Sunday, 9 June 2013

The zero-sum trade in people

The problem that I identified for the Eurozone in my previous posts is already well-documented on a smaller scale within countries - migration from rural areas to cities. And as various people have pointed out, we are also seeing it in the US and UK, which are currency unions. It's also a particularly worrying feature of the Baltic states and other Eastern European members of the European Union. In short, it's not just a problem peculiar to the Eurozone.

The theory behind free movement of labour runs as follows. Consider countries within an economic union  where there are no legal barriers to the movement of people. When a country undergoes internal devaluation which causes wages to fall and increases unemployment, the result is migration of the young, able and skilled to other countries where there is more work and higher wages. We can regard this as export of labour, and the countries receiving the migrants can be said to be importing labour. 

We assume that importing countries are attracting labour that they need, and exporting countries are shedding labour that they don't need. Migration of labour from low-wage to high-wage areas is an essential part of the internal devaluation process. For any given job, a worker will wish to receive a high wage, while an employer will wish to pay a low wage. The market-clearing price is somewhere between the two depending on their relative power: where there is a shortage of labour the price will be nearer to the worker's demand, while a glut of labour will enable employers to control the price. (Yes, I know this is a bit simplistic!) Clearly, therefore, the low-wage country has more labour than it needs, and the high-wage country does't have enough. If workers can move from low-wage to high-wage countries, therefore, the supply of labour increases in the high-wage country, putting downwards pressure on labour costs, and decreases in the low-wage country, putting upwards pressure on labour costs. And concurrently, when the cost of moving is lower than the benefit to be gained by relocating in a low-wage country, firms will move into that country. As the demand for labour falls in the high-wage country due to firms relocating, wages fall, and conversely as more firms relocate in low-wage country, wages rise. Eventually the two countries reach equilibrium, wages stabilise, labour stops migrating and firms stop relocating. 

That's the theory. Like all theories, it assumes a lot of things. Firstly, it assumes that for both workers and firms, price is the only consideration. That isn't the case: for example, for firms, availability of natural resources may be a key consideration in deciding whether or not to relocate. And workers may be put off migrating by language barriers or family ties. Also, local regulations may discourage firms from relocating and/or workers from migrating: free movement of both capital and labour may exist in theory but not necessarily in practice. 

More importantly, it assumes that the labour supply is homogenous and that there are no GENERAL shortages of skills. But this is not the case. There are general shortages of some skills - and it is always the people with scarce skills who leave first. Migration of people with skills that are generally in short supply can continue until the supply in the exporting country is completely exhausted, regardless of whether local firms need those skills: local firms are simply not going to be able to pay the wages available in the receiving country. This is because high wages usually mean a richer economy: people spend more, which generates income and profits for firms. Firms that are located in a depressed economy simply cannot match the wages paid by firms in more prosperous areas. Eventually this either forces them out of business or encourages them to move TO higher-wage areas in search of skills - exactly the opposite of the effect that forcing down wages is supposed to have on firms's behaviour.  

The usual political response to the "brain drain" of people with scarce skills away from less prosperous countries is to demand that the education system delivers workers with skills that are in short supply. But this is impossible. If industry cannot recruit people with the skills it needs because of competition from richer countries, how on earth is the education system supposed to recruit teachers with those skills? In fact the drain of skilled workers away from low-wage areas affects the education system as much as industry. Teachers can migrate too.

Along with skills shortages, there may be skills gluts which can make it almost impossible for redundant workers to find jobs that use their skills. For example, when the reason for a particular area suffering a serious fall in employment is that a major industry has collapsed, there are likely to be a large number of people with skills that are no longer needed in that area. Their chances of getting equivalent work elsewhere are vanishingly small: often the only work they can hope for is unskilled, poorly-paid and highly insecure. If the costs of migrating are high, these workers may not be able to afford to move. This is what happened in the UK in the 1980s and 1990s: despite the advice from a Government minister at the time to "get on your bike", the reality was that there were few jobs anywhere within cycling distance. Skills gluts perversely increase demand for unskilled jobs, as those who are unable to find work appropriate to their skills take unskilled jobs: this forces out the genuinely unskilled, who can find it almost impossible to find ANY work. Skills gluts are largely responsible for the prevalence of unskilled people among the long-term unemployed in many countries. 

