There is a fun parlour game, as we British call such things, to play on slow days like New Year’s Day: The Two Things. This is to try to distill the essentials of some skill or field down to the only two things that you truly need to know. For example, civil engineering becomes 1.) Dirt and 2.) Dirt plus water is mud – and there is always mud. Boxing is 1.) Hit and 2.) Don’t be hit.
Economics becomes 1.) Incentives matter and 2.) Opportunity costs. Grasp those two properly and you’ll know more than most in the profession and definitely more than any politician.
For example, say that we want to consider the hiring of trained professionals from poorer countries. Is this a good thing or a bad? There are actually those who insist that we shouldn’t do so. Some even say skilled people shouldn’t be allowed to even leave poor countries. They’re skilled, their country (supposedly) needs them. Thus they should not be allowed to improve their own lives, and those of their children, and they must stick there and make that other place better off.
Others might say that it’s all about individual rights, not group rights, so why not? A third possible answer is we want the skills and the heck with all of them out there.
The correct economic answer (note that I say economic, not one about freedom, liberty, or fairness) is that it depends. The correct answer to any economic question is nearly always that, it depends. But we can use our knowledge that incentives matter to work through this.
There’s a well-known recruitment of trained nurses in the Philippines to come and work in the U.S. It could be that we’re stripping a poor place of those whose skills are needed at home – the Philippines is not exactly free of the need for nurses. It could be that we don’t care. Mom needs a care assistant at that home down in Florida.
So, let’s study the details of what happens in order to see what depends. Which is done nicely in this paper. We’re really pretty sure we know a Filipina arriving in the U.S. as a trained nurse is going to at least triple her income, maybe more. So there’s definitely the incentive for the individual there. But what happens back home?
Well, as it turns out, that’s a huge incentive. Sure, not everyone wants to leave home but lots and lots would like to have at least the option. What we find, when we look in detail, is that for every one who does go, hitting that personal jackpot, two more enter medical training to become nurses.
That is, incentives really do matter. So much so that creaming off the top of the trained personnel with offers of three and five times the income increases the supply, even after we’ve done the creaming, of the trained personnel. If you like, our stealing nurses from the islands increases, because of those incentives, the number of nurses left behind.
The correct answer in economics generally is, before we look at all of the details, it depends. It’s the examination of those two things, incentives and opportunity costs, which are those details. Grasp that and you’ve got the heart of the subject.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
