Barriers to High-Skilled Competition?

I think Dean's point about totally free trade should be taken seriously. Where I disagree is with his acceptance of the deleterious effects that "true" foreign competition might have on the incomes of high-skilled Americans.

Aside from the protectionist laws and policies Dean claims exist, one reason why high-skilled workers earn high wages is because they are innovative, creative and are in good positions to respond rapidly to changing conditions. This is something fewer assembly line workers are able to do.

I see his point about college professors (I was one), but greater competition there convinced me to move on. I'm doing consulting work that I imagine would be difficult for many foreigners to compete with. I have started a small business in my community that I believe foreigners would have a hard time competing with. And my current firm is working on moving around the accreditation problem and starting a school to educate people to the graduate level in a very untraditional model.

And let's not forget one more thing - if the real free trade that Dean wishes for were to come to the US, then presumably trade would be freer for skilled Americans to go all over the world to ply their trade as well. How can they possibly be worse off in that case?

One last thing, if there were more competition for the high-end jobs, wouldn't that go against many of the positions that the left largely adheres to? If it is true that the rich capitalist elite are earning all of their money not from wages, but rather from profits, stock earnings, inheritances, wouldn't more competition for high skilled jobs increase the disparity between these fat cats and the rest of us chumps?

There's no doubt that in software, the cost of doing a software project has gone down significantly over the last few years, because of the improvements in offshore development. I say this as a white anglo-saxon agnostic, who at times had to struggle to adapt to this new model. But in the end, it seems to have dramatically increased the demand for "software projects" (custom-made software for specific customers), because what used to cost $100k to produce now costs $75k, which is easier to justify and budget.

It has also had the positive side-effect of making entrepreneurial software cheaper as well, in a variety of ways (new software tools, new techniques and "best" practices, more data to test theories against).

So I would say that in software, at least, Mr (Dr?) Baker is correct. Intuitively, if accounting, law and medicine were also "opened up" for foriegn access, I believe we would see lower costs and more innovation in the way services were provided.

However, I don't think the effect would be as pronounced as it is in software, for a variety of reasons that I will only get into if people express interest.

"Economists DO NOT support free trade in economist unless they suppot the elimination of rules that require employers to first try to hire qualified citizens. That is the precondition for setting up Wal_Mart universities that will undercut existing ones by paying half the wage and charging half the tuition (and getting foreign faculty who might be marginally less qualified)."

Well, first of all, there is no *trade* barrier to setting up Walmart universities right now, as in tomorrow. In virtually every field there are large numbers of qualified individuals who want, but cannot find, permanent faculty positions and subsist on temporary, low-paid work as adjuncts (or are forced to quit the field of education). Anyone wanting to set up a WalmartU and willing to offer these folks positions with job security and benefits could hire them for much less than the going rate for tenured faculty at major universities.

But whether or not such a university could be *accredited* and attract students is another question entirely. The restricted license society grants to accredited institutions to grant diplomas is the problem here, not an artificial shortage of PhDs (there really is no such shortage).

Beyond that, I would suggest the REAL problem is that in a world where the relevant knowledge is readily available to anyone for very low cost, the real problem is that students are forced to spend tens of thousands of dollars learning material in a large lecture room listening to a certified PhD (whether at a tradition university or a WalmartU) which information they could quite feasibly learn more effectively and efficiently on their own.

What is really needed is an alternate way to earn the equivalent of university degrees by demonstrating mastery of university-level material on standardized AP-style tests.

And with respect to law and medicine, the problems there are also not mainly barriers to foreign entry. In medicine, the restrictions on the number of 'slots' in medical schools needs to be eliminated and the scope of practice of nurses, nurse-practitioners, and physician-assistants needs to be expanded. In law, it should be possible (as Abraham Lincoln did) to study for and pass the bar and become a lawyer without attending law school at all:

http://showcase.netins.net/web/creative/lincoln/speeches/law.htm

Reducing barriers to foreign competition without doing these things would have little effect, since the high pay in these professions is maintained by artificial barriers even to American citizens entering those fields.

