Immigration is a vexed issue. It was at the heart of some of the greatest political upheavals of the past few years.
Within the field of economics, the debate around immigration tends to focus on the bottom line: Are destination countries better off by letting people in?
To date, the economic debate has been focused almost exclusively on the physical movement of people between sovereign countries. With the advent of remote work, additional questions come to mind:
- Where will people migrate to if they could live anywhere?
- How will remote-work-driven immigration reshape urban politics?
But before we get to these, let’s summarize the traditional debate within economics. To do so, I will rely on Wretched Refuse?, a new book about “The Political Economy of Immigration and Institutions” by Alex Nowrasteh and Benjamin Powell.
Alex and I studied together at the LSE, so I was delighted to read his book. It provides a great introduction to the various viewpoints concerning the economic impact of immigration. Most readers would either strongly agree or disagree with the book’s conclusions. There’s plenty in the book to upset both the Left and the Right. Those who read to enrich their knowledge rather than reaffirm their existing beliefs would find it valuable.
The book’s title might sound negative, but it’s derived from Emma Lazarus’s poem that’s inscribed at the pedestal of the Statue of Liberty:
"Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
Let’s dive in.
Immigration and Externalities
As Nowrasteh and Powell point out, the idea that voluntary exchange between people is mutually beneficial is a central tenet of economics. In theory, the easier it is for people to trade goods or services, the wealthier they will both be. In theory, they will then have more money to spend or invest in a way that would create more wealth or share it with more people.
Of course, if two parties benefit from a trade, this does not mean that society benefits as well. Economists recognize that transactions often have externalities — costs that are born by other, unrelated parties. A transaction between a factory and a retailer can make both of them wealthier: the factory marks up the production cost, and the retailer adds its own markup when it sells the shirt to individual customers. But the factory also polluted the nearby river, and the retailer created more garbage by adding packing to the goods — imposing costs on society that are not accounted for directly.
From a narrow economic perspective, restrictions on immigration are essentially restrictions on trade — they limit the market for goods and services. Seen in isolation, such restrictions almost definitely make society as a whole poorer. It follows, as the authors point out, that “restrictions that prevent exchanges between would-be immigrants and people residing in destination countries are likely the largest policy-induced economic distortion.”
In other words, barriers to immigration are a massive, self-inflicted economic wound in the global economy. This is true if we assume that immigration does not have any negative externalities or that these externalities are trivial compared to the huge benefits involved.
Are the negative externalities from immigration indeed trivial? This is one of the most important economic questions of our time and a question which the book seeks to answer. More specifically, the authors are interested in the impact of immigrants on their destination country's institutions.
Institutions and Prosperity
Economists use the terms “institutions” or “economic institutions” to describe the constraints that govern how people interact with one another.” Nobel Laureate Douglas North calls them the economy’s “rule of the game.”
Institutions can be formal or informal. Formal institutions include laws and legal rights and how they are enforced (compare, for example, property rights and free speech in China and the U.S.). Informal institutions include cultural habits, the social acceptability of corruption, religious beliefs, and the general level of trust between people.
Why Nations Fail, one of the most popular economic books of the past two decades, argued that the prosperity of countries is a function of the type and quality of their institutions. Institutions “shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on.” These incentives, in turn, determine whether “a country is poor or prosperous.”
Economists are still arguing about the impact of institutions. For our purpose, let’s assume that institutions have a critical impact on a given country’s level of productivity and economic development. If that is the case, when people move from one country to another, they become more productive by being in a better institutional context: they have better incentives to learn, save and invest, innovate, adopt new tools, etc.
But people cannot simply move from one economic system. People are part of the system. Many economic institutions are features of the people themselves: their customs and habits, attitudes towards saving and property rights, and their propensity to try new things or trust other people. Even formal institutions result from the choices made (or avoided) by people in specific countries. Can people change overnight when they move from one place to another?
