metadata: authors: 0: author: Do,Quy-Toan
1: author: Lokshin,Michael M.
2: author: Ravallion,Martin
count: World
docna: 0: docna: Migrants as Social Protection ? Simulations
            of a Market for Work Permits
docty: Policy Research Working Paper
abstracts: cdata!: Workers have the right to take up any
            job offer in their country of citizenship but not to rent
            out that right. This paper shows that relaxing this
            restriction using a two-sided competitive market in work
            permits can provide a basic income guarantee for workers in
            migration-destination countries, financed by selling
            temporary work permits to migrant workers. Regulating the
            market by imposing a tax on work permits narrows the set of
            beneficiaries, the income of which can further be
            complemented with the revenues from such tax. Substantial
            gains in the destination countries&#x2019; gross
            domestic product can be expected, alongside the first-order
            gains to migrant workers who would not otherwise have access
            to the labor markets in destination countries. The paper
            provides a quantitative illustration by simulating a
            fictitious market for work permits between Mexico and the
            United States.
display_title: Migrants as Social Protection ?
            Simulations of a Market for Work Permits
listing_relative_url: /research/2025/01/34443629/migrants-social-protection-simulations-market-work-permits
topicv3: Migrant Workers m1504032 2729,Migration Policies and Jobs m1504161 2836
publishtoextweb_dt: 2025-01-07T00:00:00Z
dois: 10.1596/1813-9450-11017
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 27
author_keys: 0: author_key: 433894
1: author_key: 144523
2: author_key: 99002
model_extractions: Policy Research Working Paper 11017 Migrants as Social Protection? Simulations of a Market for Work Permits _Quy-Toan Do Michael Lokshin Martin Ravallion_ Development Research Group & Europe and Central Asia Region January 2025
Policy Research Working Paper 11017

# **Abstract**

Workers have the right to take up any job offer in their country of citizenship but not to rent out that right. This paper shows that relaxing this restriction using a two-sided competitive market in work permits can provide a basic income guarantee for workers in migration-destination countries, financed by selling temporary work permits to migrant workers. Regulating the market by imposing a tax on work permits narrows the set of beneficiaries, the income of which can further be complemented with the revenues from such tax. Substantial gains in the destination countries’ gross domestic product can be expected, alongside the first-order gains to migrant workers who would not otherwise have access to the labor markets in destination countries. The paper provides a quantitative illustration by simulating a fictitious market for work permits between Mexico and the United States.

This paper is a product of the Development Research Group, Development Economics and the Office of the Chief Economist, Europe and Central Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at abonfield@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Migrants as Social Protection? Simulations of a Market for Work Permits<sup>∗</sup>

Quy-Toan Do, Michael Lokshin, and Martin Ravallion<sup>†</sup> _Keywords:_ Work permits; migration; social protection; targeting; poverty. _JEL classi ication:_ F22, J61, J68

> ∗We are grateful to Dominique van de Walle, Dean Jolliffe, Andrei Levchenko, Roman D. Zarate, participants to the Georgetown University-World Bank Poverty Conference, and two anonymous referees for helpful comments and discussions. Martin Ravallion passed away before completing this paper. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work.

> †Do: Research Department, The World Bank; Lokshin: Europe and Central Asia Vice Presidency, The World Bank; Email: qdo@worldbank.org; mlokshin@worldbank.org
# **1 Introduction**

While evidence to date suggests limited, if any, impacts of migration on local labor markets in high-income countries (see, e.g., Card, 1990; Ottaviano and Peri, 2012; Dustmann et al., 2013; National Academies of Sciences, Engineering, and Medicine, 2017), many citizens see migrant workers as a threat to their living standards. Politicians often respond to these sentiments by promising to curb immigration; they would also provide social protection to workers affected by competition with migrants. The paper proposes a market-based policy tool that could address the continuing concerns about the vulnerability of living standards among workers in destination countries, were these to be established. The policy idea is that a citizen of working age should be allowed to rent out her work permit – the right to take any job on offer in the country– for some pre-determined duration. As a citizen, she still owns her “right to work,” interpreted as an inalienable right that comes with that citizenship but she is now allowed to rent it out. On the other side of the new market, time-bound work permits would be available for purchase to people with no right to work in the destination country. The price of the work permit, therefore, would balance the two sides of the market, so that the total work time rented out by the citizens equals the total work time purchased.

