Place premium

The concept of the place premium refers to the increase in earnings (usually PPP-adjusted) of a given person when that person migrates from one place to another, without any increase in the person’s skills or human capital. Roughly speaking, it addresses questions like: if a construction worker crossed the border from Mexico to the United States and took a job with comparable hours and using the same skill set, how much would the person’s pay increase? Research suggests that in most cases, a person crossing the border to do the same job would instantaneously double their income, if not more. (On that note, see double world GDP.)

A good starting point for understanding the place premium is a working paper titled The Place Premium: Wage Differences for Identical Workers across the U.S. Border – Working Paper 148 (link to webpage, PDF linked to from there) by Michael Clemens, Claudio E. Montenegro, and Lant Pritchett. From the online description:

Are your wages determined by what you know, or where you live? This paper compares the wages of workers inside the United States to the wages of workers outside the United States. Comparing wages alone isn’t enough, because workers in (say) Bolivia could differ from workers in the U.S. in many ways—some of them easily observed, such as their level of education, and others less easily observed.

The concluding paragraph of the online description states:

The implications of these enormous differences are profound: (1) these gaps represent one of the largest remaining price distortions in any global market; (2) for many countries, the wage gaps caused by barriers to movement across international borders are among the largest known forms of wage discrimination, typically much larger than wage discrimination based on ethnic group or gender within spatially integrated labor markets; and (3) these gaps imply that simply allowing labor mobility can reduce a given household’s poverty to a much greater degree than most known antipoverty interventions inside developing countries.

Nancy Birdsall also discusses the paper in a blog post titled Clemens’s Place Premium Tells Incredible Tale of Global Non-Market in Labor.

Because of the massive wage gaps created by global barriers to human movement, open borders advocates sometimes compare closed borders to laws imposing racial segregation; see No blacks need apply.

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