Introduction

3. The Promise of Labor Mobility

Introduction

People move to take advantage of better economic opportunities. Within countries, labor migration can increase the earnings prospects of people and contribute to aggregate growth by improving the spatial distribution of labor. It drives economic concentration of skills and talent and thereby supports agglomeration spillovers (Andrews, Clark, and Whittaker 2008; Desmet and Fafchamps 2006). An extensive literature documents these improvements (see box 3.1).

Migration within a country from rural areas to cities plays an important role in enhancing productivity by increasing the density of employment and driving up local workers’ wages (Combes, Démurger, and Li 2015).1

The power of unrestricted internal migration to increase economic efficiency is illustrated by the Republic of Korea. By 1994, after more than three decades of reform, Korea’s urban-rural wage gap had entirely disappeared—indicating that workers had migrated to their optimal locations (Knight, Li, and Song 2006). By contrast, China’s barriers to migration contribute to the persistence of regional and urban-rural wage gaps, and they indicate inefficiency (World Bank Group and Development Research Center of the State Council 2013).

China might have garnered large payoffs if it had permitted migration at rates close to that in Korea, allowing faster wage convergence: By following Korea’s example, China’s economy would be nearly 25 percent larger today (World Bank Group and Development Research Center of the State Council 2013). Household income as a share of GDP would be 5 percentage points to 8 percentage points higher, while consumption as a share of GDP would be 3 percentage points to 5 percentage points higher (depending on the growth rate from additional migration). In sum, China would be richer—and could rely more on domestic demand to fuel further economic growth.

Mobile labor also provides options for people when places face adverse shocks— from trade, automation, climate change, or environmental disasters. Migration offers the possibility of a better life to those willing to uproot and move elsewhere, as seen in the case of the boom and bust in Kolmanskop, Namibia. It once produced 12 percent of the world’s diamonds. As fortune seekers moved in, it became one of the richest towns on the planet. As the mines were depleted, it was quickly abandoned as people moved on to other opportunities.