Brain drain or circulation?

From the perspective of international relations, a significant argument put forward for slowing down the global liberalisation of the labour market is the brain drain concern. The 'brain drain/brain gain' debate has continued for the past 40 years, with some irresolvable disputes and unenforceable policy recommendations (Vinokur, 2006). The concerns for developing countries tend to be most pronounced, with fears that national economic development may be adversely impacted by the loss of the most skilled workers. Nonetheless, some developed countries such as Canada also have concerns, with skilled workers flowing to the US. A loss of skilled workers is also a concern in the debate about trans-Tasman migration that at regular intervals of about five years (primarily linked to business cycles in Australia and New Zealand) leads to significant net movement of New Zealanders to Australia, with presently about 10 percent of the New Zealand population living in Australia (Poot and Sanderson, 2007). The brain drain is believed to widen the economic growth differential between sending and receiving countries and make it harder for the migrant sending country to 'catch up' (Bushnell and Choy, 2001; Gera et al., 2005).

There is some empirical evidence of significant adverse brain drain impacts. For example, skill depletion in the sending country is evident in the case of the Philippines where the success in exporting nurses, particularly the best educated and most experienced, created a major crisis in the delivery of healthcare in the country (Chia, 2006).^[16] Empirical evidence of the brain 'drain' or 'gain' issue has also been studied by Baruch et al. (2007) in the context of management studies students from developing countries undertaking study in the UK and US. The authors find that only 30.5 percent of the foreign students intend to go back to their home countries when they finish their university education, while initially very few students had the intention to stay permanently. In addition, about 40 percent of students believe they will stay for a considerable amount of time. The study found that the main factors that influence whether students leave or stay are: the perception of the labour market in the host country, students' adjustment process to the host country, and family ties of the students in both host and home countries. Furthermore, it was found that those students from countries that have a greater cultural distance with the developed country, such as China, Taiwan and Thailand, are more likely to return home. It was found that those from India are likely to stay in the host country longer as they have a smaller cultural distance, due to the 'British Raj' phenomenon.

If a brain drain problem exists, then this can be alleviated by embracing the 'brain exchange' or 'brain circulation' concept. This will help to alleviate the increasing demand for skilled labour along with helping the economies of all the countries involved. An exodus of workers might alleviate labour skill shortages in labour-importing countries, while leading to a short-term brain-drain for the donor countries. However, there will be remittances in the short-term and in the long-term there may be some reversal of the brain drain, particularly with improvement in economic conditions. In addition, increasing flows of FDI requiring skilled professionals may result in significant labour mobility from developed to developing countries, as well as flows among developing countries (Chia, 2006). The brain circulation will also result in knowledge spillovers, bringing benefits to both sending and receiving countries. Spillovers come from higher innovation, productivity and growth across industries (World Commission, 2004; Gera et al., 2005; Welch and Zhen, 2005).

As discussed earlier, skilled workers may need assistance and incentives to move between countries, for example through gaining dual citizenship, multiple entry visas or tax breaks. An aspect that needs to be taken into account during trade negotiations is therefore the ease with which migrants can return to their home countries and this is especially important in the poor country case. The idea here is that of 'skill circulation' between countries. A possible consideration is that of dual citizenship, which needs to be approved by both sending and receiving countries. This would mean that people can very easily re-enter both countries. Another way would be to look at tax or other monetary incentives, which will encourage the return of workers to their home country (World Commission, 2004).

It should be noted that as incomes increase globally, professional workers may trade off the potentially higher earnings in major agglomerations in developed countries against a better quality of life in more peripheral places. In the global competition for highly skilled migrants (also now commonly referred to as 'talent'), countries like New Zealand cannot compete on wages, but do recruit skilled immigrants attracted to a higher non-material quality of life. DeVoretz and Iturralde (2001) make a similar argument for why skilled workers might prefer Canada over the US.

Wage and employment effects

The impact of increased migration on wages and employment will depend on a number of factors, including the share of foreign workers in the economy, the elasticity of substitution between capital and labour, and also the elasticity of substitution between native and foreign workers (World Bank, 2006). Most attention is given to the negative effects on wages and employment due to immigration. The recurring arguments are that immigrants may compete in labour markets with the native-born workers, native workers may be displaced, or real wages may be pushed down (Friedberg and Hunt, 1995).

Mayda (2006) investigates immigration attitudes across countries and provides evidence that both economic and noneconomic factors matter in terms of explaining attitudes to immigration. She finds that skilled individuals tend to favour immigration in countries where native workers are more skilled than immigrants. This is not surprising, given that attitudes are likely to be shaped by the impact on factor prices of relative changes in factor supplies when immigration occurs. Relatively scarce factors typically command higher returns and, assuming that skilled and unskilled workers are complements, an inflow of unskilled labour will raise the relative wages of skilled workers (Mayda, 2006).

In an important study, Borjas (2003) finds evidence that immigration harms employment opportunities of the native-born workers in the US to some extent. He finds that a 10 percent supply shock, due to immigrants, reduces weekly earnings by approximately 4 percent. Borjas does point out some caveats to his findings. Firstly, his analysis did not look at the long-run capital adjustments which may have been caused by immigrants and capital-skill complementarities may be important. Moreover, high-skill workers (such as scientists and high-tech professionals) may have been an important factor in endogenous technological change. It can also be argued that the Borjas study clearly identifies the impact of the supply shock, but does not take account of the change in aggregate demand, nor a range of other responses (such as investment and inflows of capital, and the migration of natives) that can only be studied in a large scale general equilibrium model.

