New Socio-Economic Challenges of Development in New Socio-Economic Challenges of Development in Europe 2008Europe 2008

An Auction Approach to An Auction Approach to High-Skills ImmigrationHigh-Skills Immigration

Jānis OšlejsJānis OšlejsOctober 2008October 2008

What is important and what is notWhat is important and what is not

• Solow residual accounts for 70 to 90 per cent of growth

• Free markets for movement of labor and capital therefore account for only 10 to 30 per cent of growth

• Once economies pass from efficency to innovative econmies (@ around 9000 USD per capita) Solow residual grows

What is important and what is notWhat is important and what is not

• Innovation explains Solow residual

• For rich Innovative countries and for Transition to Innovative economy countries like Latvia policies must be directed towards innovation, not so much towards making more of labor or capital

Innovation and ImmigrationInnovation and Immigration

• Immigration: cross-fertilization of ideas• Blocked within EU• Blocked from outside EU• Why?

Immigration debateImmigration debate

• Two types of immigrants:– High skills– Low skills

• Differing wage outcomes• Differing value-added outcomes for host

communities

Which immigration?Which immigration?

• There are undisputed benefits from high-skill immigration

• Are all high-skill immigrants employed at their potential within EU?

• Are the benefits from low-skill imigration as high?

Impact of low-skilled immigrants on Impact of low-skilled immigrants on labour costlabour cost

• Hanson, University of California (San Diego)– “Immigrant labour reduces prices of services”

• Borjas, University of Harvard– “Immigrants reduce wages at the lower skill level”

Mariell imMariell immmigrationigration

• Lewis ,Federal Reserve, Philadelphia• “Mariell immigrants created a pool of low-

skilled labour”• “The technical sophistication of enterprises in

Miami still lags US average”

Impact of low-skills immigrants on Impact of low-skills immigrants on the sophistication of economythe sophistication of economy

• The wine industry is highly mechanized in Australia, whilst in California it is highly labour – intensive

• Large pools of low-skilled workers provide disincentive for mechanization, automation and innovation in work methods

ConclusionsConclusions

• Immigration of low skilled labour – Reduces technological sophistication– Increases inequality in society

• High-skills immigration– May be highly beneficial to economy

Globalization and laborGlobalization and labor

• Labor and Capital are commodities• Production can be anywhere• Asia benefits from low labor cost• Only innovative economies with highly

creative labor force can benefit from expansion of Asian middle class

Swedish modelSwedish model

• Sadly overturned in Laval case• By setting the demand to pay sector-wide average wage for

all immigrants provides disincentive for undue attraction of immigrants with substandard skills

• The free movement of labour in Sweden allowed for importing of innovative practices

• Swedish model was the best combination of market forces with incentives to develop sophistication of economy

Other modelsOther models

• Other old EU countries either had no regulation and now have backlash against immigration (UK) or are operating a bureaucratic barriers to entry (Finland) or are outright prohibiting labour from new EU countries (Germany, France)

• Points based-systems• Hiring of non-EU workers difficult

Market-based wage-auctionMarket-based wage-auction

• A nation would decide on amount of immigration it feels comfortable with

• Then a quota is generated and sold to interested companies on basis of offered wage

• Highest wage corresponds to highest value-added and biggest market need

Ways forwardWays forward

• Wage auction-based approach– Rewards above-average productivity– Measures true value added– Is easy to run – Can be outsourced to private sector– Does not hurt local workers

• Benefits innovation• Dicourages race-to-bottom

ConclusionsConclusions

• Government regulation of immigration stiffles innovation

• Free market will produce optimal outcomes• Visa auction is a free-market approach• Wage is the best indicator of innovative

potential and thus should form the basis of auction

THANK YOU!THANK YOU!

Innovation and RegulationInnovation and Regulation

• Creativity: new associations between existing ideas or concepts

• Innovation: creativity practically applied• Regulation of employment: bad, if it stiffles

creative people to innovate