This entry is about a letter a friend sent to me. I think its pretty good so I decide to share it. This does not imply that I share the view. I choose to keep my opinion regarding this issue secret as it can be a sensitive issue.
He argues that Singapore needs foreigners from a academic perspective using economics. Mind you my friend is a straight As economics major student. The letter was writtern to me and the format was rather informal, but I hope you guys will enjoy it.
"I believe that (i) foreign labor does not result in fewer jobs for local employees in the long run, (ii) free trade in commodities, of which labor is considered part of by the economists, results in net gains in welfare for both countries. Although there will naturally be individual winners and losers in trade, on balance, using an economics accounting trick to define welfare, free trade increases the total welfare of all individuals that make up society.
There is neither empirical evidence nor theoretical logic to support the notion that the influx of foreign labor results lost jobs for Singaporeans. When a foreign worker displaces a local one, he does so only by offering to work harder for lower wages. Two things happen. First, the local worker suffers by reducing his wage demand in the long run. This ensures that employment returns to its original rate, at the expense of the local worker’s wages. Second, the lower wages and productivity results in cost savings and greater profit for the employer.
Flexible wages ensure that both the local and the foreign workers are employed. Wage adjustments may be impeded in the short run. However, given an extended amount of time, there really isn’t any reason why wages shouldn’t fall to equilibrate supply of labor to demand.
Lower wages are painful for the local workers in the short run, especially if the prices for the product they make remain high. However in a perfectly competitive market, it can be mathematically demonstrated that to maximize profit, the employer must pay the local laborer just enough to allow the employee to buy back his produce. This follows by sheer logic from the assumptions we make about perfect competition.
But aren’t these assumptions questionable? Yes and No. It is possible to relax the stringent assumptions of perfect competition and construct alternative models of labor markets. Economists spend half their lifetimes twisting and turning these assumptions over and deriving the conclusions that must follow from them. However, economists spend the other half of their lives testing these alternative models with real world data. This is equally important. If we want to discuss real world issues on the basis of logic, it is essential that compare our theories with evidence from the worlds that exist outside our minds.
And were we to test these alternative models with the data, we would generally find that none of these models come as close to describing the real world as well as the aforementioned perfectly competitive model. The assumptions of perfect competition are not perfect, but given these assumptions, the conclusions we can draw from these postulates are unmatched by any other combination of assumptions we may like to make.
Paul Krugman is the Nobel prize winning economist of 08’. He has spent a lifetime examining these issues we were discussing. Many regard him as a closet socialist and he certainly is no stooge of our government. Yet when it comes to matters of trade, he is unambiguous clear on this: trade has little effect on real wages.
http://economistsview.typepad.com/economistsview/2008/02/paul-krugman-tr.html
But even if we drop the assumptions of perfect competition, it is by no means necessary that a job for a foreign laborer necessarily results in one job less for the local populace. Say a shoe manufacturer makes an additional dollar of profit per month by hiring a foreign worker over a local one. Even if the local worker were unable get back his job in his old shoe industry for whatever reason, the additional dollar of profit made by the employer must be saved or spent. Currency is always conserved, never created or destroyed. Should the employer choose to spend the additional dollar on something else, say clothing, this merely results in an additional job for the cloth maker. Should the employer save the dollar in his bank account instead, that merely adds a dollar to the supply of loanable funds available for new investment or consumption. Modern finance ensures that deposits in banks are constantly reinvested into the economy. This reduces interest rates on loanable funds, increasing borrowing and spending on another item. The job lost by the shoe employee can be compensated by a job created elsewhere.
Say the local shoe employee is rehired at a lower wage, but there are only two shoe manufacturers in the market. Wouldn’t the price of shoes remain high? Wouldn’t the shoe employee be unable to buy back his produce? Not necessarily so. Because even without an infinite number of competitors, there is an incentive for each firm to make additional profit by stealing his rival’s share. The existence of an extra dollar’s worth of profit allows each shoe manufacturer to undercut its rival share by selling a pair of shoes for a lower price. This in turn forces the other manufacturer to respond by cutting his price to. Both manufacturers cut the price of shoes until the initial extra dollar of profit is reduced to zero. The shoe employee is able to buy his shoes again! This is actually a famous game theoretical result, known as the prisoner’s dilemma.
http://en.wikipedia.org/wiki/Nash_equilibrium
The purpose of these simple examples is not to assure you that our jobs are not threatened by foreign labor. I merely wish to illustrate a point - just because the assumptions of perfect competition may not be realistic, it by no means follows, as a matter of pure logic, that foreign immigration must result in a net loss of jobs for Singaporeans. These issues are subtle and complex-they can’t really be settled by personal stories told by our relatives and friends. Statistical evidence is vital to separate myth from fact in this case.
Nevertheless, I don’t support free trade because it is economically efficient. I don’t support free trade because I think it benefits me or my friends. I support it because it has lifted millions out of poverty in China, India and many parts of South-East Asia. I take it as a matter of principal not to differentiate against foreigners in all forms, even in spite of my personal tastes. Unfairness to me takes many forms, including the belief that somebody in government should ensure that Singaporeans will preferential treatment in the job market ahead of a foreigner simply because he had the misfortune to be born in Timbuktu or somewhere else. This is a personal and philosophical/emotional stance for me rather than a logical one."
I know it seems like a wall of text, but from an economic perspective its rather interesting.
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