Library of Economics and Liberty masthead logo 
Morgan Rose

Free Labor, Constrained State

Morgan Rose*

The migration of labor occupies the attention of economists and politicians alike. Because some quantity of labor is required in the creation of all goods and services, the location and distribution of labor has an immense influence on how and where things are produced. For politicians, emigration (native-born people moving out of a country) and immigration (foreign-born people moving into a country) affect a government's total number of constituents and the division of those constituents into discernible, and perhaps electorally useful, groups. Many issues surrounding emigration and immigration have been discussed by economists for two hundred years, as we will see below.
The Economic Motive for Migration

To use a cliché, the only constant in a dynamic economy is change. Fortunes rise and fall, discoveries and innovations emerge, and trends appear and fade away. In response to changing circumstances, economic agents continually seek out chances to improve their lots. The voluntary migration of labor, whether within a nation or from one nation to another, is the natural response to there being disparate opportunities in different locations. If the available wages in Springfield rise high above those in Shelbyville, all else being equal, then Springfield becomes a relatively more attractive place in which to live overall than it did before. As a result, more Shelbyvillians will decide to pack up and move to Springfield. This phenomenon is so fundamental to the flexibility and smooth operation of an economy that the English economist Walter Bagehot laid it out in the opening sentences of The Postulates of English Political Economy (1885):

The first assumption which I shall take is that which is perhaps oftener made in our economic reasonings than any other, namely, that labour (masculine labour, I mean) and capital circulate readily within the limits of a nation from employment to employment, leaving that in which the remuneration is smaller and going to that in which it is greater. No assumption can be better founded.

In seeking better conditions for themselves as individuals, people contribute the enhancement of economic output overall. Work that is worth greater remuneration is likely to be that which contributes more toward production, implying that when labor migrates from places with low wage opportunities to those with high wage ones, labor is also shifting from production of lower value to production of higher value. This is the idea that Ludwig von Mises expressed in the second paragraph of Book II, Chapter 13 of Socialism (1981, first pub. 1922): "In a changing economy men migrate continually from the places where conditions are less favorable to places where they are more favorable for production." Those voluntary choices result in shifts of resources into more valuable activities, which generates more aggregate output. In the context of supporting a specific form of migration, colonization, John Stuart Mill made the same point, writing in Book V, Chapter XI, paragraph 50 of Principles of Political Economy (1909, first pub. 1848), "The exportation of labourers and capital from a place where their productive power is less to a place where it is greater, increases by so much the aggregate produce of the labour and capital of the world."

From Economics to Politics

The first point to made about the political ramifications of the free migration of labor is the desirability for people to be able to decide for themselves where they want to live and work, something desirable as a component of personal liberty as much as for economic reasons. The English economist Thomas Robert Malthus, discussing whether governments should involve themselves with questions of emigration, wrote in paragraph 20 of Book III, Chapter 4 of An Essay on the Principle of Population, 6th edition (1826, based on the 1803 2nd edition) that "it is not only strikingly unjust, but in the highest degree impolitic in them to prevent it.... If the wages of labour in any country be such as to enable the lower classes of people to live with tolerable comfort, we may be quite certain that they will not emigrate; and if they be not such, it is cruelty and injustice to detain them."

 

In his essay on immigration in the Concise Encyclopedia of Economics, George J. Borjas includes a numerical study analyzing who has gained and lost, and how much, as a result of recent immigration into the United States.

As a whole, then, the world is better off, in terms of economics and personal liberty, for labor being able to cross political boundaries to achieve the improvements offered by economic opportunities wherever their locations. Not every individual, however, necessarily finds his own circumstances improved. Workers already living in the country into which additional labor immigrates can find their wages reduced as a result of the new arrivals. Philip H. Wicksteed explained how this could happen in paragraph 37 of Book I, Chapter 8 of The Common Sense of Political Economy (1910), in which he described the implications of labor migrating between either locations or industries or both.

