Download North American Competitiveness and Labor Market Interdependence

North American Competitiveness
and
Labor Market Interdependence
Raul Hinojosa Ojeda, UCLA, Principle Investigator
With: Robert McCleery, MIIS
Fernando De Paolis, MIIS/DRCOG
Terrie Walmsley, Purdue
Stylized Facts of NAFTA Today

Massive US trade deficit




($70 Billion in August despite rapid export growth)
Despite falling oil prices, the 2006 record deficit will exceed the
2005 record deficit, which exceeded the 2004 record…
Growing discontent in US, particularly with China (trade and
investment diversion) and India (trade and outsourcing)
Large and growing US undocumented population





Credible estimates (Pew Hispanic Center, 2006, and Urban
Institute) place this population at 11 to 12 (Urban Institute)
Growth is accelerating, now about 500,000-800,000 per year
About 14 million in homes where one or more are undocumented
(Pew Hispanic Center, 2006)
Concern about economic and social costs of existing system in
US and Mexico
Questions about positive and negative impacts of remittances
Issues



Competitiveness and Trade Policy in NAFTA
US Immigration and Remittance Reform
Development in Mexico
Historical Separation of Trade and
Immigration/Remittance Research



Trade largely studied by economists,
migration/remittances by sociologists
Yet the two issues are clearly intertwined,
nowhere more so than in North America
Thus we have assembled a team of trade and
migration researchers and constructed a model
that considers interactions among these two
crucial flows
The Importance of Trade


Most early studies of NAFTA focused exclusively on trade
issues
NAFTA lowers trade barriers among the three countries,
leading to:





Production, investment and employment expansion in areas of
comparative advantage
Corresponding contractions in areas of comparative disadvantage
Net efficiency gains, perhaps after a period of transition
In sectors with economies of scale, production levels could rise,
costs fall, and prices fall by even more as competition increased,
creating even larger gains
Modest redistribution impacts, presumably favoring a country’s
relatively abundant factors of production
The Importance of Immigration and
Remittances




Although the economic impact of immigration in NA
is widely recognized, few NAFTA modelers considered
impacts on immigration and few immigration specialists
were included in the NAFTA debates
Conventional wisdom: NAFTA will raise employment
and income in Mexico, thus lowering undocumented
migration
Alternative perspective: Elements of the NAFTA
transition will have conflicting impacts on migration,
with the net effect likely to be an increase, due primarily
to a collapse in corn prices and production levels in
Mexico. This transition period could be long.
Remittance impacts outpace other financial flows
Why Rethink NAFTA Trade?





Despite trade liberalization (and increased FDI), we have
seen modest income and employment growth in Mexico
Despite tariff reduction, domestic subsidies, non-tariff
barriers, and agricultural protection continue to distort
production and restrict gains
“North American” competitiveness vis-à-vis the world
(especially China and India) has not improved as hoped
Exchange rate variability, in and beyond NAFTA,
decreases potential integration and gains
Massive adjustments loom, if the US trade deficit proves
unsustainable
Why Rethink Immigration Policy?





Undocumented migration has not decreased as had been
predicted/hoped (post-IRCA or post-NAFTA)
Labor market conditions for undocumented migrants in
the US are embarrassing, a point of bilateral contention
with Mexico, and undermine the push for improved labor
standards world-wide
The presence of exploitable undocumented workers
lowers wages and worsens working conditions for all
lower-skilled workers
Reducing poverty and inequality is made more difficult
and costly in migrant-receiving communities
Potential public backlash against all immigration
Asymmetries in Trade and
Immigration Policymaking


One reason trade and immigration policies are
not considered in a holistic fashion is that trade is
considered an international policy with domestic
effects, while immigration is viewed as a domestic
policy with international effects
Even the EU finds it difficult to seize the ability
to regulate labor movement within the Union
from member governments, much less craft a
reasonable policy towards immigration from
outside the Union
Our Trade and Immigration Model