Such a market would have benefits for both origin and destination countries. It allows migrant workers to access high-earning employment in destination countries. In equilibrium, migrant workers would be more productive than the domestic ones who had sold their work permits, hence contributing to the domestic economies. Finally, the market mechanism leads domestic workers to self-select into being beneficiaries of social protection transfers financed by the sale of these permits. Thus, the policy provides what we dub a Basic Income Guarantee, defined as a level of income that each worker in the destination country can be assured of without working. By providing a floor below which individual welfare will not fall, the option to sell a work permit and benefit from a Basic Income Guarantee provides a safety net that might encourage some individuals to take entrepreneurial risks they otherwise would not consider (Ravallion et al., 2008).

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Furthermore, the work permit is taxable and the tax rate levied by the government would be a key policy instrument for the targeting. By taxing work permits, the government affects the size of the market, hence determining the set of beneficiaries. When the revenues from such taxation are transferred as lumpsum cash benefits, the government is further able to exploit market forces to determine both the breadth and depth of this market-based social protection scheme.

We provide a theoretical model of a market for work permits. We henceforth use the terminologies “rent in” (resp. “rent out”) and “buy” (resp. “sell”) interchangeably, since our model does not have a time dimension. Yet, the scheme of interest in this paper is a market of _temporary_ tradeable work permits. In our model, demand for work permits is driven by risk-neutral workers in the origin country who compare their current earnings with their expected earnings, were they to move (migrate) to the destination country. However, the migrants face two types of costs: (i) expenses associated with the actual costs of the journey and (ii) a non-monetary psychic cost. Workers in the origin country observe the equilibrium price of a work permit and decide whether to demand one accordingly. Symmetrically, workers in destination countries decide whether or not to sell their work permits given their opportunity cost of time, as we assume that all workers have some disutility from work. In equilibrium, the price of a work permit clears the market and the lowest earners in the destination countries are the sellers, while the buyers are those with the highest returns to migration. We next allow the government to levy a tax on work permits. The tax generates tax revenues but the market shrinks as permit prices drop.

To calibrate our model, we assume a fictitious market in the US for Mexican workers. We first estimate what earnings prospective migrants from Mexico would earn in the US by estimating Mincer-type regressions on US survey data and inferring migrant earnings using the characteristics (age, education, etc.) of a Mexican worker. We further deflate these earnings by applying a wage tax schedule and convert post-tax earnings to their real values by deflating with the prevailing relative price indices (Argente et al., 2023). Moreover, we 2
use the studies of Clemens et al. (2019) and Binswanger and Schunk (2012) to calibrate the psychic cost associated with migrating and the disutility from work, respectively. Finally, we take some ad-hoc values for the monetary cost of migrating based on the actual costs of visa and travel between Mexico and the US.

Under our baseline specification, our calibration suggests that a market for work permits would result in 33 million permits being exchanged at a price close to US$20,000. Migrant workers would earn an average of US$50,000 per year, thus increasing fiscal revenues for the US by 5%. Under this scenario, permit sellers would not only gain in terms of leisure but would experience an average net income gain of roughly US$10,000. This increase in income of native permit sellers will reduce the poverty rate by 3 percentage points from a 2018 initial condition of 12.3% (Semega et al., 2019). An interesting simulation consists of varying a tax that a government would put on work permits and reallocating the proceeds of the tax to these same permit sellers _in a lumpsum (unconditional)_ manner. Increasing the tax, while remaining below the monopolist’s markup, would shrink the set of direct beneficiaries of the market for work permits and at the same time increase tax revenues and hence the size of the cash transfer made on top of the permit price. We find that, given the price elasticity of the demand for work permits, tax policy can potentially eradicate poverty in the US: a 140 percent tax, the proceeds of which are redistributed to the set of permit sellers, would bring the poverty rate down to 2.9%. While these simulations should be viewed as illustrative rather than be taken at face value, they indicate the potential of a market-based solution to the problem of social safety nets for citizens displaced by migrant workers.

There are antecedents to the idea of a market-based immigration system proposed in this paper. For instance, Chiswick (1982), Becker and Nashat (1997), and Becker and Lazear (2013) propose to auction citizenship as opposed to granting it based on quotas and cumbersome rules. Similarly, Auriol and Mesnard (2016) propose the sale of visas as a way to crowd out informal migration channels. While these proposed schemes typically involved a government selling visas and citizenship papers, others have argued that citizens should 3
be able to sponsor and receive compensation for doing so from the beneficiaries (Weinstein, 2002; DeVoretz, 2008; Posner and Weyl, 2018, chapter 4). These schemes are one-sided market mechanisms in that permits do not come at an opportunity cost to their sellers. In our paper, however, supply is driven by domestic workers’ choices to temporarily renounce their right to work in exchange for some financial compensation.<sup>1</sup> An upside of such double-sided market is the property that it is a self-targeting and progressive mechanism, whereby only the most vulnerable citizens would opt in. Tax policy is therefore the government lever to regulate the market for work permits and in doing so trades breadth off against the depth of this market-driven social protection scheme. On the other hand, the market for work permits will be affected by the existence of informal and unregulated labor markets, all the more than formal and informal labor markets are more fully integrated due to weak labor and migration law enforcement.