The third assumption is that the labour supply remains constant - in other words, that as fast as people migrate, other people replace them. Now, in countries with a birth rate at or above replacement level, this is true. But if the country that is losing its young and skilled ALSO has a falling birth rate, it is in serious trouble. As the young and skilled leave and are not replaced, the age profile of the population increases, the proportion of sick and disabled increases and the proportion of unskilled to skilled increases. This amounts to a form of hysteresis. The attractiveness of the remaining labour force to firms declines as both skills and productivity fall: consequently firms are less likely to relocate to the country, which removes the brake on migration that relocation of firms would be expected to create (assuming of course that if jobs are available and wages equivalent, people will prefer to stay put). Migration would therefore continue until the only people left are those who either can't or won't leave. This problem is more immediate in those countries like Portugal that have had a falling birth rate for some years: but even if a country doesn't have a falling birth rate at the time that the young start to leave, by the time the migration has continued for a few years it will have.

Someone suggested that the loss of the young & skilled would be offset by immigration, so the population profile wouldn't change that much and firms would still relocate. I find this bizarre. Why would skilled immigrants come to a country from which people with the same skills were leaving? Surely they, too, would go to the higher-wage countries?

The problem of internal devaluation where there are skills shortages, skills gluts, labour market rigidities and a falling birth rate looks insoluble. But I don't think it is. I'd turn this round and look at it another way. I recently wrote an article comparing free workers with slaves, in which I noted that slaves are capital assets - firms have to pay for them upfront - whereas cheap, unskilled and insecure labour incurs no capital cost so can be a much cheaper alternative to a slave, and this is not necessarily beneficial to the free Roman times, people used to sell themselves into slavery, if the alternative was starvation. The migration problem within economic unions is actually a variation of the same thing, but it is perhaps more immediately comprehensible to view it as a balance of trade problem. 

I noted above that the country from which people are migrating can be regarded as exporting labour, while the country receiving the migrants is importing labour. And the receiving country unquestionably benefits. Immigrants plug skills gaps, benefiting its industries: immigrants spend their wages, benefiting economic activity: immigrants pay tax, benefiting public finances. Now, if the migrants were unemployed in their country of origin, then in the short term their departure is also beneficial to the fiscal finances in the exporting country. But skilled migrants leaving in search of higher wages may not be unemployed in their country of origin, and the gaps they leave may be hard to fill: and over time, migration of the young - even unemployed ones - creates a demographic problem for the exporting country. On balance, I would say that the importing country generally does better out of the people trade than the exporting one does. Considerably better. In fact, if the export of people means that the exporting country goes into terminal decline due to loss of the young & skilled and hysteresis in the remaining population, then I would regard the trade in people as zero-sum. The importing country benefits at the expense of the exporting one.  

Which invites the question - why is this export free? After all, imports usually have to be paid for. Exporting countries receive inflows of money in payment for the goods and services they provide - unless the export is people. Well, not quite though - if we export footballers, we get paid for them. And in days gone by, the trade in people could be extremely lucrative (though it's fair to say it probably benefited the intermediaries most). But we've abolished slavery now.....
And I'm certainly not advocating bringing back slavery! But there is a strong argument to my mind that countries that export labour as part of an internal devaluation programme within an economic union should receive payment from the importing countries. The labour they export for nothing contributes to the GDP and the tax revenue of the importing countries. It seems only right and proper that they should share in that benefit. 

Now, before anyone suggests this is not a "real" trade imbalance, let me remind you that the cost of supporting an ageing and poorly skilled population when GDP is falling means increasing levels of public debt....just as would be the case if this were a real trade imbalance. The loss of productive labour is disastrous for the fiscal finances. 

To my mind the normal riposte to this - that migrant workers will of course send money back to their families - is inadequate. Migrants make those payments out of taxed income: the exporting country does not share in that tax payment.  And as I've noted previously, if migrants believe that the state will support the old and frail, they may not send much back at all. Voluntary remittance is no substitute for a system of payments to compensate exporting countries for the loss of productive labour. Or, if you like, to reverse the implicit fiscal transfers from low-wage countries to high-wage ones that are the inevitable consequence of economic migration.

Of course, our rich young migrants might send money back to their countries of origin - to buy themselves retirement homes for their old age. I suppose this would stimulate the construction industry and increase house prices. I'm not entirely clear in what way raising house prices for an impoverished population is supposed to stimulate the economy. It is more likely, surely. to make it even harder for these people to afford basic necessities such as a roof over their heads. Nor is it reasonable to assume, as some have, that the inexorable march of technology will somehow make an ageing and increasingly unproductive workforce more affordable for states that are already highly indebted and whose GDP is falling. On the contrary, it seems more likely that technological improvements - which require capital investment that these countries are unlikely to be able to afford - will simply pass them by.

