The Labor Market Effects of Immigration

Immigration in the world today is largely an economic phenomenon. Despite the numerous differences in the structure and function of governments throughout the western world, the world's people are overwhelmingly migrating to the United States, Canada, and Western Europe at the expense of Mexico, Central and South America, Eastern Europe, Asia, and Africa. Indeed, looking at world immigration flows on a purely national basis paints a picture of migrants that move unerringly straight toward the largest concentration of wealth in their immediate proximity. The United States is the destination for well over 95% of Mexican migrants and Western Europe has a similar monopoly on Eastern Europeans.

Given the obvious economic incentives for the immigrants themselves to go wherever their lives will be most quickly improved, the only worthwhile area of study is on the populations already in the destination country and those remaining behind.

For those communities that send a significant portion of their population abroad, immigration is a mixed blessing. The local economy is likely to swell dramatically with remittances from abroad, but the workforce will be decimated by the loss of many of the best workers who receive the greatest potential benefit from moving away. So-called "brain drain" is a very real possibility, but wildly overpopulated countries like China or India are likely to receive competing benefits that overwhelm that force.

Communities that welcome numerous migrants, either explicitly willingly or not, are likely to feel a palpable sense of anger toward those migrants when they add to the labor market and drive down prevailing wages. But immigrants don't join the workforce solely as a source of cheap labor. If the immigrants have any degree of higher education, they are significantly more likely than the native population to start their own small businesses. In a modern service economy, of the type that dominates many of the world's immigration magnets, small businesses that employ fewer than 100 workers are actually one of the greatest sources of job creation. While most immigrants will not likely immediately start a new business upon their arrival, over the course of their lifetimes they are more likely than the general population to choose this path.

The ultimate labor market influence of immigration is likely to be a steep decline in the value of the goods and services that immigrants can produce, and a concomitant rise in the living standards of everyone else in society that is only a consumer of those goods and services.

What does American Poverty Look Like?

Poverty will always be with us. But today's poor look surprisingly different than their brethren from just a generation ago. In relative terms, every wealth distribution is going to have someone who is poorer than average, although that person might be quite wealthy in absolute terms. For example, a millionaire in a room full of billionaires might be a wealth lightweight in his immediate community, but the case for calling him or her truly poor seems pretty weak.

The average person below the poverty line in the United States today owns a microwave, a color television, gets cable, and a car. None of these assets are going to be top of the line, but when they break they will get replaced - and possibly long before then.

There are actually more obese Americans living in poverty today than in the general population. Some might consider this a triumph of food distribution, but others consider it just the absence of affordable gym access. Healthy food does cost more than junk food, but a cheaper way to avoid getting fat is to simply eat less junk food.

The plight of the poor is always highlighted around the holidays, but very rarely is it contrasted with the plight of the rich in poor countries. Consider the average Latin American. Would he or she rather have more wealth than 90% of the population in his or her country or be poorer than 90% of Americans? The answer may surprise you. In terms of absolute wealth measured by purchasing power parity, the two amounts aren't even close. The poor in America are significantly wealthier than not just the vast majority of people who have ever lived, they are much better off than the relatively wealthy in poor countries.

For lots of reasons, it is always going to be difficult to be at the bottom of the ladder. Yet for poor Americans today, being poor has never been better - and the future looks fine.

The Chief Executive Compensation Premium

The NYT reports that the rewards of scaling the very top of the corporate ladder have grown significantly in the last few decades. A study put out by Carola Frydman of MIT and Raven E. Saks of the Federal Reserve found that chief executives today earn 260% more than their third ranked executives. Compared with the 1960s and 1970s, this represents a massive increase from the previous 80% premium.

The NYT is perhaps more interested in the implications of this shift in terms of basic fairness and economic equality, but their single-minded approach to the issue ultimately misses the point. The economic ladder of the 1960s and 1970s was indisputably flatter than the one today, but it didn't reach nearly as high. Obviously, the economic relationship between top-tier compensation and economic well-being does not automatically follow in the same way that straightening a ladder inevitably makes it taller. But the basic fact that most journalists overlook is that the changes in terms of executive compensation have come about as a result of a fundamental shift in the way society seeks to compensate its highest performers.

Stock options were almost unheard of in the 1960s and 1970s, but today most of the highest paid executives receive the great majority of their pay in the form of stock options. This dramatically increases the chances that the CEO is going to get a massive payout on retirement, but it also more closely aligns the financial interests of the CEO with the shareholders of the company.

Stock options lead to wildly inflated pay packages that "fairness" types are going to criticize as being basically unfair to Joe Six-Pack. Yet Joe Six-Pack actually does better if the CEO is working non-stop to get that titanic payout than if the CEO spends the day at the golf course - which is precisely where the old fixed compensation scheme left the incentives for the CEO to go.

Society in general has become a much better place to be if you're the CEO. But if the CEO is watching out for everyone's interests in order to advance his or her own, everyone ends up better off.