The rest of the paper is organized as follows. Section 2 presents our theoretical model of a market for work permits and section 3 uses data from the US and Mexico to calibrate it. In section 4, we discuss the results of the calibration under our preferred specification as well as under alternative parameter values. In section 6, we discuss the limits of the model in the presence of imperfect enforcement. Section 7 concludes.

# **2 Theoretical Framework**

To understand the implications of a market for work permits, we consider two countries indexed by _j ∈{o, d}_ , where _j_ = _d_ refers to the destination country and _j_ = _o_ refers to the origin country. Each consists of a continuum of workers of measure _Nj_ . Consumers-workers have utility where **c** is the vector of consumption and _l ∈_ [0 _,_ 1] is labor supplied.

> 1Lokshin and Ravallion (2022) discuss the policy issues further, including those related to implementation.

4
Each heterogeneous good is produced by one worker _i_ . Technology is linear so that for worker _i_ , output is given by _yi_ = _Ajθi · li_ , where _Aj_ is a country-specific productivity parameter and _θi_ is worker _i_ ’s idiosyncratic productivity term, which is assumed to follow country-specific distribution _Fj_ ( _._ ). The variable _li_ denotes the labor supply of worker _i_ . With _pij_ being the price of good _i_ in country _j_ , wages paid to workers are thus _wij_ = _Ajθipij_ .

Taking labor supply and hence income as given and looking at consumption optimization, agent _i_ maximizes utility subject to budget constraint � _pkjckdk ≤ Adθipijli_ . The agent then chooses labor supply accordingly.

Assuming for this baseline scenario that the disutility from work is low enough, labor supply is equal to _lij_ = 1 and the agent’s indirect utility thus comes down to where _P_ is the price aggregate given by _Pj_ = � _p_<sup>1</sup> _ij_<sup>_−σ_</sup> _di_ , _τj_<sup>_w_isthetaxonearningsincountry</sup> _j_ (which we assume to be homogenous), and _τij_<sup>_ψ_capturesthepsychiccostassociatedwith</sup> worker _i_ leaving for a foreign country. For domestic workers, we thus have _τii_<sup>_ψ_=0and</sup> Γ _ii_ = 0.

# **2.1 A market for work permits**

We now consider the possibility of a market for work permits in country _d_ , whereby each producer is endowed with one indivisible permit to work that can be sold to workers in country _o_ , allowing these workers to immigrate and access the labor market. We assume a perfect enforcement of immigration and employment laws. As such, the migrants can enter the host country only on a valid entry visa, which they cannot overstay. Once a native sells her work permit, she cannot work in the host country for the duration of the contract. We discuss the implications of these assumptions in Section 6 of the paper. An equilibrium is ˆ defined by aggregate price _P_<sup>ˆ</sup> _j_ (and the corresponding prices _pij_ ) and work permit price Π.<sup>ˆ</sup> 5
**Supply of permits** Workers in country _d_ take prices as given and are willing to sell their work permit if and only if

Sellers enjoy utility from leisure and the income generated from the sale of the permit (lefthand side of (2)); they forgo their post-tax earnings (right-hand side of (2)).

**Demand for permits** Workers in country _o_ take prices as given and will migrate and purchase a work permit if and only if

where _μ_ denotes the migration cost, which is denominated in real terms. The left-hand side of (3) measures the agent’s welfare (i.e. real earnings) were she to remain in country _o_ and thus faces price index _P_<sup>ˆ</sup> _o_ . The right-hand side measures the agent’s real earnings net of taxes and net of the psychic cost and the price of a work permit. We deflate expected nominal earnings by price index _P_<sup>ˆ</sup> _d_ , which builds on the simplifying assumption that all the income earned in country _d_ is spent locally. We thus ignore the role that remittances (see, e.g., Albert and Monras, 2022), the nominal value of which should instead be deflated by _P_<sup>ˆ</sup> _o_ , play in the migration decision.