Economists DO NOT support free trade in economist unless they suppot the elimination of rules that require employers to first try to hire qualified citizens. That is the precondition for setting up Wal_Mart universities that will undercut existing ones by paying half the wage and charging half the tuition (and getting foreign faculty who might be marginally less qualified).

I find it difficult to imagine that with the free entry of highly skilled professionals, from other places, that the new equilibrium wage rate wouldn't still be nearly where it was before. This assumes the quality and productivity of the professional are maintained. Wouldn't at least some American professionals leave the profession as competition tightened? And wouldn't these highly skilled immigrant professionals eventually start living like and behaving like Americans? And asking for an American-like compensation?

If you really mean what you write, about opening and freeing the markets for everything up to and including labor, then you really should advocate that we, in the United States, should start advancing the idea of allowing more states into our union through Article IV, sections 3 & 4. Only then would there be an opportunity create a free(er) market.

I believe the ghost in this discussion is productivity.

Employers and consumers don't care what wages are, they care about what is produced.

High wages attached to high productivity do not lower real wages for anybody else.

There are more than a few incredibly productive people on this planet who can't be lured out of leisure except by at least the prospect of incredibly high wages.

In high wage occupations, you also have the phenomenon of winner takes most all. If you have a valuable invention, are you going to pay extra to make sure it is defended by the absolute best legal team- of course, and the same holds true when you are picking your brain surgeon.

What does hurt us all is when low productivity workeres are compensated with higher wages than would otherwise prevail if there was no licensure, immigration controls, or other distortions to the free labor market.

Well, economists have been complaining about occupational licensing in medicine since the time when Milton Friedman was just a young whippersnapper. So on this point there is no disagreement.

With respect to the point about economists proper, you have conceded that the economics' profession (certainly in academia) has done little to impede the free flow of academic labor. So there is no inconsistency in economists' support for free trade in both goods and services.

So the bottom line is: In the area where economists have direct interest and control, they have done as well or better than almost anyone to promote free trade. Where markets are restrictet -- such as in medicine -- economists have argued for changing licensing requirements, for removing the AMA's monopoly, and for eliminating distinctions between foreign and local doctors that are unrelated to productivity. Hence -- unlike many businessmen -- economists are not hypocritical. They do not simultaneously espouse free trade while supporting high state barriers on trade in their own industry. Indeed, it should be noted that because of the importance of private universities in America, rules on salaries or promotion in public universities must conform to the market. This is entirely unlike the market for academics in most of the rest of the world.

Okay, let's try this again -- i'll try to talk slowly this time. I was referring to a wide variety of professions, not just economists. Some of these professions (e.g. law and medicine) have very specific training and licensing requirements. For these professions, it would be necessary to tell students in developing countries exactly what courses they would have to take and exams they would have to pass to meet our standards. This is not true in the case of some other professions, such as economists, as folks on this blog have been quick to note.

The second part of this story is that it is essential to remove hte requirements concerning efforts by employers to first hire U.S. citizens or greencard holders. Any guesses what these requirements mean? I know that they are not well-enforced, but they are meant to prevent competition based on price. Even if employers essentially cheat (I don't think anyone has ended up in jail for failing to be conscientious on this) the law is effective in preventing a Wal-Mart university, law firm, or hospital, that hires whole staffs of foreign professionals at half the prevailing wage in the U.S. (which would still be a huge pay increase for professionals coming from the developing world).

Finally, the relevant issue is not the supply from the developing world of qualified professionals today. The question is what the supply of qualified professionals from the developing world be in 10 years, if we changed the rules to allow Wal-Mart employers of professionals today (or if we had free-traders designing our trade policy 10 years ago). Businesses always tell us how they need assurances of stable rules and tax policy if they are going to undertake long-term investments. That is why NAFTA and other trade pacts have long sections on investment -- they want to ensure U.S. firms that if they set up manufcaturing operations in Mexico that the business will not be expropriated, that they will not be restrictions on repatriating profits, and that there will not be tariffs or other barriers imposed at some future point to prevent the output from being exported to the United States.