So where does this leave us? Most currency unions have some kind of system of fiscal transfers, though these are usually flawed and inadequate, not least because the importing countries/states/cities resent sending money back to exporters. But the European Union is not a currency union. Yet it still needs somehow to staunch the flow of people from countries such as the Baltic states if they are to avoid going into a death spiral. 

There are, of course, real issues here concerning the rights of the individual. It would be very easy to suggest that where there is no fiscal union, states should be free to prevent people leaving if they so wish. But this could result in a Kafkaesque nightmare, where people that aren't needed in the workforce can leave but others can't.....Though I find myself asking why states should be free to prevent certain people coming IN if they so please, but not free to prevent certain people LEAVING? To its credit, the European Union - in theory at least - does not allow member states to prevent people coming in, either.  But this doesn't help the states that are slowly bleeding to death.

I am forced to the conclusion that free movement of people within any economic union requires a commitment from all members of that union to ensure economic prosperity for all the people within the union, even if that means giving up cherished ideas of fiscal independence. Fiscal transfers to countries that are suffering the consequences of large-scale emigration are not "aid" or "bailouts". They are simply a recognition by more prosperous states that their prosperity is not entirely due to their own efforts. It is simply not acceptable for some states within a union to obtain competitive advantage by bleeding other states of productive capital and labour. For what kind of "economic union" is it if the prosperity of some is bought at the expense of the impoverishment of others? 

Related links:

The creeping desert - Coppola Comment
Ubi solitudinem faciunt, pacem appellant - Jonathan Portes (NIESR)
The shortage of Bulgarians inside Bulgaria - Edward Hugh (Economonitor)
The financialisation of labour - Frances Coppola (Pieria)


  1. This reflects one of the big problems with the Eurozone as a currency union & the EU as a single market (in principle). The EU does not have the political or financial structures to deal with the imbalances caused by the above-two.

    For a start, the EU is dependent on revenue from nation states rather than having its own direct revenue. But seceding tax-raising powers (even if a Tobin tax/FTT) to an EU body would be political dynamite - especially in England.

    Even if you were able to deal with that problem, you then have the problem of how to distribute the revenues. Any civil servant who has experience of managing EU funding programmes can tell you how swamped up in paperwork the whole thing can become. Thus you have to solve the public administration problem to ensure that funds are not lost in transaction costs.

    Despite the problems of the above-two, it's difficult to see what the other alternatives are. Asking nation states to make contributions to each other could be just as, if not more bureaucratic than other solutions. Should the nation state take the hit or pass it onto the employer? What if the migrants choose to be self-employed or set up their own businesses?

    With transfer of funds back to home countries, again there are huge commissions that people have to pay - out of all proportion of what it actually costs to make the payment.

    This brings us back to the awkward political question of crossing political red lines - the one about giving the EU direct tax-raising powers. Which politician wants to take that gig? (Even if it's something that could help deal with the problems if tax avoidance, gaming the tax system and tax evasion by multinational corporations - something made worse by the widespread discrepancies in tax rates in the Eurozone and across the EU generally)

    1. I agree, it's not at all simple. I suspect that imposing restrictions on movements of certain types of people would be both politically more acceptable and bureaucratically simpler - even though it is anathema under EU treaty law. The EU will do nothing, of course, until it is forced to by the threat of secession or default by one or more drained states. Then it will sacrifice its principles for political expediency. As always.

  2. Frances,

    Is internal devaluation AS SUCH a big problem for not?

    You suggested in your previous post that it was. Then in a comment after that post you said “So it is not internal devaluation that is the problem…”.

    Then in the above article you say, “When a country undergoes internal devaluation which causes wages to fall and increases unemployment, the result is migration of the young…”. Now you seem to be suggesting that internal devaluation IS A PROBLEM.

    As I pointed out in a comment after your previous post, devaluation AS SUCH does not cause a big drop in real wages. There is also no reason in theory for it to bring any big increase in unemployment (jobs are lost in importing firms, but employment ought to rise in exporting firms).

    The mega problem in the EZ is not internal devaluation as such: it’s the fact that austerity is imposed with a view to bringing internal devaluation, and that austerity is of doubtful efficacy in actually bringing such devaluation. I.e. the periphery is getting austerity without any significant devaluation.

    In short, the problem is not internal devaluation: if anything it’s the opposite, namely the failure of internal devaluation to come about.

    1. You are missing the point AGAIN, Ralph. This is not a discussion of whether internal devaluation is or is not a "problem". It is a discussion of the consequences of migration in an economic union where there are no barriers to the movement of people and fiscal support is weak. Really I am applying Krugman's work on Economic Geography to larger economic areas - hence the link to his paper.