Trade is motivated by both price differentials and
regional characteristics of goods (Armington)
Services trade is included, such that none of the
29 sectors in the models (see appendix for
sectoral definitions) are “purely non-traded”
Trade liberalization can consist of reducing or
eliminating manufacturing tariffs, all tariffs, or all
barriers, including non-tariff barriers.
Our Trade and Immigration Model (2)



Immigration is motivated by real wage differentials and
influenced by immigration policies
Migrant remittances are explicitly modeled, and are
impacted by any policy that affects migration levels or
migrant earnings
Immigration policies:


Impact the wage differentials directly, raising or lowering the
percentage of domestic wages earned by migrants (0.6 people
revisited?). For example, wages (and productivity) of legalized
migrants increases with immigration reforms
Impact the responsiveness (elasticity) of migration with respect to
any given wage differential. For example, additional enforcement
lowers immigration, for a given wage differential (Dallas Fed,
2001)
Our Trade and Immigration Model (3)

Immigration and trade interact in several important
ways:
The presence or absence of immigrants in a country
impacts the relative price of goods, and thus trade flows
 Openness to trade impacts wage levels, and thus
immigration incentives
 Remittances impact the balance of payments and thus
trade flows
 Remittances further fuel investment and growth in
migrant-sending regions, thus impacting wages, prices,
trade and migration

Scenario Descriptions
We run three types of scenarios, although only the
first two types will be presented today:

1.
2.
3.
Change migration policy, with direct impact on migration
and indirect impacts on trade
Change trade policy, with direct impact on trade and
indirect impacts on migration
Change both policies, with direct and indirect effects on
both types of international flows
Within each type of scenario, we tighten or loosen US and
Canadian policy, decomposing impacts of various “subpolicies” whenever possible
Tighter Immigration Policies

Version 1-deportation/closed border with Mexico
In this scenario, over 6 million migrant workers (and
their dependents) are deported (or, alternatively, never
allowed to enter the country). In this “Year without
Mexicans,” we see the impacts on GDP, real wages for
skilled and unskilled workers in the three countries,
total exports, imports, and the trade balance as shown
on the next slide
 All figures in the table are percentage changes, relative
to today’s “status quo” or “baseline”

(1a) Mass Deportation
Deportation (2 million skilled and 2 million unskilled Mexican migrants workers
(and dependents) are no longer in the US)
Mexico
Increase in unskilled labor migration to US, from: -2000
(In thousands of people)
Mexico
Change in GDP, in:
2.2
(% change from base)
Real Wages for unskilled workers in:
(Change in $)
Real Wages for skilled workers in:
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Rest of LA
Rest of LA
0
US
-1.2
Canada
0
US (Native) US (Mexican Migrant) US (LA Migrant) Mexico Rest of LA
44
NA
27
-34
0
470
NA
Mexico
-100.0%
Rest of LA
0%
Mexico
8872
Rest of LA
-941
-920
US
4118
Canada
-192
1
Tighten Border and Anti-Immigrant
Policies



A less extreme policy option is increased border
enforcement and weaker legal rights and
protections for existing undocumented migrants
Wages for undocumented migrants in the US
and Canada will drop from about 50% to about
40% of the earnings of “natives”
A one percent increase in the wage differential
now elicits a 0.3% immigration response, down
from 0.4% in the status quo
(1b) Tighten Border and AntiImmigrant Policies
Tighten Border Controls
Mexico
Increase in unskilled labor migration to US,-375
from:
(In thousands of people)
Mexico
Change in GDP, in:
0.6
(% change from base)
Rest of LA
-580
Rest of LA
0.24
US
-0.4
Canada
-0.01
US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA
Real Wages for unskilled workers in:
51
32
31
-8
-2
(Change in $)
Real Wages for skilled workers in:
15
4
-15
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Mexico
-15.0%
Rest of LA
-22%
Mexico
1264
Rest of LA
3578
US
-216
Canada
-7
Loosen Immigration Policies

Two potential “loosening” policies are considered,
with different motivating philosophies and
impacts:
A) “Wink and Nod” The historical practice of reducing
border enforcement when the US labor market is tight,
which lets in more migrants but does not address
migrant-native disparities
 B) Greater legal protection of existing migrants,
probably through “regularization” rather than blanket
legalization