The above question is too important to be left for economists. Economists usually can’t explain why things happen, but they can sometimes describe what happened. In Wretched Refuse?, Nowrasteh and Powell go through piles of data to figure out whether past waves of immigrants from low-income, low-productivity countries had a negative effect on high-productivity countries. They explore whether the benefits of migration are offset by the negative externalities of “importing” unproductive habits, attitudes, and propensities.
By the end of the book, Nowrasteh and Powell are happy to report they could not establish that immigration harms institutions in destination countries. In their words:
“We cannot rule out that, in some cases, in some places, from some particular immigrant flows, a negative externality that undermines formal and informal institutions or norms related to productivity does exist. However, in general, our findings should make scholars skeptical of how widely relevant the new case for immigration restrictions is…. our findings also bolster the standard economic case for free immigration”
That’s good news for anyone in favor of immigration. But the book’s conclusions are not dispositive, and even if they were, people’s views on immigration are informed by multiple non-economic reasons. What I found most valuable in the book was not the conclusions it offered but the questions it brought up concerning my own research areas.
Domestic Migration and Telemigration
The impact of people who move between countries will remain a hot political issue. But today, technology give rise to two related issues: The impact of remote workers who move within countries and the impact of workers who “enter” new labor markets without moving at all.
The first issue refers to domestic migrants who move between cities (or out of cities altogether). This is not a new phenomenon. In the U.S., about 10% of the population moves each year, including 3% or so who move between states. These figures were significantly higher during the 20th Century.
Since 1990, the emergence of the consumer internet did not cause Americans to move more. Some even argued that the internet made it easier for people to stay in the same place: It made jobs and salaries across the country more uniform, decreasing the likelihood of “finding something better” elsewhere; and it made it easier to match the right person to the right job which meant that people did not have to move multiple times before finding their “ideal” job. (for the latest labor mobility trends and explanations, click here)
These arguments sound dated, but they are not without merit. Until very recently, it was impossible to perform even the most basic work tasks remotely. Twenty years ago, only half of Americans had access to the internet, and less than 1% of them had broadband access. And consumer broadband back then was 200-1,000 times slower than today. Twenty years ago, the economy was also much more dependent on manufacturing jobs that could not be performed remotely.
As I have written previously, the potential for remote work is completely different today — significantly different than it was even a year ago, let alone a decade. And as Richard Baldwin points out, the number and type of jobs that can be done remotely are about to explode.
Baldwin, backed with data and multiple examples, envisions a future in which service and knowledge workers could take up jobs in other locations without moving at all. Multiple technologies will enable them to be “present” and perform physical actions and collaborate on complex tasks remotely.
Future technologies aside, the COVID lockdowns gave us a taste of what is possible now, forcing hundreds of millions of people to work remotely. Whole industries and companies handled that unplanned transition surprisingly well.
If many more people could work remotely, where would they move to? And how will their movements affect the institutions of individual cities? A recent partnership and a 65-year-old economic theory offer some clues.
The Teeming Shore
Yesterday, Mayor Francis Suarez announced a partnership between the City of Miami and WeWork. The purpose of the partnership is to offer a “soft landing” for companies relocating to the Magic City in the form of discounted access to WeWork spaces. The benefits are quite trivial, but the partnership between the two brands — WeWork and “Miami” — is telling.
As Mayor Suarez put it:
“To be a City of the Future, Miami needs to be at the forefront of adaptation… we need to be as swift and nimble as the companies we’re trying to attract here–so I think it speaks volumes of us as a City that we’re partnered with a brand as trailblazer as WeWork”
The young mayor recently earned the nickname Silicon Suarez for his efforts to attract tech companies to the city. These efforts constitute meeting with venture capital funds and corporate CEOs, cutting red tape, highlighting Florida’s lack of state income taxes, and interacting with people who influence the conversation around the future of cities on Twitter.