Students in Mexico need the same guarantees. They are not going to take years to study U.S. law and mastering English, unless they know that they will be able to compete on an equal footing with U.S. professionals and that Wal-Mart employees will be free to hire them without obstruction.

This situation did not exist in Mexico or anywhere else 10 years ago, and it doesn't exist today, which is why economists and other highly paid professionals still get such oversized paychecks.

I know that all the "free trade" economists will say that they support this sort of free trade for professionals, but I have never once seen a column in a newspaper or magazine complaining about the protectionist barriers that maintain high salaries for professionals, nor have I ever seen a textbook that highlights this porfessional protectionism. Nor have I ever seen an articles that have sought to estimate the potential gains from eliminating the barriers that protect U.S. professionals (references anyone?)

It seems that the "free trade" economists only get upset about the relatively small barriers that still provide some protection for manufcaturing workers. Apparently, they can't even see the barriers that keep their own wages high.

Aren't the type of wage caps Baker proposes *exactly* what were put in place during World War II as a cost control measure? Employers back then faced exactly the same situation Russell describes - they were faced with the loss of their highest skilled workers because it no longer paid to put their skills to work where they were in the most demand. Meanwhile, the businesses had to deliver on contracts they negotiated with the War Department and other customers - which became difficult because their top talent wasn't producing to the top of their ability because they no longer had the incentive to do so.

Employers got around this situation by providing these workers with special benefits and perks well beyond what regular employees received (think health insurance with personal physicians, company cars, living allowances, rationing stamps, etc.)

In the end, the most highly skilled were, in effect, as highly paid before, but now they were getting their top level compensation from a different system than all the other workers had. Net losers: regular workers, who didn't get the same degree of perks, and the government, who lost tax revenue from income taxes because these people were getting a good portion of their compensation outside the payroll.

Do we really need to create a more elaborate and perverse system of dodges than we have today?

OK, so Dean is basically a free trader spreading the gospel with classist populism. It's like wearing a Speedo to your wedding, but I'm sure some people can pull it off!

Dean, one group you can ask is software developers. The 90s saw a huge trend in offshoring experiments, to cheap labor places like Estonia and India. Some of these experiments worked, many didn't. So what you're talking about has already been tried in spades.

Today you'll find more disparity in the wages of people who actually write software, as the field has become much more entrepreneurial than it was at the beginning of the 90s. As in other professional fields that require interfacing with non-expert customers in the public, I think you'll also find that native English skills and having a personality above that of a brick have great value.

The way I read it is that whenever demand for professional services goes up with little increase in the supply, prices will be raised. The professionals will be better off (with higher wages since they now charge a higher price) and those who buy professional services will, in effect, have less buying power (if their wages don't similarly increase).

I think this is the scenario that Dean Baker was talking about. I don't really find anything objectionable about it. I also agree that we need to allow more immigration into this country to compete on an equal footing to offer professional services.

Dean,

Most of us here are very much against licensing laws, and protectionism in general.

And perhaps we misread your words, but it did sound like just another manifestation of the zero-sum fallacy.

"We sign committments that tell students in Mexico, India, China etc. exactly what courses they have to take and what exams they have to pas to practice a profession in the United States. Once they meet these requirements, they get to compete on an equal footing with an professional from new york or Kansas."

I have read this three times, and still have no idea what you're talking about. You refer--repeatedly now--to knowing the "tests" you have to pass in order to become an economist. But there are no such thing! It's not like the AEA has any authority to restrict people entering into the trade of "economist"--I think Robert Barro called it the least efficient monopoly in America in one of his books.

If you're saying that schools shouldn't be obligated to first try to hire a US citizen, I certainly agree with you on this point, but the rest of your comment is frankly nonsense. How exactly WOULD you explain "what courses they have to take and what exams they have to pas" when that's not even obvious to US citizens--should you take grad micro or another semester of analysis? It's not at all clear. This isn't medicine, after all--heck, there are Nobel Laureates who don't have degrees which are in economics proper.

