Of Markets and Migrants

It’s not secret that America has a rusty immigration policy that’s costing us billions. Almost everyone seems to agree that we could use more talented doctors and engineers, presumably from India or China. There’s even considerable consensus that tolerating unskilled (mostly Latin American) workers has huge long-run benefits.

But there’s a pretty vocal contingent – left and right – that believes other things equal more unskilled workers are bad thing. Take Madeline Zavodny from the American Enterprise Institute, what we might take as a reasonable barometer of center-right market-oriented thinking:

The fact that these immigrants would receive more in benefits than they would pay in taxes if they legalize their status does not mean that the US should not have an earned legalization program — it means that the US should reform its government transfer programs.

Tethering freer borders to the “reform” of America’s safety net is not only counterproductive, but effective political suicide on our third rail. Not to mention study after study has shown immigrants will increase America’s tax base (satisfying conservatives) as well as working-class salaries (satisfying liberals).

No matter, there is a superior alternative that would definitely raise revenues, and attract the most valuable immigrants: permit auctions. Australia and Canada are both cited as having relatively robust “point based” immigration policies. However, the market is a far more efficient and fairer arbiter potential immigrant competence than a bureaucrat in government.

America’s first-come-first-serve (FCFS) system is even worse. I propose that the government should electronically auction some anticipated number of permits at the beginning of each month on a free market. Similar ideas have been floated by economists like Giovanni Peri at the University of California at Davis, but my idea would be quite a bit different:

• There are no different classes of permits for “high” and “low” end workers. Skill is determined only by the market.
• There is no price floor, the government can tighten labor supply by supplying fewer permits on the open market.
• The auction would not be limited to firms – it would include individuals as well as local and state governments.
• Would shift the focus to employers rather than more common residency permit auctions, like the ones Matt Yglesias discusses here. The idea behind this is to attract the most productive, not the richest, people – though you could say the spirit of our proposals is quite similar.

To the extent that we cannot tolerate purely open borders, a consistent permit auction is the most optimal choice. Right now, family members and bad FCFS policies don’t ensure that each immigrant we accept is better than all potential immigrants. That is far from Kaldor-Hicks efficient.

But if permits are auctioned on the open market, only the agents that will maximize the resultant marginal revenue product (MRP) receive clearance. Furthermore, this will end the need for the cruel government practice of tethering visas to employment, which certainly depresses wages in the lab sciences. Rather, employers themselves will sign contracts with foreigners only on the condition of sustained employment, thereby mitigating the risk of purchasing permits.

Left-leaning liberals like Dean Baker should also be pleased. While I believe his concern that immigration decrease native wages is false (studies actually show it has a 2-3% positive effect), my proposal deals with this in two ways:

1. Especially with minimum wage laws in full-force, the MRP of high skilled workers is almost certainly higher than unskilled workers. The only other purveyors of such permits might be the North Carolina Growers Association which couldn’t find a single American to do the job. (Okay, I lied, they found seven).
2. Consistent auctions would lend a steady stream of revenue which can be used to finance education and employment for the poorest Americans, who those like Baker claim to care the most about.

Furthermore, this is a great way to increase partnership between the Federal government and immigration-friendly states. Piggybacking on the spirit of regional visas from Adam Ozimek, state politicians should be given the right to petition the Federal government for an increase in the supply of permits. I do not endorse that they be traded on a separate exchange, which would too strongly favor public sector work. Rather, this is a means by which interested states (like Michigan) can bring down the permit cost. If states buy large quantities thereof, they me operate a secondary market within their state, to identify the most competent local businesses.

Here itself, we can observe the deep flexibility of this market-oriented proposal. Secondary and tertiary markets allow for a reallocation of permits in a far more efficient manner than centralized bureaucracy can ever dream of. Further, the high-skilled immigrant labor market will become rather more competitive when employer restrictions imposed by the government are removed, thereby enhancing regional mobility and hence overall welfare.

The revenue potential is not insignificant. Just at this moment, the United States has almost 150 million potential migrants. The United Kingdom is a laggard runner-up with a figure of 42 million. Assuming each permit floats at $5,000 – and this is conservative based on Peri’s work – the United States has a potential revenue of $750 billion. Indeed, a market-based immigration reform would further accelerate demand to become American.

It’s crucial to note that the burden of permit financing would fall on both employers and employees, depending on elasticities of demand and supply. The dearer the permits, other things equal, the less a potential employer is willing to pay for the same level of output, realized as a lower wage. This can be thought of as a migrant financing his own permit.

Therefore, if the USA manages to bring more people today – who will then want to bring their friends, families, and loved ones – a naturally captive demand for American visas will alleviate the employer’s share of the permit burden.

Most economists firmly believe that tax is an evil far kinder than bad regulation. The American bureaucracy is rusty, expensive, and highly detrimental to long run growth prospects. A market (ultimately) for citizenship would increase government revenues, per capita income, labor market flexibility, and innovation. Markets lend themselves to a devolution of regulation to state and local governments, which can then compete with each other as centers of immigrant activity.

To maximize growth in a time of debt immigration market reform is the clearest step. And can perhaps command bipartisan support. Market framework also helps us clarify foggy thoughts. Why do we regulate migration, anyway? Would anyone even dream of something as nutty as a “permit to innovate robots”? No! But why is immigration any different?