Monday, 4 February 2013

On Pandemics, Immigrants and Wages

Between 1347 and 1351, an outbreak of what was probably bubonic plague swept Europe. Estimates vary, but the disease probably killed 30-60% of Europe’s population, with the death toll in some areas of Italy, Spain and France reaching as high as 80%.

One interesting economic consequence of this tragedy may have been a large rise in wages. There were fewer workers being supported by the same amount of agricultural land as before. This was effectively a rise in the ratio of land to labour, which raised the marginal productivity of each worker, and therefore wages.* In some sense, therefore, the people that survived the plague greatly benefited from the reduction in population. The flipside of this, of course, is that increases in population reduced average living standards. The value of land and therefore the leverage of the landowners would go up, allowing them to exploit the workers more, and with decreasing marginal returns to labour, output per worker would fall.

This scenario has interesting parallels with immigration. Opponents of immigration suggest that higher immigration will have the reverse effect of the Black Death. The supply of labour will go up, the ratio of capital to worker and therefore productivity and wages will fall, and people will be worse off. The immigration literature, on the other hand, does not show much evidence of these effects.

This is because the world we live in is very different to the world of the 14th century. Back then, almost everyone worked in the agricultural sector. Particularly in Europe, virtually all of the capital stock was in the form of land.** Obviously, it’s (almost) impossible to make more land if we have more workers, so adding more workers in this scenario results in a falling capital-to-worker ratio. But today, most capital is not land or even natural resources. Most capital takes the form of office blocks and machinery and educated workers. Increasingly, capital is crystallised labour, not a fixed and finite resource. What that means is that when the marginal productivity of capital rises, the rising price of capital provides a signal to the market that it should make more. If the number of workers doubles, we can simply build twice as many schools and office blocks and factories, and (in the long run) everyone is almost as productive as before.

Then there is the basic Smithian economies of scale argument. There was very little specialisation in medieval Europe, because most people were farmers. Adding more farmers just meant more people doing the same job. But today’s industries have many opportunities for specialisation, so the benefits to larger, deeper markets are substantial.

The world of the Black Death also had many fewer spillover effects from immigration. Economies of scale were low. Serfs’ productivity wasn’t dependent on the productivity of the other serfs on the farm. Now, however, we live in a world that looks much more like Kremer’s ‘O-Ring’ modelof development, where worker productivity depends on the success of their colleagues. The implication of this model is that grouping large numbers of people together in one place agricultural labourer’s productivity does not necessarily affect another labourer’s productivity all that much. It’s notable that in sectors like academia and technology, incumbents are very supportive of immigration, even though immigrants would compete with those workers. This is likely because workers in these high-skill industries complement each other and make everyone more productive. More academics also means more people working on the technological discoveries that accelerate the development of humanity.

Population density also has different implications than it once did. Too many people clustered together in the 14th Century meant breeding grounds for squalor and disease. These days, density means reduced impacts on the environment, increased social and economic opportunities, and (most importantly) more great restaurants.

‘It’s a global market’ is often a weasel phrase deployed to assert that ‘this time is different,’ painting reasonable economic concerns as antiquated scaremongering. But the world really has changed. It’s not the Malthusian dystopia it was prior to the industrial revolution. Worryingly often, proponents of immigration restrictions treat it as though it were one.

*Under serfdom, marginal productivity might not have had much effect on wages. The shortage of labourers, however, meant that there was less incentive for landowners to enforce the system, and far more incentive to compete with each other to attract workers with higher wages. So serfdom began to break down during this period. The Black Death had a lot of fascinating historical and political implications outside of the economic story I’m focusing on today.

**The implication of this is that big exogenous population declines would have had less of an effect in places like Egypt and China, where farming methods relied much more on capital-intensive methods of irrigation. I’d be very interested to see data on this.

PS: Happy #ImmigrationTweetDay, all!

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