Loosen Immigration Policies (A):
“Wink and Nod”
Relax border controls
Mexico
Increase in unskilled labor migration to US,460
from:
(In thousands of people)
Mexico
Change in GDP, in:
-0.7
(% change from base)
Rest of LA
760
Rest of LA
-0.25
US
0.5
Canada
0.1
US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA
Real Wages for unskilled workers in:
-67
-42
-42
10
3
(Change in $)
Real Wages for skilled workers in:
12
171
19
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Mexico
17%
Rest of LA
27%
Mexico
-1384
Rest of LA
-4532
US
316
Canada
11
Regularization/Legalization (B)
Legalize/Regularize Migrant's Status
Mexico
Increase in unskilled labor migration to US,-100
from:
(In thousands of people)
Mexico
Change in GDP, in:
-0.29
(% change from base)
Rest of LA
185
Rest of LA
-0.09
US
0.63
Canada
0.2
US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA
Real Wages for unskilled workers in:
50
3104
3076
2
0.5
(Change in $)
Real Wages for skilled workers in:
84
79
5
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Mexico
6.5%
Rest of LA
7%
Mexico
-343
Rest of LA
-674
US
-7466
Canada
-40
Legalization Plus Remittance
Banking and Re-Investment Policies

In addition to the legalization of migration flows,
both countries would most benefit through
remittance banking and re-investment policies :
A) Greater legal protection of existing migrants,
through “regularization” and legalization should
include easy access to opening bank and credit union
accounts for low cost remittance transfers
 B) “Community Re-investment” programs should be
put in place to encourage these banks and credit unions
to invest in migrant sending areas, further increasing
intermediation and productivity gains in both countries

Legalization Plus Remittance
Banking and Reinvestment Policies
Legalize/Regularize Migrant's Status
Mexico
Increase in unskilled labor migration to US,-500
from:
(In thousands of people)
Mexico
Change in GDP, in:
2.2
(% change from base)
Rest of LA
185
Rest of LA
-0.09
US
0.78
Canada
0.2
US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA
Real Wages for unskilled workers in:
85
3220
3112
178
0.5
(Change in $)
Real Wages for skilled workers in:
98
95
5
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Mexico
8.5%
Rest of LA
7%
Mexico
-343
Rest of LA
-674
US
-7466
Canada
-40
Trade liberalization scenarios

These also come in two types: Expansion of
trade preferences within NAFTA to all products
and multilateral trade liberalization in
manufactures
Further NAFTA Liberalization
Preferential Trade liberalization under NAFTA (Eliminate remaining trade barriers on ALL products and services
Mexico
Increase in unskilled labor migration to US, from: -15
(In thousands of people)
Mexico
Change in GDP, in:
0.22
(% change from base)
Real Wages for unskilled workers in:
(Change in $)
Real Wages for skilled workers in:
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Rest of LA
-2
Rest of LA
-0.04
US
0.02
Canada China
-0.05
-0.01
India
-0.01
US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA China
2
1
2
4
0
0
1
8
Mexico
-0.03%
Rest of LA
0.0%
Mexico
-361
Rest of LA
75
US
-365
0
Canada China
-38
-6
0
India
5
India
0
0
Multilateral Liberalization (Mfg.)
Multilateral elimination of all tariffs on manufactured goods
Increase in unskilled labor migration to US, from:
(In thousands of people)
Change in GDP, in:
(% change from base)
Real Wages for unskilled workers in:
(Change in $)
Real Wages for skilled workers in:
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Mexico
-6
Rest of LA
-11
Mexico
0.33
Rest of LA
0.17
US
0.01
Canada
0.01
China
0.58
US (Native) US (Mexican Migrant) US (LA Migrant) Mexico Rest of LA
22
14
13
17
13
53
Mexico
-1.4%
Rest of LA
-1.5%
Mexico
-1566
Rest of LA
-8970
US
26853
India
0.7
China
5
India
2
8
38
22
24
Canada
1724
China
-7656
India
-4583
Trade Barriers Targeting
India/China
Double US and Canadian manufacturing tariffs against China and India
Mexico
Increase in unskilled labor migration to US, from: 0
(In thousands of people)
Mexico
Change in GDP, in:
0.01
(% change from base)
Real Wages for unskilled workers in:
(Change in $)
Real Wages for skilled workers in:
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Rest of LA
0
Rest of LA
0.01
US
-0.01
Canada
-0.02
China
-0.11
US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA
-5
-3
-3
1
0
-11
Mexico
0.00%
Rest of LA
0.0%
Mexico
-6
Rest of LA
-1
US
693
India
-0.04
China
-0.4
India
-0.1
-0.3
1
0
-2
Canada
71
China
-1372
India
-92
Double Tariffs Globally (Mfg)
Double US and Canadian manufacturing tariffs against all partner countries
Mexico
Increase in unskilled labor migration to US, from: -3
(In thousands of people)
Mexico
Change in GDP, in:
0.08
(% change from base)
Real Wages for unskilled workers in:
(Change in $)
Real Wages for skilled workers in:
(Change in $)
Remitances from immigrants in US to:
(percent change from base)
Change in Trade Balance, Millions
Rest of LA
3
Rest of LA
-0.02
US
-0.04
Canada
-0.06
China
-0.05
India
-0.01
US (Native) US (Mexican Migrant) US (LA Migrant) Mexico Rest of LA China
-17
-10
-10
5
-1
-0.3
-45
Mexico
0.40%
Rest of LA
0.5%
Mexico
-408
Rest of LA
528
US
282
8
-1.5
-1.5
Canada
184
China
-1204
India
-135
India
-0.1
-0.13
Interpreting the Results and More



