Background
In China, people gets assigned to a registry (a city or a town), which determine what benefits they are eligible to. For example, your registry in Shanghai will entitle you to the public education system in Shanghai. If your registry happen to be not in Shanghai, but you happen to work in Shanghai, will unless you find some way to change it or work out some other way, it is going to be a lot of trouble for you. Your choice will be limited, you might need to pay for some of the choices others can enjoy for free, and there might be a longer line for some services. The gist of the problem as many see it is that there is underprovision of public service to migrant worker. They ask, why is there a differential treatment to people? Why are people not born equal?"Walls" of Social benefits
The short answer is, people are never born equal.I am talking about eligibility for social benefits here. If you look around the world, there is huge discrepency in social welfare. Some countries are doing great--Denmark is an example, but no one in his right mind would suggest that Denmark should extend its benefits to people from all over the world. In fact, Denmark would not allow people from all over the world to migrate there freely. Many people migrate to work in other countries, and it is very common to find themselves excluded from the social benefits in the other country (they pay the taxes, by the way), in addition to lots of obstacles in finding a job. I do not wish to dwell on this too much, but it suffices to say that countries do set up walls for social benefits.
Beyond Country Level?
It makes people less comfortable when it goes beyond country level. Now let us look at the data. The following graph plots different countries and different provinces in China, on a two dimensional graph, showing their GDP per capita and life expectancy. It shows the amount of heterogeneity among different provinces in China.www.bit.ly/aV32Mn
As you can see, the country China is like a miniature world (excluding the poorest niche). If it is reasonable for different countries to set up walls of their social benefits, then the same goes for a country like China. In fact, this graph underestimate the amount of heterogeneity, because the biggest difference lies in countryside vs. cities, and thus by mixing them together, some heterogeneity is lost.
Disruptive Flows
Of course, all these are not satisfying. We still want to ask why we need walls? The answer is simple, because flows are disruptive. Flows of migrant worker, while being instrumental for the cities' development, could be highly disruptive when it is extended social benefits too quickly. Consider a minuscule case: flows of mainland Chinese to Hong Kong to shop. These shoppers like certain things a lot, and the flow is disruptive enough for Hong Kong government to impose a ban on sales of certain items to mainlanders. The truth is, supply of public benefits, adjust even more slowly, and when more people demand a slice of the pie, the slice becomes thinner and thinner.Finally, A Model and some General Equilibrium
We now consider the issue using the following model. There are two types of labor: skilled and unskilled labor. In the city, both types of labor exist and for simplicity, the migrant workers to the city are unskilled labor. What happens when we allow the flow of migrant worker to increase? The supply of unskilled labor goes up, and hence the relative wage of unskilled labor goes down. Thus, the flow of migrant worker hurts the welfare of unskilled labor while improving the welfare of the skilled labor (informally by decreasing the price of goods produced by unskilled labor, or more formally it is isomorphic to the Stolper-Samuelson effect in trade theory).In reality, the effects on welfare of unskilled labor will be cushioned by public education, health care, and other benefits provided by the local government. We consider two alternatives--1)extend those benefits to the migrant worker. 2)deny those migrant workers the benefits. If we extend the benefit, since the number of recipients increased the quality will decrease. Thus from the perspective of unskilled labor in the city, it is a double hit--their wage goes down and the public service becomes crappy. From the perspective of migrant worker, they have chosen to come to the city---via revealed preference, must have improved their life from that in their hometown. (On a side note, four years ago, I did use a Computable General Equilibrium model calibrated to model this, and it does suggest that unskilled labor in city will lose, and migrant worker will gain a little from such a flow) Empirically, the unskilled labor is much more dependent on social programs as the rich can afford private schools and now increasingly private health care. Thus, unskilled worker is the only loser in this game, and if we take the status quo as a reference point, there is a reason for denying social welfare to newcomers. What is important here is to realize that we are faced with the tradeoff between unskilled labor native to the city and the migrant worker, it is not the trade-off between rich and poor.
The reason why migrant worker will only gain a little in the model when we improve the access to social benefits is due to its general equilibrium nature. As I commented in the previous blog, we need to think general equilibrium when we consider a policy. Now consider the following shock: we give migrant workers more benefits. What will happen? In the short run, migrating to the cities to work becomes more attractive, and thus, more people will flow into the city, bidding down the price, and adding to the burden of social programs--ultimately these two forces will make working in the city less attractive to induce more flows. These two forces work on the unskilled worker in the city as well, and there is no initial positive shock to counter it--in fact, they only have an initial negative shock. I suspect, this general equilibrium consequences are never in people's mind when they discuss this issue.
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ReplyDeleteI am not sure if immigration limitations are justified with the utilitarian framework and maybe even less with other schools of moral theory. With probability weighting and risk aversion factored in, would we have preferred a world with so much inequality as we do now? And that applies to within-country inequality as well.
ReplyDeleteI am also very curious what the effect to the world economy would be if we allow free immigration and, on a smaller scale, what would the effect to the Chinese economy be if the registry system is abolished. In the process of reform there may be disruptive flows, but the ultimate state seems to be a better allocation of resources and talent. Dramatic reforms can be very problematic but that's not the same question as which direction we should take. Similar to US immigration, perhaps registry reform can take small steps like with emigration of relatives first, skilled immigrants first, and then slowly expanding to the unskilled population.
Haven't read any of the literature in the registry discussion so just some thoughts.
From a policy point of view, we need to consider the short-run consequences of reforms. This is because negative short term consequences might cause political backslash, chaos, and instability in general, which would compromise any good intentions. As for immigration and registry, the problem involves welfare distribution. The existing system relies on the demographic composition as it is, but changing the demographics, might crack the system completely. The political process of welfare distribution has the element of rent-seeking in it, and the system as it is balances the effect of rent-seeking and social safety net. When this balance is disturbed, it is not clear if we will be able to get back, because of problems of hysterisis. That is why we see countries with populist government, trapped in demogogue politics, like Greece, and some Latin American countries.
DeleteI think the most important thing is we do not know what will happen with a drastic change. That is why we need to be cautious. We can discuss comparative statics, but we have no idea what will happen during the time things adjust, and if all else could be the same after it adjusts. We proceed with incremental steps, crossing the river by feeling for the stones.
Let me go back to the mockery example of HK. Opening HK to mainland visitors would be welfare improving in a simple framework. The problem is with opening up, this generates too much antagonism, and the experience of the visitors got much worse. The flow reached a critical point that generates all these antagonism. It would be much better if the flow were allowed to increase more slowly, giving HK people the time to adjust. The reason I call this a mockery example is because one would think tourist flow is such a trivial thing. But as it turned out it is not. This should give us some warning for more far-reaching policies.
Yeah I agree on moving very conservatively in policy reforms. On an unrelated note, this may be a great defense of the merits of US politics. Everything moves so slowly and the status quo is very rarely disrupted. They call it "gridlock" but it might be a good thing to some extent.
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