Labor Dumping

This article appeared in the September 2007 issue of Forbes magazine.

The flood of foreign labor pouring into theU.S., the European Union and other hospitable environshas brought political strains. In the U.S., PresidentGeorge W. Bush and Senator Edward M. Kennedyfailed to win passage of an immigration reform billthat the President viewed as legacy legislation. In Europe, France'snew President, Nicolas Sarkozy, has been busy promising to gettough on immigrants and erecting roadblocks to Turkey's bid forEuropean Union membership.

These are only the latest shots in a long and ultimately futiledebate about immigration policy. There is little chance of stemmingmigrant inflows, as long as the countries supplying immigrantsembrace policies that effectively mandate labor dumping.

To understand labor dumping, look at one of its pioneers,Yugoslavia. After Marshal Josef Tito broke ranks with Moscow in1948, Yugoslavia rejected notions of Soviet-style central planningand created its own brand of socialism. The Yugoslav modelmandated that resources be allocated by worker-managersinstead of central planners. This decentralized socialist setup wassupposed to mimic markets, but without capitalists, it wasdoomed. Worker-managers viewed additions to the labor forceas competitors for their slice of the pie. Consequently, they hungout "no vacancy" signs and wouldn't hire new employees.

Opening Yugoslav borders—at least by communist standards—provided Tito with the means to dump surplus labor andmask flaws in the paradise of worker-managed firms. Tito's broomworked very well. At its peak in the early 1970s it had swept 11%of the Yugoslav labor force into western Europe, and those workerssent home hard-money remittances that amounted to 30% ofYugoslavia's exports.

Today Mexico is the world's largest labor dumper and thesource of much of the contentious U.S. immigration reformdebate. Surprisingly, the politicalcombatants on both sides ofthe debate fail to mention thesource of the problem: Mexico's statist economy. Like Yugoslavia,Mexico can't produce enough jobs. According to the WorldBank's Doing Business 2007 report, Mexico's labor market ranks108th out of 175 countries in terms of the ease of hiring and firingworkers and labor-market flexibility.

Rather than modernize the economy, Mexico's politicians useTito's broom. Mexico's 47 consulates in the U.S., more than anyother country has, facilitate the sweeping by issuing passportsand offering assistance when Mexican immigrants run into trouble.Thus 30% of Mexico's labor force is working in the U.S., andin 2006 they sent home $23 billion, 12% of Mexico's exports.

Turkey has a similar story. Burdensome laws and regulationsput Turkey's labor market 146th on the ranking from Doing Business2007. Adding to the labor market's regulatory burdens is thetax system. According to the Organization for Economic Cooperation& Development, in Paris, the tax wedge—the differencebetween labor costs to the employer and an employee's takehomepay—is 42.8% for a family with two children and oneworking parent. This is the largest wedge in the OECD, 15.3 percentagepoints higher than theOECD average.

Turkey has swept 5.5% of itslabor force into western Europe.Employment in the formal sector—on the official labor rolls—of the Turkish economy accountsfor only 22% of total employment.Others who are luckyenough to find work in Turkeytoil in the relatively unproductiveinformal or agricultural sectorsof the economy, leaving 11%unemployed.

Poland is another labordumper, with 7.6% of its labor force at work in foreign countries.Poland's overregulated economy and overtaxed labor market (thetax wedge is 42.2%) can't produce enough jobs. Even with labordumping the jobless rate is 13%.

In Indonesia, says the Doing Business 2007 report, firing aworker costs the employer 108 weeks of wages, three times theOECD average. As a result, Indonesian companies are extremelyreluctant to make legal use of the country's labor supply, forcingan estimated 70% of the labor force to work in the informalsector of the economy and 10.3% to remain unemployed.

As in Mexico, Turkey and Poland, politicians in Indonesiamindlessly favor the same policy: the broom. Indonesian LaborMinister Erman Suparno estimated that there were more than3 million Indonesians legally working overseas at the end of2006, with at least another million doing so illegally. In additionto enforcing our laws, we must encourage foreign governmentsto respect their workers and reform their labor markets.