Why the Economic Theory of the Free Movement of Labor Doesn’t Work

A colleague and friend of mine regularly espouses that the United States should have open borders. That sentiment extends not just to the United States, but to all countries of the world. Why you might ask? Is he crazy? No, he is not crazy. He is professor of economics, holds a PhD, is a well-regarded researcher, and has published numerous academic papers. He is a smart guy.

So why would he suggest something that many of us would intuitively think “not such a good idea.” The answer lies in economic theory. Much of today’s free trade among nations is built upon economic theory. There are two theories that support the free movement of labor. The first theory is that labor is just another component of production, like materials and capital. Capital can clearly move around the world, to places where that capital can be best put to use, and where it can earn the best return. The movement of capital has never been easier than it is today (you don’t have to load gold bars onto a ship and hope the gold gets to its destination). Capital can be transferred from you to almost any place in the world, electronically, within minutes (or at least within 24 hours).

The same rules apply to materials. While materials cannot (yet) be sent electronically, a metal sheet in Brazil can just as easily be formed into a car fender as it can in Detroit. Therefore, materials move across the globe to locations where those materials can be incorporated into products to meet consumer and industrial demand. From raw materials (such as logs, crude oil, and iron ore) to semi-finished materials (such as plywood, plastic, and steel) to finished goods (furniture, toys, and cars) materials circle the globe. Materials move to places where they can be incorporated into finished goods at the lowest cost, and then those finished goods move to those places where demand for those finished goods exists.

The second theory is that all countries would prosper with the free movement of labor. As an example, an unemployed person in Guatemala, where there are few jobs, could move to the United States, where there are plenty of jobs. That would take pressure off Guatemala, a country with limited social safety nets for the unemployed, and help the United States, a country whose productivity is constrained by shortages of labor.

Win win, right? Well not so fast. What if the United States were overwhelmed by workers flooding here from across the globe for job opportunities. Wouldn’t that cause a problem? Not according to economic theory. At some point it would become apparent that the job market in the US was not as good as it once was, and further, that labor moving to the US would keep wages in the US down. At the same time, back in Guatemala, there would at some point be a shortage of labor, causing wages to rise. Then, some of those people who had moved from Guatemala to the US would begin to move back, to take advantage of the rising wages and job opportunities in their homeland.

From an economic theory perspective, money, materials, and labor move freely across the globe, improving global efficiency and delivering increased prosperity to all. Anyway, that’s the theory. But it doesn’t work. Why? Because human capital is different than money and materials. A dollar in Singapore is the same as a dollar in Tokyo. A sheet of plywood is just the same in Canada as it is in Brazil. But the two hands that deliver “labor” in the United States is not the same at the two hands that deliver labor in China. Why? Because attached to those hands are a body and on that body is a head, and in that head is a brain, and because that body has a brain it is subject to all the uncertainties, biases, emotions, beliefs, desires, and actions inherent in human nature itself.

Forgetting about the risk of open borders from uncontrolled immigration, let’s just focus on a worker who made the trek from Guatemala to the US. Carlos arrived in the US and got a great job in Colorado Springs working for Amazon. While here he met a nice lady who also works at Amazon. She is from Columbia. They fell in love, got married, had two children, and bought a house.

Ten years later, he gets a call from Jose. Jose was a school mate and the two have stayed in touch through the years. Jose stayed in Guatemala. After Carlos left, huge deposits of lithium were discovered in Guatemala. With the demand for lithium for batteries, the Guatemalan economy took off. Jose now tells Carlos that if Carlos comes back to Guatemala, he can earn double what he earns in Colorado Springs working for Amazon. At the same time, Amazon has continued to automate, and while Carlos still has his job, about half of the workers in the Colorado Springs facility have been laid off.

The question is will the theory of the economists hold true? Will Carlos, along with thousand or tens of thousands of workers pack up, leave the US and scurry back to Guatemala. Human nature suggests not. When people decide to move from one location to another for economic reasons, the decision is not based solely on money. Other factors that come into play are family, friends, community, safety, entertainment, health care, education and even weather. And to prove that all you have to do is look at California. As someone who lives in California, I constantly hear moans and groans about the high cost of real estate, the gas prices, the food prices, the regulations and the state income tax. But when I suggest the people doing the groaning consider moving to Texas, Colorado, or Florida the answer I get almost always something to do with California’s weather.

The reality is that my friend’s economic theory will not hold true because as mentioned previously the flow of labor is much more complex than the flow of money and materials around the globe. Economic theory sounds great – but I’d rather plan the United States immigration policy (and other policies too) based on the fundamental basics of human nature. And you can’t put those into an economic equation or regression analysis.