In a subsequent study, Borjas (2005) looks at the effect that Ph.D. immigrants have on the labour market for Ph.D.'s in the US, and finds that a 10 percent increase in the supply of immigrant doctorates in a given field causes the earnings in the field to fall by 3 percent. However, a study by Weiss (2000, as cited in Freeman, 2006b) on the effect that highly educated immigrants in Israel, finds that the flow of such immigrants from the former Soviet Union had no noticeable impact on the labour market outcomes of the skilled workers born in Israel.

Positive effects of immigration on wages are found by Parasnis et al. (2005) in their study of Australia's experiences. Their findings suggest significant and positive changes for native workers resulting from immigration: a 10 percent supply shock causes a 1 percent increase in hours worked and a 3-4 percent increase in weekly income. They also test for consistency of the effect over time, and find that this holds, mainly because immigration levels had not changed significantly over time. Similary, an important study by Ottaviano and Peri (2006) finds positive effects of immigration on wages of most US born workers.

It is argued that migration can create additional job opportunities, because migrants may increase demand in local markets (e.g., Bodvarsson et al., 2007). However, immigrants often have higher unemployment rates than the local workers, because immigrants are sometimes unable to take jobs from locals and obtain a fair wage when existing workers are entrenched in the labour market (Harrison, 1984). Miller and Neo (2003) find that immigrants in Australia have a 12 percent disadvantage in wages and also experience unemployment rates in their first year that are significantly higher than those of their native-born counterparts (see also Thapa, 2004).

The World Bank's global modelling of a three percent increase in the labour force of high-income countries, due to migrants from developing countries during the period 2001-2025, finds a small decline in average wages for high-income countries but a 'barely perceptible' impact on the long-term growth of wages (World Bank, 2006). This highlights the importance of differentiating between level and growth rate effects. As noted earlier, while migration can generate significant economic gains, opposition to migration is often driven by concerns about the social and political consequences rather than an economic calculation of gains and losses (World Bank, 2006).

Friedberg and Hunt's (1995) extensive survey concludes that the literature does not support the argument that immigration has adverse impacts on wages and employment in the host economy. Their survey considered cross-sectional approaches, time-series approaches, wage inequality and growth. The theoretical literature on immigration and growth and subsequent empirical research has found conflicting evidence. Friedberg and Hunt (1995) therefore argued that more work is needed in this area. Longhi et al. (2005a) provide a more up to date review of the international evidence on the wage impact of immigration by means of a meta-analysis. In a subsequent meta-analysis, these authors study the impact on employment (see Longhi et al., 2005b). These syntheses of available empirical evidence suggest that the impact of immigration on wages and employment is small.

Source country impacts

Host country impacts

Maximising the benefits and minimising the costs of migration

There exist a number of ways to help maximise the benefits and minimise the problems caused by the trans-border movement of people. For example, in some situations there may be benefits to both host and source countries from temporary migration. It has also been argued there may be benefits from applying some kind of 'tariff' to migrants. We will consider both policies in turn.

Temporary migration programmes have been around for some time in many different forms. There is now renewed interest in their expansion because of the perceived benefits over more permanent forms of migration (Abella, 2006). Temporary migration may offer many of the benefits of immigration but without the costs (e.g., World Bank, 2006; Winters, 2003b). In the source country, financial and knowledge benefits should be higher if suppliers of services abroad return home to contribute to their own communities in the longer term (Mattoo, 2003). In the host country, there may be lower social tensions, a limited burden on public expenditure and the opportunity for controlled variation in response to labour market conditions (World Bank, 2006). These types of advantages make liberalising temporary admissions politically much easier to sell to populations who may feel threatened by more permanent immigration (Abella, 2006).

The disadvantages of temporary migration may include: higher training costs; no guarantee of future access to labour markets or workers; and some disincentive for workers to develop region-specific skills, including language skills (World Bank, 2006). It may also be the case that some countries have difficulty in controlling 'temporary' labour movements. For example, facing widespread unemployment during the Asian financial crisis, some governments tried to wean their economies off foreign labour, but without much success (Chia, 2006). In addition, temporary workers are human beings who may grow attached to their host country, or find partners among the host population, and therefore desire to permanently settle with their families. This consequence of the guest worker schemes of the 1960s and 1970s in Western Europe, which was unanticipated at the time, led to social tensions arising from the absence of policies that would have facilitated integration and the greater acceptance of multicultural societies.

While temporary labour movements appear to offer significant potential gains to participating countries, care will need to be taken. Current temporary workers policies aim to provide better incentives and institutional arrangements to increase the effectiveness of temporary migration as an instrument for alleviating labour market shortages. Abella (2006) offers a set of guidelines proposed as offering a 'best practice' approach to managing temporary migration: these guidelines range from forecasting and managing demand for labour through to agreements that better organise labour and protect workers rights. Winters (2003b) suggests that the biggest concern raised by the temporary movement of workers is likely to be the competitive challenge to local unskilled workers. However, this 'challenge is no more imposing than that presented to such workers by imports of labour-intensive goods from developing countries, which has been overcome by the weight of economic gain that trade can deliver'. Winters argues that policies are needed to ease adjustment among local unskilled workers (Winters, 2003b).

With respect to applying some kind of 'tariff' to international labour movements, Chang (1998) applies international trade principles to trade in labour services and argues that the United States should eliminate immigration quotas and barriers and move to using immigration tariffs instead. This appears to follow the general principle that improved transparency is preferable to obscured barriers; it may also facilitate clear and substantive reduction in barriers over time. Chang's analysis suggests that skilled and unskilled immigration should be permitted without restriction, but that unskilled immigration should be subject to an effective immigration tariff, perhaps in the form of a special income tax and less generous fiscal treatment. Chang (1998) argues that reciprocal liberalisation of services trade could help to overcome political obstacles, facilitating more liberal movement of labour into the United States.