Do migrant workers depress local wages in the GCC and beyond?

The two biggest electoral shocks this year were unquestionably the UK’s decision to leave the European Union, and Donald Trump’s victory in the US elections. A key issue among voters was the perception that migrant workers depress the wages of low-skilled nationals, because of their willingness to work for a lower wage.

This sentiment is shared by the citizens of many countries that receive migrant workers from developing economies, including the GCC countries. In fact, employers who hire migrants at supposedly lower wages are often accused of exploitation. Are these criticisms well-founded?

Unfortunately, it is very difficult to say, because there are two counteracting forces, one of which is hard to measure, and the other that is almost impossible to measure.

The first force fits in with the traditional narrative, and amounts to a straightforward application of supply and demand theory. Labour is like any commodity: increasing supply means decreasing prices (wages in the case of labour), whether it is chief executives, janitors or chefs. Moreover, if the new entrants are willing to work at a lower wage, then that accentuates the downward pressure on the market wage rate.

No economist will argue over the existence of this direct effect. But that is only half of the story.

The second force is a series of increasingly complex indirect consequences resulting from cheaper labour entering the market. First of all, at all levels of the skill ladder, a worker’s productivity is not just a function of their own abilities, it is also a function of the abilities of the worker’s colleagues. Infusing the workplace with migrants changes the prevailing configuration of workers; given that firms are free to hire and fire migrant workers, they will only actually offer them employment if they raise productivity in some sense.

A good illustration is farm workers in the US. It is possible for American farmers to employ US citizens to pick fruits during harvest, but the wage would be very high, meaning higher prices for consumers, lower profits for the farmers and much lower output because of the elevated costs. Allowing migrant workers from Mexico to work means a lower wage, but it also amplifies the farmer’s productivity, allowing for much larger output.

The productivity gains extend beyond a specific workplace, too. In the GCC, migrants working as domestic helpers for low wages dramatically increase the productivity of parents working as professionals, such as lawyers or doctors, who might otherwise have to be stay-at-home parents.

The effect becomes even more complex when one accounts for the knock-on price effect. The US citizen who can buy cheaper oranges has more money to spend on other goods and services, implying an increase in living standards. The same is true of the Kuwaiti lawyer who need not stay at home. Moreover, as the savings are directed toward other goods and services, wages will increase in those sectors.

After this convoluted mixture of effects settles, which force wins out? Lower living standards for low-skilled citizens because of the increased competition, or higher living standards because of lower prices and more productive workplaces? The impossibility of measuring the latter component means that there is no definitive answer, but it also means that we should not sloppily fixate on the first part just because it is easier to detect.

As policymakers seek to gather high quality data upon which to base their decisions, it is worth emphasising that the question that should be posed is not: “Did your wages fall due to migrant workers?” Rather, they need to ask: “Is your overall standard of living higher due to migrant workers?” It is possible for both to be simultaneously true, in which case we should certainly embrace migrant workers.