Many or most of these gestures are symbolic. But that’s exactly the point: In the world of consumer brands, symbolic value is a key driver of consumer choice and willingness to pay. WeWork’s rise over the past decade heralded the transformation of office spaces into consumer products — into something individual people choose and expect to identify with. Miami’s rise heralds the transformation of cities into consumer products. A partnership between these two brands captures the post-COVID zeitgeist.
Cities have been trying to brand themselves for decades. New York is (was?) “the city that never sleeps,” what happens in Vegas stays in Vegas, etc. But when the intensity of competition that cities are about to face is unprecedented. In the era of remote work, large cities are losing their monopoly on great jobs and great services. Large cities can remain very good or the best at certain things, but many new places will suddenly become good enough.
Mayor Suarez understands this. He is incentivized to understand this, and he understands it earlier than most other politicians. But all local politicians will soon have to act similarly. The Tiebout Hypothesis explains why.
Voting with your Feet
In 1956 the economist Charles Tiebout published a journal article that suggested a new way to ensure that government resources are allocated efficiently. Until then, economists assumed that since governments have a monopoly, they will always be less efficient than companies that compete in the open market. Further, governments tend to under-serve or miss-serve their citizens since there is no clear way for these “customers” to express their specific preferences.
Tiebout pointed out that there is a key difference between country governments and city governments. And that in the case of cities, a mechanism exists to ensure that governments are focused on the needs of their citizens and that these needs can be communicated more clearly by the citizens themselves.
While previous economic theory focused on migration between countries, Tiebout pointed out that migration between cities and towns required a different set of assumptions. The wide variety of localities and the legal ability to move between them offered citizens a way to vote with their feet (by moving) and express their preferences clearly and specifically (by choosing a town with a mix of services that appealed to them).
Tiebout hypothesized that competition between locations would help make local governments more efficient and more focused on their citizen-customers' needs. He also assumed that a lot of this competition would be focused on lowering tax rates.
Tiebout did acknowledge that his model is theoretical. It could only apply if people can move easily, are not restricted by their jobs, and have “perfect information” about multiple locations.
These assumptions did not apply in 1956. But they do apply now, at least to a certain extent. As Mark Lutter points out:
Imagine you live in Detroit in 1955 working in the auto industry. Where else would you move? Your skills are related to cars, and there aren't many other cities with comparable industries. If you're an auto executive, you also live in Detroit. You read Detroit newspapers, go to church in Detroit, etc. Because of these captive residents and businesses, the Detroit government makes a series of decisions that eventually lead to Detroit's downfall.
Think about the job market in 2030. If you work remote, you can live anywhere. If one city raises taxes, or limits entertainment, or property prices rise too high, you can decamp and go to a better city. With all remote companies, their executives would face similar decisions…
As the cost of moving declines, particularly among higher income segments that pay a disproportionate amount of taxes, the more cities and other jurisdictions will adopt policies to compete for those residents… The increased competition for residents should lead to improved governance.
Lutter is putting his money (and time) where his mouth is. He is the founder of the Charter Cities Institute, a non-profit focused on the creation of new cities that are built from scratch to compete with existing ones and “tackle humanity’s most pressing challenges: global poverty, rapid urbanization, and conflict and migration caused by poverty, war, and climate change.”
The most consequential immigrants of the 21st Century are not the desperate “tired… poor… huddled masses” enshrined under the Statue of Liberty. Instead, the most consequential immigrants are the small minority of high-income earners and creative professionals who can live and work anywhere.
This is not a value judgment about which group is more important. It is a simple statement of fact: individual cities and, to a lesser extent, whole countries are entering an intense competition for talent that will force them to raise their game.
“The confluence of these trends and incentives point towards a future in which physical locations become more focused on the needs of certain groups. To attract affluent residents, tenants, and tax payers, cities and buildings will have to double down on their best "customers" and ignore everyone else.”
I will continue to explore them in future newsletters. Subscribe so you don’t miss it.
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