If you gave some of the workers in an "underpaid" industry the opportunity to migrate into one better paid, you would have put them where they were worth more; and further, since the margin would recede in the industry they had left, you would also raise the marginal significance and therefore the pay of their late companions. But you would also lower the marginal significance of a worker in the ranks which they had joined.... Objectively (and we can have no other test) society is enriched by the change. The comparatively low worth of the work dropped, is replaced by the comparatively high worth of the work taken up. The total revenue of the community, then, is raised. And, moreover, the persons in the most deplorable condition have been relieved; and therefore whoever has suffered the redistribution of wealth has been socially justifiable. But the persons whose marginal significance has been reduced will not see the thing in this light.

 

Differing circumstances will obviously lead to differing attitudes toward the migration of labor. In "Foreign 'Paupers,' " (1984, first pub. 1837) editorialist William Leggett showed that those in the American interior could favor, emphatically so, immigration, even if Bostonians did not. In paragraphs 2l and 28 of Book IV, Chapter IV of Principles of Economics (1920, first pub. 1890), Alfred Marshall described how the rise of new industries altered the enforcement of the Settlement Act, British legislation designed to control migration.

Mises explicitly pointed out how such an outcome could give rise to political barriers to immigration, in paragraphs 8 and 9 of Book II, Chapter 13 of Socialism:

The migrating workers depress the marginal productivity of labour wherever they betake themselves. The fact that wages, their income, sink, directly damages the workers who were employed in centres of migration before the incursion of new workers took place. They regard the "immigrants" as the enemy of high wages. The particular interest would be served by a prohibition of "immigration." It becomes a cardinal point of the particularist policy of all such particular groups of workers to keep newcomers out.

It has been the task of Liberalism to show who bear the costs of such a policy. The first to be injured are the workers in the less favourably situated centres of production, who, on account of the lower marginal productivity of their labour in those centres, have to content themselves with lower wages. At the same time, the owners of the more favourably situated means of production suffer through not being able to obtain the product which they might obtain could they employ a larger number of workers. But this is not the end of the matter. A system that protects the immediate interests of particular groups limits productivity in general and, in the end, injures everybody—even those whom it began by favouring. How protection finally affects the individual, whether he gains or loses, compared with what he would have got under complete freedom of trade, depends on the degrees of protection to him and to others. Although, under protection, the total produce is lower than it would have been under free trade, so that the average income is necessarily lower, it is still quite possible that certain individuals may do better than they would under free trade.

Importantly, those individuals that are better off without the entry of new workers act in their own rational self-interest in opposing immigration, even though in doing so they harm their economies. Because it can create winners and losers, immigration tends to be a politically contentious issue year after year. For example, WashingtonPost.com reports that in recent weeks the United States and Germany, both of which will hold national elections later this year, each have proposed significant changes to its immigration policies.

The Broader Political Impact of Migration

Above and beyond contemporary political struggles, the migration of labor can play an interesting role in shaping the very nature of political institutions and the role they play. In The Power to Tax: Analytical Foundations of a Fiscal Constitution (1998), Geoffrey Brennan and James M. Buchanan proposed to determine what sort of tax institutions people would establish if they were to create one from scratch. In doing so, the authors pointed out that the possibility of migration of the constituents of a government will have important effects on how that government operates.

In Brennan and Buchanan's model, a government is assumed to be a "Leviathan," a revenue maximizer intent on taxing as much away from its constituents as it can under the authority it is given. Constituents are willing to give the government tax authority in exchange for the provision of public goods, but they also want to fiscally constrain the government so that it will provide public goods efficiently, that is, without appropriating from them more than it needs.

 

Charles M. Tiebout was one of the first economists to discuss the impacts of people "voting with their feet" in response to the provision of public goods in rival political communities. His classic paper on the subject is "A Pure Theory of Local Expenditures,"The Journal of Political Economy, Volume 64, Number 5 (October 1956), pp. 416—424. [Link requires subscription to JSTOR.]