      Internal devaluation DOES cause falls in real wages relative to other countries in the union. And the mechanism by which it does this is unemployment - increasing the supply of available labour and therefore reducing its price. If internal devaluation did not cause unemployment there would be no mechanism for relative wages to fall, which they must if competitiveness to be restored. Of course, if you think basic supply & demand economics don't apply in this case, perhaps you will explain how internal devaluation works without causing wages to fall relative to competitors?

      You implicitly assume that labour is sticky, so people won't move to higher-wage areas. Where there are no barriers to the movement of people, this is naive, frankly. Parts of the labour force are sticky - but the young and skilled are not.

      What the Eurozone's internal devaluation doesn't seem to affect much is the general price level. In my view that is because of the lack of trade barriers - which is a counterpart to the lack of barriers to the movement of people. I didn't discuss this in the post, but the reason why the price level doesn't fall is blindingly obvious. Firms want the highest prices for their goods, naturally. In an economic union with no barriers to trade, why would firms reduce their prices in these countries when they can sell the same goods elsewhere at a higher price? I didn't discuss this explicitly in the post, I admit. But I would have thought it was obvious that forcing down prices in an individual country is not possible in an economic union with no barriers to trade.

      However, you haven't noticed that this post is not about the Eurozone. The issue of migration in an economic union applies to the European Union, the US, and the UK, among others.

    2. Your point is insightful.

      However to your answer to Ralph i disagree with this
      "it is a discussion of the consequences of migration in an economic union where..." and "Migration of labour from low-wage to high-wage areas is an essential part of the internal devaluation process"

      In Greece the internal devaluation in not so clearly related with "migration of the young and skilled to other countries where there is more work and higher wages".
      The main issue is first the inability of Greek state to develop innovative practices and to liberate economy and second the antilipsis to understand the importance of technology eg in industry which defines better the need for countries like Greece Spain Portugal to seek quality areas of economic activity.
      The internal devaluation is not a "problem" but migration is not the ONLY point which "force" the internal devaluation as a consequence.

      The role of technology and why some countries do not endure better in a crisis.


    3. I agree with you about technological factors and resistance to change. However, like many you ignore the demographic timebomb and the highly-indebted nature of these states. The combination of migration with all of these factors is what makes their recovery impossible - not any one factor alone.

    4. I agree that devaluation (internal or not) causes a fall in real wages. But that is on the small side because the bulk of the cost of stuff consumed in most countries is made up of the cost of labour in that country. So if say wages and prices fall by say 50%, that sounds dramatic, but there is little effect on REAL WAGES in the country concerned. Thus not much cause for migration.

      In contrast, the significant effect (which is the desired effect) is the drop in the price of labour in EURO TERMS. That 50% drop would make exports from the relevant country much more competitive, which would solve the problem. If you remember, in my crude back of the envelope calculation in a comment in your previous post, I put the drop in real wages in the UK resulting from the 25% devaluation in 2008 at less than 6%.

      Against that, there is the fact that with an INTERNAL devaluation, unemployment has to be raised in order to get the price of labour and goods to fall in the country concerned, as you rightly point out. If that unemployment does its job quickly and efficiently, then the devaluation as such will cause minimal problems. But the big problem is that the job is not being done “quickly and efficiently”: as you put it, “what internal devaluation doesn't seem to affect much is the general price level.” Actually that should be “what austerity / deflation doesn’t seem to affect much is the general price level”, I think.

      As to why wages and prices aren’t falling much, I’d put that down to Keynes’s “wages are sticky downwards” point, rather than to your idea that firms in the periphery can sell to other countries. That is, for a given “exchange rate” between two Euro countries, and given level of recession or boom in other countries, exporters will already have maximised exports to the point where further sales are not profitable.

    5. Really?? You don't think the single market affects the price level in member states? I would have to disagree on that. Sticky wages are a partial explanation, but the fact is that wages have fallen considerably further in say Greece than prices have, so it certainly isn't a sufficient explanation. I don't buy your "exports are maximised" argument for the EU. If the EU is so far from economic equilibrium that people are migrating to where there is demand for their labour, goods & services will also migrate to where there is more demand for them.

      For import-dependent countries, it is the cost of labour in the supplying country that makes up the bulk of prices, not the domestic cost of labour. I remind you that most of the countries I am talking about - including the US and UK - run trade deficits and are dependent on imports for essential goods. Therefore I disagree that prices and real wages keep pace in these countries, as you seem to think. The evidence is that wages have fallen much further than prices.

