Good Economics for Hard Times Chapter Review: From The Mouth of The Shark

Good Economics for Hard Times Chapter 2: Summary

Abhijit V. Banerjee and Esther Duflo, authors of Good Economics for Hard Times, were the 2019 winners of the Nobel prize in economics. In their book, they use a modern approach to economics to argue for solutions to various issues ailing our economy. In Chapter 2, they don’t seek to make grand gestures about policy, but instead, seek to clear the air about immigration and establish a ground floor. The title of the Chapter: “In the Mouth of The Shark” refers to what they argue is the most significant factor of emigration: a home that doesn’t want you there.

The actual book and chapter contain lots of statistical data and historical anecdotes to support its claim. However, the majority of this has been left out of this summary for the sake of simplicity.

The Greatest Factor of Emigration

Before continuing, it is important to establish some definitions. Immigration is travel into another country. When referring to factors of immigration, economists look at what incentivizes people to choose a particular country to travel to, be that connections, monetary incentives, ease of travel, or any other variety of pull factors. Emigration refers to travel away from a particular country. Reasons for leaving a country may also include monetary incentives, but factors such as war, famine, natural disasters, and social ostracization may be reasons as well.

What Banerjee and Duflo argue is that emigration in large numbers is not caused by simple monetary incentives. It is instead caused by push factors, large in magnitude, that force people away from their homes. Simply put, people don’t like change. They don’t like leaving behind what they call ‘home’, even if that means living in generally lower welfare. It has been shown through historical precedent that poor conditions, if livable, are not enough to drive people away from their home countries.

In Nepal for instance, bad seasons of agriculture did nothing towards driving up emigration numbers. In fact, it lowered them. Nepal’s Emigration was, however, affected by a Maoist Insurgency. The violence forced people to leave when they otherwise wouldn’t. There are other factors involved as well, such as a lack of information about the opportunities of immigration. If one isn’t aware of what another country has to offer, then there are no incentives that drive travel. Furthermore, people tend to overestimate the risk associated with emigration. Fear and ignorance are just two more factors that impede travel. This means that emigration rates are much lower than one may believe, and they are only high in areas of incredibly bleak living situations. This redefines the way we look at immigration. There isn’t a flood of people waiting to burst through the gates, and for the ones that come, they far from hurt the economy.

Immigration’s Effect on the Economy

The effect of immigration has been commonly misrepresented in simplistic economic models, which look at immigration as something that increases the supply of labor while simultaneously requiring a greater demand for housing. The effect of this is that new immigrants will ultimately lower the average wage for unskilled labor and drive up the price of housing. As Banerjee and Duflo point out, this would be an incorrect assumption.

This assumption relies on a very simplistic model of economics that cannot be applied to immigration. Unlike simple supply and demand, demanders of labor do not look for the cheapest labor available. Workers that are paid too cheaply do not work as efficiently. This creates a sweet spot of payment, known as the efficiency wage, that sits above the minimum wage an individual will work for. When immigrants enter the market, their willingness to work for cheaper does not entice many business owners since their low price does not vouch for their ability.

It is much more difficult for immigrants to find work than their domestic counterparts. They do not have the trust and connections that long-standing citizens have, and for the same reasons that business owners decide not to pay their workers the minimum possible, they decide that hiring an immigrant worker comes with more risk than established members. What this means is that immigrant workers often end up in jobs that no domestic worker was going to take to begin with. They end up living in places that have unsavory jobs, places that for whatever reason were not appealing to the people that were already in the country.

Key Takeaways

The reasons for immigration are driven much more by necessity than they are by monetary gain. People in general do not find comfort in leaving their place of identity, connections, and knowledge. To emigrate often means heading into the unknown, where one doesn’t even know the risk of what they are undertaking. This leads most people to stay tied to their origins unless something forcibly removes them. Immigration is not a massive wave of people, and it is not a danger.

Ultimately, immigrants end up filling a niche in a country of wealthy and educated individuals. They take the jobs and housing that there was previously little supply and demand for. In this way, they grow the economy without affecting the markets that domestic residents benefit from.