The possibility of migration, along with the free trade of goods and services, across borders serves as a check on a potentially rapacious government by placing it in competition with rival governments for constituents, who represent a government's tax base. (Brennan and Buchanan's analysis concerns rival subordinate governments under a central federal government, but the lessons regarding migration apply to an international setting as well.) If migration is assumed to be costless, then each government would be forced to extract only enough to provide the desired amount of public goods. If it tried to extract any more, all of its constituents could be enticed away by some other government who would tax with more restraint. In the authors' words in Chapter 9, paragraph 12, "Each governmental unit, regardless of its motivations to maximize net revenue surplus, will find it necessary to offer public goods in the efficient quantities desired and to finance these goods efficiently. In this limiting case, freedom of trade and migration will render any overt fiscal constraints unnecessary."

As the costs of migration are assumed to rise, the government acquires more power to extract additional revenue from its constituents without the constituents emigrating to another territory. For example, suppose there are two countries, each of which extract only enough in taxes from its constituents to pay for the public goods they provide, and there are no differences between those goods. First, we'll assume that train tickets across the border between the countries are free, so migration is costless. (For the sake of simplicity, we will ignore all other costs associated with migrating, like time spent packing, traveling, and finding a new home and job.) If my government decided to impose an additional, one-time tax of $50 without providing any additional public goods, then I would "vote with my feet" by hopping on a train and moving to the neighboring country. All of my other countrymen would do the same, and suddenly there would be no tax base left in my old country at all.

Now assume that train tickets cost $100. In this case, it would cost me more to move away than it would to just pay the tax. Because of the higher cost of migrating, I would stay in my home country even though the government there is extracting more than it needs to provide its public goods. I would stay even if the tax were raised to $99, because staying is still cheaper than going. And if the costs of mobility rose further, then so would the amount of revenue that the government could extract. As Brennan and Buchanan wrote in paragraph 35 of Chapter 9, "If a person, for any reason [including costs of migration], simply prefers to live in X rather than in Y... he becomes vulnerable to some fiscal exploitation by the government of X, even if it remains in 'competition' for people and resources with the government of Y."

This presents us with a "good news, bad news" situation. The bad news is that, because migration is never completely costless, all governments will possess some degree of leverage with which to extract more revenue than is justified by the public goods they provide. The good news, though, is that as it becomes easier and cheaper to move from place to place, and especially as improvements in communications make it easier to learn about labor conditions all across the globe, the amount of leverage that governments have becomes smaller. As early as the mid-nineteenth century, English economist John Stuart Mill noted the importance of falling costs of migration in Book II, Chapter XIII, paragraph 18 of Principles:

The extraordinary cheapening of the means of transport, which is one of the great scientific achievements of the age, and the knowledge which nearly all classes of the people have now acquired, or are in the way of acquiring, of the condition of the labour market in remote parts of the world, have opened up a spontaneous emigration from these islands to the new countries beyond the ocean.

As transportation and information technologies continue to improve and their costs continue to fall, Brennan and Buchanan's model suggests that the competition for constituents will introduce increasing discipline in governments' innate desire to extract as much revenue as they can.

Conclusion

By matching up available workers with their most productive opportunities, the migration of labor provides immense direct economic benefits. However, without confidence that a predatory government will not extract all the surplus revenue generated from production, labor would not have the incentive to expend much time and effort to locate those opportunities. This makes a check against government predation perhaps the more consequential, although indirect, benefit derived from the free migration of labor. To the extent that Brennan and Buchanan's model reflects reality, competition over a mobile labor force places restraints on rival governments similar to those that rival firms face when competing for customers, creating incentives to provide goods and services with greater efficiency.


*Morgan Rose is a Ph.D. candidate in economics at Washington University in St. Louis, with research interests in industrial organization, corporate governance and economic history.

For more articles by Morgan Rose see the Archive.
Return to top
Copyright ©2008
Liberty Fund, Inc.
All Rights Reserved