Key Findings
Interesting sectoral details
Areas for further research
Key Findings



Migration scenarios have impacts that are an
order of magnitude greater than trade scenarios.
Therefore NAFTA studies that ignore labor
markets miss the primary driver of integration
and the primary source of both gains and
conflict.
Trade impacts of migration scenarios can also
be large, confirming that a model incorporating
both channels is important to understanding
either phenomenon.
Deportations




Massive deportations of 4 million skilled and unskilled Mexicanorigin workers would lead to a sharp economic contraction in the
US. US GDP falls by 1.2% (around $130 billion).
Mexico’s initial GDP gains from more labor must be balanced
against the foreign exchange and development impacts of reduced
remittances. A $9 billion trade balance adjustment (increase
exports and decreased imports) is needed.
Distributional impacts are mixed in the US, with modest gains for
low skilled labor (under $50/year), greater gains for skilled labor,
and losses of 0.5% of capital income and 1% for landowners.
Wage declines in Mexico are similar in magnitude, but greater in
percentage terms. Capital and land owners gain, but modest
amounts (0.2% and 0.5%, respectively).
Tighter Border Controls




Tighter controls cannot reasonably halt migration. Our
benchmark was to “deter” about 1 million unskilled (and
0.5 million skilled) migrants, 375 thousand from Mexico
and 580 thousand from the rest of Latin America.
The macro impact on the US and Mexico is less extreme,
but still very significant. US GDP declines by 0.4% (nearly
$50 billion), while Mexico’s increases by 0.6% (just 6
billion) and GDP for rest of LA rises by ¼ percent ($4
billion). This differential of nearly 5 to 1 between gains
and losses illustrates the global efficiency of migration.
Distributional impacts are similar, but are now born
disproportionately by low skilled labor.
Modest impacts on “rest of LA” as a whole clearly obscure
large negatives for some small Central American and
Caribbean countries.
Legalization



Legalizing existing migrants creates large gains for the
US (0.6% of GDP), with only modest GDP declines in
Mexico (0.3%) and rest of LA (0.1%).
Migrants themselves are the big winners, with modest
declines for other US workers.
Even the modest negatives above rest on an increase in
immigration in response to legalization (about 350,000
low skilled workers, 150,000 from Mexico). Studies
(Dallas Fed 2001) did not indicate such an increase
immediately before and after IRCA in 1986.
Weaker Border Controls


