Decoding "Good Economics for Hard Times" by Abhijit Banerjee and Esther Duflo

Hello everyone and welcome back to another blog at EcoDecode. Today’s episode is going to be a little bit different. I am reading a book called ‘good economics for hard times’ by 2019 Nobel prize winners Abhijit Banerjee and Esther Duflo. I have found this book so interesting that I am sharing a chapter wise summary for you.

This section on immigration challenges two common misconceptions surrounding the movement of people. Initially, it contests the notion that migrants primarily relocate for economic reasons, emphasizing that their decision is often compelled by challenging circumstances rather than mere economic incentives. Secondly, it highlights that migrants, upon settling in a new area, typically contribute positively to the local economy, improving the quality of life for both themselves and the existing residents. This positive impact contradicts the traditional supply and demand principles, which might suggest that an influx of inexpensive labor would depress wages and displace native workers. However, this simplistic supply and demand framework does not entirely align with the complexities of immigration. Research consistently demonstrates the influence of six key factors when individuals decide to move, illustrating that the dynamics of migration extend beyond conventional economic reasoning. The reason why people overlook facts is rooted in an economic idea that seems so obvious that many struggle to look beyond it, even when evidence suggests otherwise. The economic analysis of immigration often simplifies to a tempting argument: There are many poor people in the world who would clearly earn more if they could come to a better place (wherever that may be). So, the assumption is that given the opportunity, they will leave their current location and come to our country, leading to lower wages and making life worse for those already here.

Perhaps there isn't a mystery here; maybe we overvalue the advantages of migration. A significant issue in evaluating the benefits of migration is that we typically only consider the wages of those who decided to move, overlooking the numerous reasons that prompted their decision and the various factors that enabled their successful relocation. Individuals who migrate may possess unique skills or exceptional endurance, leading to higher earnings, even if they had stayed in their home country. Although migrants engage in tasks that don't necessarily require specific skills, many of their jobs involve strenuous and demanding labor, such as construction or fruit picking (common jobs for Latin American migrants in the United States). These roles demand considerable stamina and patience, and not everyone can sustain such work consistently. Why doesn't the traditional supply-demand theory (where more supply leads to lower prices) apply to immigration? It's crucial to understand this because, even if it's evident that immigration doesn't necessarily impact low-skill wages, we need to know why. Otherwise, we'll always question if there's something unique about the circumstances or data. Several factors come into play that the basic supply-demand model overlooks. Firstly, when a new group of workers arrives, it usually boosts demand, counteracting the downward slope effect. These newcomers spend money on things like dining out, getting haircuts, and shopping, creating jobs—mostly for other low-skilled individuals. This tends to raise their wages and potentially compensate for the shift in labor supply, keeping wages and unemployment unchanged.

A second reason why low-skilled migration might push up the demand for labor is that it slows down the process of mechanization. The promise of a reliable supply of low-wage workers makes it less attractive to adopt labor-saving technologies.

Another important point is that employers might rearrange how they produce goods or services to effectively utilize new workers, leading to the creation of new opportunities for local workers with lower skills. In the example from Denmark, low-skilled Danish workers ultimately gained from the arrival of migrants, as it allowed them to switch to different types of jobs.The beliefs about immigration are being proven wrong. There's no proof that moving to wealthier countries for low-skilled jobs reduces wages and jobs for locals. Labor markets aren't like fruit markets, and the usual rules of supply and demand don't apply here. The explosive part of immigration is the idea that there's a massive number of potential immigrants, a flood of strangers with different languages and customs ready to overwhelm our borders. However, there's simply no evidence of such hordes waiting to enter. In reality, unless there's a disaster pushing them out, most poor people would rather stay in their home countries. They aren't actively seeking to come to our countries; they prefer their own. This fact is so surprising to people in wealthier countries that they often refuse to believe it, even when presented with the facts.

And that’s it! That brings us to the end of this episode about the big idea of migration discussed in the book good economics for hard times. I want to clarify that all the views expressed in this episode are of the authors of the book “Good Economics for Hard times”