  3. I cant believe we do agree on something!

    I think you are making a valid point - this is a classic case of externalities where 'investment' into human capital goes to waste for the investor because the 'investee asset' is free to get up and walk out of the door. As you pointed out, this is not only a problem for countries, but also for regions, and I might add even for employers who train people who then leave. There are two issues that arise: firstly, as you have identified, it is a problem for those left behind, but also it leads to 'underinvestment' - at one point eg Jamaica might decide to cut back on educating nurses if this investment is continuously lost to them because the nurses go and work for the NHS, which would be bad for everyone, including the UK.

    Whilst this is difficult to address in the private sector - which leads to underinvestment in human capital there - in case of countries a 'fair' fiscal transfer scheme is indeed reasonably easy to implement. There are really only two parameters you can play with

    (1) the percentage of taxes and social security contributions that has been 'earned' by the country bringing up and educating the person

    (2) the extent to which the person rather than the society receiving the person should be made to contribute (ie a levy on foreign-educated workers that goes directly to the country that educated them)

    I would think, something between 20-40% would be a reasonable number under (1); for (2) I would argue that this number should be zero in countries where the state generally covers the cost of educating the population, but possibly higher in countries that charge significant university fees; it can also be used to discourage migration if this is what is intended (even though this might fall short of current EU law; but then, so do OMT's, at least according to BuBa...)

  4. Migration is not a zero-sum trade because the migrants productivity is increased by his new home country. On aggregate migration makes all involved countries richer. You also did not mention the big(gest?) beneficary: the migrants.
    This leaves us with the question of how to best manage negative side effects of migration.

    1. Increased productivity and prosperity of migrants is implied in the zero-sum equation. Their new country benefits because of their increased productivity and new-found prosperity. I said that in the post, and I have also said it in both my previous posts on this subject - see the links at the end of the post. Migration is beneficial to migrants. It may also be beneficial to their families, if they send money back. But at the macro level, under certain circumstances (and I did say what those circumstances are), it causes hysteresis among the remaining population, leading to long-term decline. And when the exporting nation is highly indebted it can result in impoverishment and debt default.

  5. People will always move to places where they have heard they will prosper. That's how the US was born. That's why China is going through its own industrial revolution. The issue in Europe is that some countries are now de industrialising because capital has moved elsewhere, to be followed by skilled or ambitious people. People will always follow capital and the opportunities, especially when the alternative is penury. The US is having an energy-driven revival, something we all want and need.

    1. I did point out that this post is not just about Europe. The US has a lot of the same problems with migration from poorer to richer areas, which are softened but certainly not eliminated by federal support. Nor are the people I'm talking about moving because the alternative is penury, as you suggest: they are moving because they want jobs commensurate with their skills and with higher pay. It is skilled people who command good incomes who are moving, not the unskilled unemployed. In that respect the situation in the EU is not like the UK example that I cited - but it is like the present-day US. This article from Pacific Standard explains the US situation brilliantly:

    2. Paul Antompietri9 June 2013 15:15

      The US has always realized population = wealth. Every major city has at its core a local business community that works hard at promoting that city. Mayor Bloomberg of NYC is about as outstanding an example of this as there is. The places that decline in this country lack this; note in that article you cite that there are only a tiny number of private employers in that Delta county.
      Other cities have declined due to having wound up as company towns. Detroit was so dominated by the carmakers that it became a company town; Rochester and Kodak is another example. Seattle was a company town for Boeing but escaped that fate due to the overwhelming success of Microsoft, which seems to have catalyzed an entrepreneurial burst there. Seattle might be an interesting contrast actually since Boeing would have had a relatively educated workforce, so that probably had a lot to do with Seattle escaping the fate of Detroit and Rochester. There is a long list of cities in the north that don't seem to have the wherewithal to come back, of course. Newark seems to have stabilized, but that may just be due to its position as an industrial suburb of NYC, although the mayor there, Cory Booker, is well-known and admired, and is now running for the US Senate.
      Besides that, there's two differences between the US and the EU:

      1 - Social Security. There is no remittance question in the US because of Social Security, of course. Maybe the EU should think about a Europe-wide standard pension scheme?
      2 - Fiscal transfer/banking union. Done to death already I know, but just one more interesting example: somewhere along the way (if I can find it I'll cite it) someone pointed out the US transferred, via the now defunct FSLIC and via the fund set up specifically to deal with that crisis, the RTC (Resolution Trust Corporation), billions of dollars to the Southwest back in the late 80s when we had a savings and loan crisis here. So the two are inseparable: one, the banking union, can lead to the kind of large fiscal transfers that keep a crisis from spiraling out of control and leading to the demographic hemorrhage (Ireland, Spain) you're writing about. Not a panacea, obviously, as Greece would have happened regardless, and over here in the US this does nothing for places like, say, Cleveland. Or the Mississipi Delta, for that matter. Just a way of showing that everything is connected.

