Another way to resolve global imbalances: migration

Today’s Financial Times has a very interesting article describing the exodus of jobless young people from Ireland (unemployment rate 14.5%) to work in places like Australia (unemployment rate: 5.1%). Could America and other rich nations learn something from this story?

Ireland is suffering from the aftermath of an overwhelming inflow of capital—particularly from Germany—that could not be productively invested. This was exacerbated by excessively loose monetary policy at the European Central Bank.

The result was a sharp rise in real Irish labor costs (nominal wages divided by productivity) relative to those in the more competitive northern European nations. The declining competitiveness of Irish industry was masked by the booms in building and finance, both of which subsequently collapsed.

To make matters even worse, Ireland remains stuck in the eurozone. Unable to regain competitiveness through a currency devaluation, the Irish have been forced to reduce labor costs through wage cuts, which increase private debt burdens in real terms. The result has been high unemployment and an economy that is still more than 18% below its pre-crisis peak.

Understandably, many Irish, especially those without jobs, are looking abroad for work. Meanwhile, tens of thousands of immigrants who had come to Ireland during the boom years are going back to their own countries.

The people who are leaving Ireland are generally those whose skills matched the demands of their country in the boom but who cannot find work now that the economy has bust:

Most people at the expo were under 45 years old, the demographic hit hardest by the recession and most at risk of unemployment. Many were former construction workers, who had  no prospects of finding a job at home.

Brendan Curtis said he had been a bricklayer until 2008, when work dried up. He had been working as security guard but recently received an Australian visa and plans to travel to Perth, Australia, in February.

“I’m going because I want a better life for my family. I would like my son to  go to school in Ireland but we will see how it goes over there,” said Mr Curtis,  as he pushed his one-year-old son around recruiters’ stands.

The FT article makes a compelling case that this is a positive development for both the Irish who stay in Ireland and those who leave:

“Putting aside the emotional side of emigration, it is better for the country and the individual to go abroad and work than stay inactive at home,” said Alan Barrett, professor at Trinity College Dublin. He said workers were better off going abroad than staying inactive at home, and that evidence showed returning workers could gain a wage premium for new skills.

“People’s skills become depleted when they aren’t working and there is evidence to show returning emigrants in the past enjoyed a wage premium of up to 7 per cent when they returned to the workforce because they had acquired new skills,” he says. Emigration also saves the state a lot in social welfare payments, he added.

In many ways, the Irish story mirrors the American one. Excessive capital inflows degraded American competitiveness by pushing the real exchange value of the dollar above a sustainable level. Faced with the choice of running large trade deficits or enduring high unemployment, the Federal Reserve opted for loose policy that created bubbles but made the economy appear stable.

Ireland’s government finances are in worse shape than ours because they do not have sovereign control over their own currency. Despite our apparent advantage in this regard, we too seem to be unable to improve our competitiveness through devaluation. That is because the countries that rack up the biggest trade surpluses with the U.S. are all currency manipulators. Together, they spend hundreds of billions of dollars every year to prevent the dollar from reaching a sustainable level. We might as well be trapped in the eurozone.

Yet despite these similarities, we do not see many Americans leaving to find work in other countries. In fact, quite a few prominent voices argue that the United States can improve its overall employment situation by letting more job-seekers in.

Put aside prejudices about the topic of immigration—countries like Ireland and the United States do not have enough jobs relative to their populations. Meanwhile, other countries do not have enough workers relative to the job opportunities their economies are creating. If people in the countries without enough jobs moved to countries without enough workers, everyone would become better off. Outside of the United States, this is already happening.

The U.S. is home to more than one-fourth of those who lost their jobs during the crisis. If they were free to move to the world’s rapidly growing countries they could find gainful employment and take advantage of the lower cost of living to secure a reasonably comfortable lifestyle. Differences in language and culture would present challenges for these migrants but surely none greater than those faced by earlier immigrants to the United States.

So why aren’t more Americans leaving to find work?

This is not as odd an idea as it may sound. Historically, the workers of the world could and did move to wherever there were jobs.

Britannia has been a net exporter of its people for hundreds of years. The frightful Dickensian visions of industrial London did not endure because the British poor decamped for more promising locales whether in Brooklyn, Brisbane, or Bombay. Overcrowding, poverty, and social upheaval were prevented through the safety valve of emigration.

Just as emigration in Britain balanced population growth with productivity growth, immigration in the United States—particularly between the end of the Civil War and the start of WWI—matched a rapidly growing economy with ever more workers.

Unfortunately, today’s large dynamic nations are not as welcoming of newcomers as America once was. One way or another, the imbalances these countries have created have to be resolved. They can allow the free flow of capital and stop manipulating their currencies and financial systems, or they can allow the free movement of labor and let in the millions of unemployed from the United States and Europe. The choice is theirs.

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About Matthew C. Klein
I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.

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