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Poverty

What might a US-Mexico market for work permits look like?

In a new NBER Working Paper, “A Market for Work Permits,” Michael Lokshin and I have explored further the case for introducing a market in work permits (building on a shorter World Bank paper we wrote a few months ago). The policy idea we study is that working-age citizens in high-wage economies should be given the option of renting out their work permit—viewed as an asset of citizenship, though an asset that is not currently marketable. On the other side of the market, foreigners can buy (taxable, time-bound) work permits. The price of a work permit would balance supply and demand.

We argue that creating such a market would help capture the economic gains from freer migration, while keeping the host-country government in control of the migration flows, and aggregate labor supply. A minimum income can be assured for workers in host countries, financed by tapping into the currently unexploited gains from international migration. Thus, this market would offer a new instrument for social protection, as well as an efficient, growth-promoting, means of managing immigration, which would now be seen as an asset to workers in host countries, rather than a threat.

In the new paper, Lokshin and I elaborate further on the idea and provide illustrative calculations for the US and Mexico. We simulate the economic returns to sampled Mexican workers from migrating, and compare this to the likely costs, including the equilibrium price of the work permit, also allowing this to be taxed by the host country.

The results suggest that the missing market for work permits is large, with 18-36 million participants (depending on the chosen tax rate on work permits and other parameters for the costs of migration). For example, with a 10% host-country tax on the work permits and a 10-20% “remittance tax” on the US wage earnings of the Mexican migrants, the equilibrium price of the WPs would be about $20,000 per year, and around 30 million workers would participate. The US tax revenue would be around $300 billion, and the gain in earnings would represent about 6% of US GDP. The poverty rate in the US would fall by two percentage points, reflecting the pro-poor feature of the market’s implicit targeting mechanism.

Our simulations for the US and Mexico are only intended to be broadly indicative of likely orders of magnitude. More research is needed, including on the costs of migration and the spillover effects on the labor markets for workers who do not directly participate. Lokshin and I argue that further exploration of these and other issues discussed in our new paper is warranted, given the huge potential benefits of a market for work permits.

 

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