Again, I'm in agreement that there shouldn't be barriers for economists. However, you seem to be under the impression that there are lists of "courses" and "tests" to become "economists" (which is rather vague to begin with--are we talking about tenure track faculty? Do YOU count as an economist?), and that's just not so.

Finally, these professors (http://econlog.econlib.org/archives/2006/06/doe...) indicate that foreign candidates face no substantial disadvantage--do you have experience or evidence that suggests otherwise?

I don't think Dean is quite that dumb. If you read the whole thing, he has a point, and one uncle milton made long ago. Free trade in doctors is tantamount to eliminating professional licensure. something uncle milton firmly believed in. I have to agree, the rents earned by doctors who help keep the supply down is likely quite large. This is to say nothing of the real costs imposed on me by having to go to a doctor to get a medication I know I need. Just because someone has an MD doesn't make them any smarter than anyone else, and certainly doesn't qualify them to understand my needs.

And I do believe we american born economists compete quite well with foreign born economists. Thank god for the mother tongue interference!!

I love the "Mexican tomato" theory of international trade. According to this theory, if I can point to a substantial number of foreign economists, doctors, engineers etc. working in the U.S., then i have established that we have free trade in their services.

This is the Mexican tomato theory because when it is applied to agriculture, it means that I can demonstrate that we have free trade in agricultural products by showing that I can buy Mexican tomatos at the grocery store.

Real free trade in professional services means doing what we did for manufacturing goods with NAFTA. We sign committments that tell students in Mexico, India, China etc. exactly what courses they have to take and what exams they have to pas to practice a profession in the United States. Once they meet these requirements, they get to compete on an equal footing with an professional from new york or Kansas.

This also means eliminating current laws that require that employers first try to hire a citizen or greencard holder. Free trade professionals means that it is as easy to hire a foreign professional at half the price of a U.S. citizen as it is for wal-Mart to buy low-priced shoes from China.

WE don't have that situation now, and we would not have that situation even if every single professor at every top school was foreign born. The law protects highly-paid professionals, who apparently lack the skills to compete in the global economy, unlike their less educated counterparts in manufacturing.

The argument was that if we bring many more high-skilled professionals into the country, thereby lowering wages for people in these professions, then it would raise the wages of everyone else.

Great point, however maybe you need to review basic ideas of inflation and the differences between inferior, normal, and luxury goods (and the likely scarcities of these goods). If suddenly a large cohort of Russian billionaires moved to NYC the price of bread there would not go up measurably. However, the price of a waterfront lot in the Hamptons would probably appreciate.

"I want to eliminate the protectionist barriers that keep our doctors, lawyers, and economists from having to compete in world markets."

Again you say this about economists (you said the same on Prof. Mankiw's blog). What exactly are you talking about? Here are the current MIT Ph.D. candidates seeking job placement (Adobe Acrobat Reader file): http://econ-www.mit.edu/graduate/Placementbookl...>

I get 5 US citizens against 12 non-US citizens (had to guess on two based on "native" language, but I hardly think it changes the argument if they immigrated to the US and then became citizens). In some other top departments I've looked at, there's an even stronger skew. What evidence do you have that a great deal of people desiring to become economists are being shut out by anything other than MIT, Harvard, and Chicago only having a fixed number of slots?

I only ask this on two separate blogs because it seems to be a popular delusion that if only economists competed against foreign labor, they wouldn't be so keen on free trade, but as far as I can tell, it's a "gotcha" with little basis in reality

In my last sentence, "spend our savings" ought to read "spend those savings (a.k.a. raises)" instead. My post reads like double counting, and that was not my intent.

I suspect his reasoning is that doctors and lawyers are in effect like barbers.

Barbers, not counting fancy-schmancy hair stylists, just do the same thing year after year, with no innovation. Thus for a barber who has a full schedule daily to get a raise, he must raise prices, and his customers get less bang for their paychecks, thus lowering their "wages".

