(This excerpt has been taken with permission from ‘Good Economics for Hard Times’ by Nobel laureates Abhijeet Banerjee and Esther Duflo, published by Juggernaut Publishing.)
What Caravan?
The myths about immigration are crumbling. There is no evidence that low-skilled migration to rich countries drives wage and employment down for the natives; nor are labour markets like fruit markets, and the laws of supply and demand do not apply.
But the other reason immigration is so politically explosive is the idea that the numbers of would-be immigrants are overwhelming, that there is a flood of strangers, a horde of foreigners, a cacophony of alien languages and customs waiting to pour over our pristine monocultural borders.
Yet, as we saw, there is simply no evidence the hordes are waiting for a chance to descend on the shores of the United States (or the United Kingdom or France) and need to be kept out by force (or a wall).
The fact is that unless there is a disaster pushing them out, most poor people prefer to stay home. They simply aren’t knocking on our door; they prefer their own countries.
They don’t even necessarily want to move as far as their local capital city. People in rich countries find this so counterintuitive that they refuse to believe it, even when faced with the facts. What explains it?
Without Connections
There are many reasons why people don’t move. All the things that make it hard for new immigrants to compete with long-term residents for jobs also discourage them from moving.
For one, as we saw, it is not easy for an immigrant to find a decent job. The one exception is where the employer is a relative or a friend, or a friend of a friend, or at least a co-ethnic: someone who either knows or at least understands the migrant.
For that reason, migrants tend to head to places where they have connections; finding a job is easier and they have help to land on their feet in the city.
Of course, there are all kinds of reasons why the employment prospects of migrants from the same location will be correlated over time; for example, if a village produces great plumbers, both recent and previous generations of migrants will be employed, and employed in plumbing.
But the pull of kinship is stronger. Kaivan Munshi, a professor at the University of Cambridge, and perhaps not coincidentally a member of the small and very tightly connected community of Zoroastrian Indians otherwise known as Parsis, demonstrated that Mexican migrants explicitly seek out people they might know. He observed that, regardless of opportunity in the United States, bad rains (disasters) have pushed people out of Mexico. When the rains failed in a particular village, a group of people left to seek other opportunities.
Many of them ended up in the United States, with the result that a subsequent migrant from the same village would have connections in the US who were securely employed and able to help him or her find a job.
Kaivan predicted that if one compares two villages in Mexico that have the same weather this year, but one of them had a drought several years ago (causing some villagers to emigrate) while the other did not, it will be easier for a resident of the village with the past drought to find a job (and also to find a better job) than for the resident of the village without the past drought.
He expected to see more migrants, more employed migrants, and better-paid migrants. This is exactly what the data showed. Network connections matter.
The same applies to the resettlement of refugees; the ones most likely to find employment are those sent to a place with many older refugees from the same country. Those older refugees usually do not know their new countrymen, but they still feel compelled to help.
Connections are obviously useful for those who have them, but what happens to those who don’t? They will clearly be at a disadvantage. In fact, the presence of some people who come with recommendations can ruin the chances for everyone else.
An employer used to workers coming with recommendations is likely to be suspicious of anyone without one. Knowing that, anyone who can get a recommendation would rather wait to get it (maybe some connection to a prospective employer will emerge; maybe a friend will start a business), and only those who know no one will ever recommend (perhaps because they are actually not good workers) will go around knocking at doors to find a job. But then the employer would be right in refusing to talk to them.
The market in this situation is unraveling.
In 1970, George Akerlof, another future Nobel laureate, but then just a fresh PhD, wrote a paper, “The Market for ‘Lemons,’” in which he argued that the market for used cars might just shut down because people have an incentive to sell off their worst cars.
That sets off the kind of self-confirming reasoning we saw in the case of newcomers to the labour market; the more suspicious buyers become of the old cars being sold, the less they will want to pay for them. The problem is the less they want to pay, the more the owners of good used cars will want to hold on to them (or sell their cars to friends who know and trust them).
Only those who know their car is about to collapse will want to sell on the open market. This process by which only the worst cars or the worst employees end up on the market is called adverse selection.
Connections are supposed to help people, but the fact that some have access to them and others do not may actually shut down a market that would function just fine if no one had connections.
The playing field is level if there are no connections. Once some people have connections, the market can unravel, with the consequence that most people become unemployable.
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