Thursday, March 01, 2012

Economics of Immigration

Most abilities of interest to employers: intelligence, conscientiousness, agreeableness, are normally distributed in the population. This means that once you’ve hired the brightest and the best, you’re into the diminishing marginal utility of the remaining labour force.

If the labour market is expanded with smart foreigners, then you can carry on recruiting the people you really want to. This is the business case for allowing immigration (at least of high-quality people).

Still, those left-hand-side-of-the-bell-curve people haven’t gone away. The may be semi-employable at best but they still need to be fed and housed. There are three possible responses to this conundrum.

a. Tax the economically-productive and use the proceeds to support the incompetent in their non-working state.

b. Restrict the immigration of competent people. Subsidise employers to take on less-employable UK people to compensate for their disutility (this corresponds to lowering their cost as seen by the employer). This works provided the UK person can actually do the job to some level of quality; it won’t work for the truly incompetent.

c. As option (b) but force employers to take on inferior-to-incompetent staff by legislation. Or the Government could be an employer of last-resort in some form of coercive workfare (note that this still involves ongoing taxpayer-funded transfer payments *).

None of these are good answers from the point of view of economic efficiency but what other choices do we really have?

Since no-one likes either running or using a business with sub-standard employees, the sad truth is that option (a) might even be best, provided all the paid-through-taxation unemployables don’t occupy their time by imposing further negative externalities on everyone else.

Perhaps that’s the reason why conventional wisdom is converging on option (b), to keep these people off the streets. The moral view, however, that it's actually better for them to be in some kind of work than hanging around in social exclusion does seem to carry some evolutionary psychological weight.

* Because of the gap between what you have to pay to keep someone alive and the actual net value of what - in their incompetence - that person can actually produce. In a competitive market their wage might even be negative.