Kind of an anti-WalMart effect, where WalMart substantially lowers prices on its goods, and thus in effect gives huge raises to its customers via stretching their paychecks.

His view (seems to be, to me anyway) is essentially we need to increase the supply of high wage workers (via immigration, although no doubt he is in favor of it happening via education of more Americans too), thus reducing the price of their product. It is an interesting thought with regards to entrepreneurial professions like doctoring and lawyering. Imagine all those doctor-entrepreneurs (d-e's) stay in business with a whole bunch of new d-e's entering the market. What does that do to the price of their fees they charge to their patients? It lowers them, although the price of what they outsource to testing labs (blood samples etc.) stays the same (unless these labs also have lab workers facing new entrants too).

In a "normal" business that is owned by shareholders for example, if their high priced laborers faced new competition, then their (businesses) costs go down due to the lowered wages of the new supply of workers. The price they charge their customers stays the same, at least initially, and that price is whatever the market will bear. However, over time one would expect the new profits would spur new entrants into the market, driving down prices eventually anyway.

This brings on a new feedback effect of increased demand due to those lower prices, thus raising wages (eventually, via arbitrage due to new demand for them overall) thanks to the new customers who are getting new services.

It looks like to me that Russell Roberts is missing the first feedback effect that lowers prices, while Dean Baker (judging by his last paragraph in the linked post) is missing the last feedback effect which is essentially, dare I say it(?), Say's Law, i.e. supply creating its own demand. In essence, we all get "raises" when we "import" immigrants, or their labor, and we get to spend our savings as well, thus increasing the overall pie.

yeah folks -- why don't you try to read the whole post? The argument was that if we bring many more high-skilled professionals into the country, thereby lowering wages for people in these professions, then it would raise the wages of everyone else.

The "maximum wage" story is an hallucination by folks on this blog. I was talking about free trade. I want to

eliminate the protectionist barriers that keep our doctors, lawyers, and economists from having to compete in world markets. I know that folks with advanced degrees may be less able to compete in the world market than auto workers, textiles workers and custodians, but life is tough.

There us one sense in what Baker is saying that is true. If I remember from what the original post (before the one you quotes) said, he was saying that skilled workers like docs and lawyers should see the same type of competition from foreign suppliers as low-skilled workers do, then the prices of medical care, legael services, etc. would fall (as would their wages), and thus, lower wage earners here would see their real wages increase (through higher purchasing power). I actually don't think anyone here would argue with that.

But Dean's follow-up post certainly weakened his point.

The most efficient way of forcibly (as in, can be done tomorrow) making the US more equal in outcome is of course vastly extending the scope and magnitude of the earned income tax credit (and it has the bonus of not encouraging underclass behavior, like not working). Dean Baker could have used the death of Friedman as am oppurtunity champion this. I'm not saying I want that to happen, but it would be less of a disaster than what Baker is now proposing.

Great post. I actually remember e-mailing you a similarly silly quote from Baker's book "The Conservative Nanny State". I hope he responds and a debate ensues.

Dean Baker's alternate universe economics is incoherent in this universe no matter how you slice it (nice try though Russ), but you can get a bit closer if you add the "incentives don't matter" theory and the "ignore capital formation and gains" assumption to the "fixed pie" theory.

It totally misses the point of innovation, typically done of course, by high wage workers. By investing in innovation, you may improve the product (more value) or bring it's production cost down (more profit and/or lower prices).

Similarly, by paying the CEO $2 million to sit in his gold chair in his huge office and arbitrarily fire everyone so he can offshore jobs to Elbonia, he might save the company $10 million in producing the same exact thing, which can then be split among consumers (lower price) and investors (profit). Well, that is until the company that ponies up for the $4 million CEO and gets $30 million in savings drives prices down even further.

In short, Mr. Baker needs to look at the LCD TV market, where lots of high paid workers at several companies are driving prices so low that the execs are getting caught price fixing. ;-)