    3. Hi Peter,

      "Company towns" are a problem in the UK too. Sheffield is a case in point: it has not recovered from the loss of the steel industry and it is doubtful if it ever can.

      I do agree that Federal support does soften the effects of relative decline and can stem migration. But it doesn't eliminate either - as you note in relation to the Mississippi Delta among others. Fiscal transfers are no panacea. Reversing the flow of people and the decline of some areas requires policy decisions which are bound to be unpopular in prosperous areas.

    4. Paul Antompietri9 June 2013 15:31

      Re the S&L crisis: turns out it was Krugman:

  6. Frances, my quibbles with your position start with your choice of language: "Kafkaesque nightmare" and "states that are slowly bleeding to death". I think you are overly-pessimistic. I don't think youth migration will lead to "terminal decline" for EU periphery states because a) it isn't that big a deal, and b) because there are countervailing forces.

    I'm well aware of the secular decline of peripheral regions relative to the core, such as the North of England versus London and the South East, but that is the product of a) persistent geography and b) variable politics. Migration is a relatively minor component (compared to, say, inward investment), and better seen as symptom rather than cause. Yes, it has a reinforcing effect, but not so great as to produce an inexorable "death spiral".

    You say: "Why would skilled immigrants come to a country from which people with the same skills were leaving? Surely they, too, would go to the higher-wage countries?" The answer is that the high-wage country might be their first choice, but that a lower wage country would still mean an improvement on their prospects at home, even if they are then pricing themselves into a job by taking an even lower wage than the natives are prepared to accept. Linguistic and cultural ease of integration, not to mention visa requirements, would also play a part (e.g. Brazilians might still prefer Portugal over Germany).

    Re remittances, you say: "the normal riposte to this - that migrant workers will of course send money back to their families - is inadequate". I agree. My point is that remittances haven't been significant for parental support for years, due to the introduction of state pensions in the periphery and the associated diversion of returning funds to property investment, and that's not about to change. In your original post you asked: "Are our family ties still strong enough for these highly-educated young people to send money back to the older generation that they leave behind". My point is that this is irrelevant, because it's marginal to pension affordability.

    You also say that it is unreasonable of me to assume "that the inexorable march of technology will somehow make an ageing and increasingly unproductive workforce more affordable for states that are already highly indebted and whose GDP is falling". What I actually said was that technology can offset this growing burden, not that it would reverse it. My point is that the doom is over-done. I'm not suggesting that an ageing population is of no consequence.

    1. I specifically used the term "Kafkaesque nightmare" about the possibility of restricting migration of skilled people, actually - not about the effects of migration. However, I am not the only person who thinks that the Baltic states are slowly bleeding to death. As is Detroit in the US, of course - which is now bulldozing apartment blocks because there is no-one to live in them. And Detroit is on the verge of debt default. You don't think migration has anything to do with that?

      There is no difference between the core/periphery problems in the UK and US and those in the EU. It is all a matter of economic geography (hence the Krugman link) exacerbated by unhelpful or even counterproductive policy.

      I disagree with you that migration from the regions in the UK is not a major problem. The growth of London versus the rest of the UK is only possible because people choose to work there and live there. Failure of inward investment in the regions happens because of the migration of people, not the other way round.

      I think we will have to agree to disagree about the effects of migration. Where the birth rate is already falling, I think migration of the young & skilled is a considerable problem and one that is not being addressed - probably because like you, policy makers think it is "no big deal" or even a good thing.

      My point about remittances was exactly that. The issue is the sustainability of fiscal finances in highly-indebted countries with a falling birthrate and experiencing substantial migration of the young & skilled. Remittances make only marginal difference to this. I did make that point in my second post, where I explained the reasoning behind the first post. I do think you should read both.

    2. The nub of your argument appears to be the statement "Failure of inward investment in the regions happens because of the migration of people, not the other way round"; and the assumption that labour mobility within the EU is now comparable to intra-country mobility and thus Krugman's 1991 model applies (though it deals with the flow between an agricultural periphery and an industrial core, rather than the flow of skilled labour between different industrial zones).

