And freer migration would become a more popular idea—relieving public concerns by helping to internalize the externalities in host countries generated by migrants (or at least perceived to be). If the option of selling your RTW is confined to those in the workforce then aggregate labor supply would stay the same. A broader base of eligibility would allow rising employment. That is a policy choice.

Going back to the question I posed at the outset, our proposal will undoubtedly have a more pro-poor incidence than a UBI; specifically, it will bring both direct (first-order) gains to relatively low-wage workers who take up the option of renting out their RTW—a “self-targeting” mechanism—and indirect gains to others via the likely tightening in the low-wage labor market.

We probably can do better than a UBI, which can be a rather blunt instrument. For example, a UBI has been advocated as a means of addressing job-loss due to automation. But why would one give the transfer to everyone, including those who stay working? Our scheme would directly help those who lose their job due to automation.

Also, unlike a UBI, it is self-financing. This overcomes a widespread concern about UBI proposals that require higher domestic taxes or are only available as an option to existing welfare programs, thus reducing the net gains to poor people from the UBI.

Time to rethink global poverty measures

Today we find two main approaches to measuring poverty and monitoring progress in reducing it. The first focuses on “absolute” measures that strive to use poverty lines with constant real value. For example, this is essentially what the official poverty measures for the US strive to do. It is also how the World Bank measures global poverty, aiming to apply a “rigidly unchanged” real line across countries as well as over time.

The second approach uses “relative” measures for which the poverty line varies in real terms, being set at a constant proportion of the current mean or median—an approach that emerged in the 1960s and became popular in Western Europe in the late C20th. There has been much debate on the choice between absolute versus relative measures.

In a new paper, “On Measuring Global Poverty,” I argue that neither approach makes economic sense. A new approach is needed for measuring and monitoring global poverty going forward.

The nub of the problem is that existing poverty measures tend to opt for one of two very different assumptions, neither of which can be seen as acceptable any longer:

• that relative income does not matter to economic welfare, or
• that relative income is all that matters.

When applied globally, the fixed real line cannot capture relative economic deprivation at country level or the need for higher outlays for economic well-being in richer countries—a higher cost-of-living not reflected in the existing Purchasing Power Parity (PPP) rates. However, it is no less obvious that the absolute standard of living, at given relative income, also matters, thereby ruling out measures in which the poverty line is set at a constant proportion of the mean or median.

The new paper proposes a welfarist interpretation of global poverty lines, which is augmented by the idea of normative functionings, the cost of which varies across countries. In this light, current absolute measures are seen to ignore important social effects on welfare, while popular strongly-relative measures ignore absolute levels of living. It is argued that a new hybrid measure is called for, combining absolute and weakly-relative measures consistent with how national lines vary across countries.

Illustrative calculations indicate that we are seeing a falling incidence of poverty globally over the last 30 years. This is mainly due to lower absolute poverty counts in the developing world. While fewer people are poor by the global absolute standard, more are poor by the country-specific relative standard. The incidence of purely relative poverty has been rising in the developing world, as can be seen from this graph. The vast bulk of poverty, both absolute and relative, is now found in the developing world.