The Ultimate Resource and its Allocation

June 2013, IZA Compact

(Op-ed by Klaus F. Zimmermann)

Free trade and open labor markets are determinants of economic welfare. In his legendary 1981 book, the American population economist Julian Simon suggested that human beings are The Ultimate Resource. Simon died much too early in 1998, but his vision is still alive. Each year IZA’s migration research network honors the pioneer of population economics with the Julian Simon Lecture, most recently held at the 10th Annual Migration Meeting in Jerusalem. Indeed, in the age of information and knowledge capitalism, human capital is the key driver of economic growth, and its use can be optimized globally through migration. Not surprisingly, Julian Simon was also a strong proponent of open labor markets.

A high-profile IZA workshop held in Bonn last month discussed the interaction between human capital use and labor migration, with a particular focus on the mobility of high-skilled workers and ongoing efforts to lift restrictions on labor migration. In a recent article on Open Borders published in the Review of Economic Dynamics, IZA Fellow John Kennan uses a simple static model of migration costs to show that the net gains from lifting mobility restrictions around the world would be enormous. China’s strong role in the upcoming global market for human capital, which will soon challenge the position of the United States, is analyzed by a recent study in the Journal of Contemporary China, co-authored, among others, by IZA Program Director Amelie Constant and myself.

The recent revival of the vision to create a transatlantic economic partnership, which could evolve into the world’s largest open economy with a population of 800 million people and an economic output of around 700 billion euros, has added momentum to these considerations. More than 50 years ago, U.S. President John F. Kennedy had already envisioned a transatlantic partnership of equals. President Obama built on this vision during his visit in Germany in June. At the same time, concrete negotiations on a U.S.- European trade agreement finally got underway.

Without a doubt, a trade agreement that does not just reduce tariffs but also tears down non-tariff trade barriers will be an effective program to boost employment. The main winners of this agreement, though, are the consumers. A transatlantic agreement would coincide nicely with the series of regional trade agreements in effect after the failure of the Doha Round. This sort of competition for the world’s most open markets is certainly fruitful.

Unfortunately, the issue of open labor markets is missing from the agenda of the transatlantic partnership negotiations. This is a huge mistake. Over the long term, human capital is the most important factor of trade relations. A free transatlantic labor market would be an important test run for globally open labor markets. The risks would be low, particularly if the market were initially opened only to high-skilled labor.

However, the ongoing public debate shows that this will be politically difficult to implement. Prejudices in favor of protectionism and its alleged benefits are too deeply rooted. The same goes for unjustified fears of job losses due to immigration.

  • China's Latent Human Capital Investment: Achieving Milestones and Competing for the Top, Journal of Contemporary China, 2013, 22 (79), 109-130. Amelie F. Constant Bienvenue N. Tien Klaus F. Zimmermann & Jingzhou Men [Open Access]
  • John Kennan, Open Borders, Review of Economic Dynamics, 2013
  • IZA Compact

Reprinted with permission.