      You say "It is all a matter of economic geography (hence the Krugman link) exacerbated by unhelpful or even counterproductive policy". I would put more weight on the second half of that statement.

      The growth of London relative to the rest of the UK over the last 30 years was a political decision as much as the product of "economic geography" or secular trends in technology, notably the privileging of financial services over manufacturing. Migration from North to South was a consequence of deindustrialisation (i.e. the decline in investment), not the cause of it.

  7. If I read your conclusion correctly, you do not seem to take effort into consideration. If labor is not equal between states then it would seem your conclusion is flawed. Perhaps the EU states are at fact it appears this way in the case of Germany vs France. You may argue the southern states are out of balance, though it appears the have brought forward consumption with credit and are actually returning to balance. Labor in this case will migrate and should be allowed free access in line with capital flows. Labor is money and will flow where it is needed.

    1. Oh yes I do take effort into consideration. I'm concerned that you are confusing effort and productivity. For example, ten workers with scythes are nowhere near as productive as one worker with a combine harvester - but who is putting in more effort? The problem in this case is the availability of capital. Lack of capital reduces productivity for the same effort - but unless you understand this, workers can appear to be "lazy" because they are producing less than their better-equipped fellows.

      You are completely ignoring the point of this and my previous posts, which is the effect on the people who are NOT able to move - and indeed on the future of countries that are losing their young & skilled.

      The extent of migration in the EU - which I highlighted in my first post - suggests that the EU states are nowhere near equilibrium.

      My argument is that labour should be treated as capital, not revenue. Long-term migration when there is a falling birthrate depletes capital assets in much the same way as destruction of topsoil due to poor farming practices does. It makes recovery virtually impossible without external assistance. But perhaps you think it doesn't matter if some EU states become depressed, impoverished backwaters.

    2. Your use of productivity is accurate...I used the wrong word. I have not read your previous works, mostly just follow you on twitter (of which I don't know that I've disagreed yet) I do not make a moral issue out of labor flows. While the situation is southern eu is truely sad, I'm unable to view it as you do. (I'm also starting a new business while everyone else is afraid of loosing their jobs) Labor is revenue, however it's practical application determines how much income it provides. Honestly I quit my job and went on my own when they began to view me as an least for my production...I am not a capital good or expense...I'm a profit center and I don't view my fellow man as a capital good. Perhaps I don't follow your lingo correctly...but it appears you want people to be chattle.....anyway have a great day and I is likely I have missed your point completely.

  8. I think you are wrong abou who is migrating. At least in Sweden a large fraction of EU immigrants are unskilled labour. The cost of travel is so close to zero that it really does not matter.

    1. The evidence I've used is who is EMIGRATING from Southern Europe - which by and large is the young and skilled. That's not to say there aren't unskilled too, but the migration evidence is that the main movement is young professionals.

    2. Perhaps skilled labour will to a larger extent move to countries with less compressed wages (UK)? Also, perhaps the reasons for emmigrating matters. Cleaners from Poland will move since they get paid more. IT peopke from Spain will move because they can't get hired in Spain.

    3. Yes, that's true. Skilled labour is more internationally mobile. And I agree ppl have different reasons for leaving.

  9. It isn't the actual wage balance that matters but the relative benefit. The cost of living in the peripheral EZ and EU can be a lot lower than in the richer countries - for property particularly. And as the UK has inflated property prices, this is true pretty nearly everywhere in the world. People will move when their perceived standards will improve and this will include the elusive 'quality of life'.

    So there is migration the other way which partly balances the numbers. Retiring or eco-people move to rural areas in Eastern Europe - even with no familial background - bringing some money and investment in property but, as you say, push prices up for locals. And eventually as they get older they end up a responsibility of the health and social services in their new countries.

    So the picture is even bleaker than you say as expensive countries like the UK not only import productive workers but export some of their liabilities in part because the pensions have become too low to live here.

    All for nothing - it makes it a good deal for us (and the Germans) but is indeed impoverishing our EU partners.

    I am not sure what the solution is. In fact I doubt there is a humane or politically tractable solution at all other than a complete federal state for the whole EU which will be over a lot of dead bodies - literally.

    1. To push property prices up for the locals, you need the inbound migration to be above the outbound.

      The effect of someone leaving a country is the same as building a new house similar to the one they were occupying: there is +1 empty house added to the stock of available houses (square footage per inhabitant increases correspondingly). So in that sense it is wealth creating (and very green!).

      When there are strong emigration waves houses tend to become essentially free: if you have a city with 100k houses and 50k families, the lesser 50k houses will essentially be free (you might even get a stipend to move in and maintain it). This is sort of good for those who stay (people like free stuff!).