Compared to legalization, the US gains less (0.5
versus 0.63), unskilled US workers lose more
($67 versus $50), and Mexico and rest of LA
lose more (0.7% and 0.3% versus 0.3% and
0.1%).
Additional migration inflows are three times
greater, explaining why costs to Mexico and rest
of LA are about three times higher.
Interesting Sectoral Details



Tigher border controls reduces output in all US
sectors, in the long run.
In dollar terms, output falls by more than $2 billion in:
Other processed foods, leather-wood-paper, Chemicalsrubber-plastics, other metal products, motor vehicles
and parts, electronic equipment, and non-electrical
machinery. Construction falls over $5 billion, and total
capital goods production falls $9 billion.
In percentage terms, the largest declines are in textiles,
garments, transport equipment and electronic
equipment, all of which fall by more than 0.6%. Many
other sectors see decreases of more than 0.5%.
Legalization-Sectoral Impacts



One sector (other agriculture) contracts, but 13 sectors
record gains of more than $2 billion. Those with gains
above $3 billion are: leather-wood-paper, chemicals-rubberplastics, motor vehicles and parts, non-electric machinery,
and construction. Note that all of these sectors were $2
billion losers from tighter controls. Total capital goods
production rises by $14 billion.
Large percentage gainers besides those noted in the last slide
are: Ferrous metals, trade and transport, and government
and misc. services.
Note that there are three potential effects in this scenario—
labor supply, income, and productivity. Each can influence
sectoral output, in potentially offsetting ways.
Weaker Border Controls-Sectoral
Impacts


The usual suspects gain, with the largest absolute gain
in construction and the greatest percent gains in textiles
and garments.
On the Mexican side, large absolute contractions of
about $1 billion are seen in trade and transport, nonelectrical machinery, and electronic equipment. In
addition, large (<1%) percentage reductions can also be
seen in: textiles, ferrous metals, other metal products,
and motor vehicles and parts. In contrast, no sector
experiences a contraction of ½ billion or more in the
legalization scenario.
Notes for Further Research

First and foremost, this is a comparative static
model. Many of the interesting questions
related to NAFTA involve looking at transition
periods and impacts of policies on economic
growth. This model is not well suited to those
tasks, hence our long-term goal is to make the
model dynamic.
Notes for Further Research 2

Following on the above point, the model
assumes integrated, national labor markets for
both high and low skilled labor. Even before
making the model fully dynamic, introducing
more realistic labor market frictions could allow
us to address some adjustment issues with
respect to our trade and migration scenarios.
Notes for Further Research 3

A huge advantage of this model is that it is
based on a standardized, consistent international
data set, over many countries and sectors. Thus
the users can “dial in” the combination of
countries/regions-sectors they choose. The
disadvantage is that one cannot introduce the
most up-to-date data on a particular relationship,
such as US-Mexico-Canada migration, from
North America-specific sources.
Appendix
16- mineral products = 34
17-ferrous metals = 35
18-Other metals and products = 36+37
19-motor vehicles and parts = 38
(1-7, primary products)
20- transportation equip = 39
1-Irrigated ag in Mexico (Mexico’s CA) = 4+6
21-Electronic equipment = 40
2-Traditional ag in Mexico (US/Canada CA)=
22-Non-electric machinery and equipment = 41
3+5+7
23-other manufactures = 42
3- Animals and animal products = 9,10,11,12
(24-29, services)
4-Other Ag = 1,2,8
24-utilities = 43,44,45
5-Forestry and fisheries = 13+14
25-Construction = 46
6-“raw” energy = 15,16,17
26-Trade and transport = 47,48,49,50
7-Mining = 18
27-high-tech services (finance, insurance,
(8-23, manufactures)
real estate) = 51,52,53,54
8-other processed foods = 19,20,21,22,23,25
28-Government and misc services = 55,56
9-Sugar = 24
29-Dwellings = 57
10-beverage and tobacco = 26
11-textiles = 27
12-garments = 28
13-leather, wood and paper products =
29,30,31
14-“refined” energy = 32
15-Chemicals, plastics, rubber = 33
Our 29 sector definitions related to the 57
sector GTAP “base” data set:
Questions?