      Same for any infrastructure that is capital intensive and non-shareable: imagine a city with 1 MRI scanner, if half the population leaves, there's suddenly twice as many MRI scanning slots available per inhabitant.

      For incoming immigrating pensioners to reverse that effect, they need to occupy more than the house (or other infrastructure) that was vacated by the matching emigrants, that is be more numerous, or have a higher usage per person.

      If pensioners get houses built at their expense, it's a net benefit for the receiving country: the prices of the existing housing stock doesn't move (the supply and demand is unchanged: the same number of incumbent people are chasing the same number of existing houses) and if they give work to some local builders it means the locals get wealthier (money which wasn't in the country before gets to the locals).

    2. internal devaluation has been pursued because it can be controlled, i.e. book value of assets can be stabilized and thus the balance sheet of the local oligarchs can be protected, the consequence is a mismatch between the incomes of the vast majority of the population and the prices they can afford. In particular, the Portuguese government enacted a tax law which, cleverly (because subtle), puts a floor on the price of property, the next thing they did was sell visas for property purchases. Coppola's article is spot on.

  10. Great essay, Frances.

    I can't resist this, though: "Why would skilled immigrants come to a country from which people with the same skills were leaving? Surely they, too, would go to the higher-wage countries?"

    This describes New Zealand's situation. Young skilled and semi-skilled people are emigrating in large numbers, mainly to Australia, and they are replaced by skilled migrants from South and East Asia and from Southern Africa.

    Of course this can only happen because advanced countries restrict immigration. As soon as a large advanced country relaxes its immigration policy, the arbitrage opportunity will disappear and New Zealand will slide decisively out of the OECD. This despite its relatively high birth rate.

  11. Another excellent article Frances.

    The UK is a perfect example of this. England should pay Wales for the huge migration of labour and skills to England, AND for the huge movement of elderly and sick people the other way.

  12. Another thing: the essay seems to imply that it's a bad thing if places get lower population than they have now.

    I don't think that as such there's a reason to say population levels should stay at whatever random level they currently are. Some places are pretty grim places to live and current population patterns often date from land-based economics that have ceased to be relevant a century or two ago. Should anyone live in the Baltics? It's pretty grim up there. It may make more sense to let it shrink and re-designate it as a nature reserve.

    Of course it might bankrupt local government in the process if they had debt structured to assume constant population. This problem is really fairly easy to solve going forward: make government debt investors explicitly carry the risk, e.g. make all debt GDP-linked (so the coupon and principal repayments halve if GDP/population halves). Fixed income with everything in nominal is a bit of a barbaric relic (which dates from when people didn't have computers to price more sophisticated products!) that really has no place in modern financial markets.

  13. Frances,

    I'm hoping to prepare a more substantial response to your excellent series of articles on migration, but for now I'd point to two pieces of evidence.

    First, until recently the salary expectations of Greeks thinking of working abroad generally pointed to a very tight calculus:

    That is to say, back in 2010 our labour export market was probably still in equilibrium.

    Second: I can't dig out my graph for this unfortunately as it was on Twitter (and I've closed my account) but the gap between unemployment of graduates and unemployment of school leavers in Greece has been widening throughout the crisis. The people under most pressure to leave are low-skilled; the economics of migration will certainly not work out for them.

    Now one might argue that the higher-skilled will tend to leave first anyway because they have more options, and their skills are more marketable, but I should note that they have been doing so in droves for years - no big change there.

    And then finally there's the language barrier. Greeks generally learn foreign languages quite passionately, and they have long been considered a life skill. Still, some countries are more accessible than others. The Eurobarometer looked into this a couple of years ago and found that we were still disproportionately inclined to migrate to the UK, which at the time was still in recession.

    Bottom line: I don't think migration from the peripheral countries will be as strong as commentators expect. Which of course changes very little in your analysis.

    What I would say does change a little is that skilled immigrants are lured not only by the promise of better salaries but also the opportunity to build up human capital in the host country. Greeks abroad will often tell you that they were attracted to the host country's working culture, levels of professionalism and quality of management. These are, for the most part, positive externalities not priced into an employment contract. The host country has paid for nearly all of that and the home country has paid for none.

    If immigrants ever return to their home country, they take the less context-specific parts of this new human capital back with them, at a net benefit to the home country. In my mind, this (alongside any remittances) should compensate the home country for what it loses in the short and medium term, but it hinges on the assumption that people will return.

    - @lolgreece