**Market clearing** Assuming an elasticity of substitution _σ ≤_ 1, inequality (2) defines a cutoff _θ_<sup>ˆ</sup> _d_ (Π)<sup>ˆ</sup> such that workers with productivity below _θ_<sup>ˆ</sup> _d_ (Π)<sup>ˆ</sup> are willing to sell their work permit at price Π.<sup>ˆ</sup> Symmetrically, (3) defines a cutoff _θ_<sup>ˆ</sup> _o_ (Π)<sup>ˆ</sup> such that workers with productivity above _θ_<sup>ˆ</sup> _o_ (Π) are willing to buy a work permit at price<sup>ˆ</sup> Π and migrate to country<sup>ˆ</sup> _d_ to work there.

The market clearing condition pins down Π,<sup>ˆ</sup> i.e.

6
The market for work permits described above would create a new binding floor to earnings in country _d_ . Price Π<sup>ˆ</sup> works as a basic income guarantee for workers in country _d_ .

# **2.2 Welfare and work permit market regulation**

The welfare implications of these tradeable rights for destination country workers are fourfold. First, permit sellers enjoy increased leisure and receive income from the sale of their permit net of salary they would have earned otherwise. On the other hand, all consumers benefit from lower prices because aggregate output has increased but that could come at the cost of domestic workers who might experience downward pressure on their wages.<sup>2</sup>

**Increased leisure** Permit sellers no longer supply labor. The welfare gains associated with increased leisure are given by

**Net income gains** In exchange for the price of the work permit Π,<sup>ˆ</sup> permit sellers forgo their past earnings, i.e.

**Market regulation** We can now introduce a tax _τ_<sup>_p_</sup> on the sale of work permits as a policy instrument for managing the scheme for determining the desired basic income. Assuming, without loss of generality, that the tax is paid by the buyer, the market-clearing condition gets rewritten as

> 2We henceforth ignore in first approximation the impact that the introduction of a market for work permits can have on wages and prices in sectors other than the ones directly concerned with the sale of permits.

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so that fiscal revenues from the scheme would equal As expected, a tax on work permits is passed on to the seller through higher equilibrium prices. A regulated market for work permits could thus create a binding floor for the earnings of domestic workers, a floor that could further be altered through taxes (and subsidies).

We can also define and solve the inverse problem. For this, we take it as given that the ̄ government wants to attain some desired basic income guarantee Π<sup> ̄</sup> and find tax rate _τ_<sup>_p_</sup> so that market-clearing condition (7) holds, i.e.

# **3 Calibration**

To calibrate our model and give some empirical estimates to the variables we derived, we look at the specific US-Mexico migration corridor. We use data from the 2018 Annual Social and Economic Supplement of the US Current Population Survey (CPS), US Census Bureau (2019), and the Mexico National Survey of Occupation and Employment (ENOE) (INEGI, 2021). The CPS is a monthly survey of approximately 60,000 US households. The survey provides information on labor force participation, employment, unemployment, hours of work, earnings, and other demographic and labor force characteristics. The March Supplement of the CPS includes detailed questions on income received in the previous calendar year. We use the official poverty thresholds for the US, which gives a poverty rate of 12.3% in 2018 (Semega et al., 2019).

For Mexico, we use the 2018 round of ENOE, a tri-monthly survey applied to a representative household sample in Mexico. The survey aims to provide statistical information on the population’s occupational and substantive socio-demographic characteristics at the national 8
level. We do the currency conversion at Purchasing Power Parity (PPP).<sup>3</sup> We also allow for extra costs of living in the US not fully reflected in the PPPs, such as higher housing costs.

Using these data, we can now explore the impact of creating a market for work permits by calibrating the model and going through a series of simulations.

**Supply of work permits: Calibrating the disutility of work** To calibrate supply – curve (2), we need some estimate of the disutility of work the parameter _γ_ . To that end, we draw on the surveys that have been done to determine what share of pre-retirement income will make a retiree no worse off on a pension. Binswanger and Schunk (2012) report their estimates from such surveys for the US. The mean replacement rate is 80%, but they find that it is higher for lower-income workers, as one would expect. Based on their results, we set that rate to 0.9. Namely, we henceforth assume that a US worker _i_ will sell her work permit at any price that exceeds 90% of her income.

**Demand for work permits** To calibrate the demand for work permits, we proceed in two steps. First, we need to estimate the wages that Mexican migrants would earn if they were to migrate and work in the US. Second, we calibrate the other parameters in equation (3) such as migration costs or the cost of living in the US.

**Mincer regression** To predict the expected wages of Mexican migrants in the US, we first estimate the coefficients ( _β_<sup>_US_</sup> ) of a Mincer earning regression for the log yearly earnings of US worker _i_ on a set of her productive characteristics using the CPS data:

where _εi_ is a standard error term with mean zero and variance _σ_<sup>2</sup> . We predict the expected ˆ earnings of a Mexican migrant, which we denote _wMX_<sup>_US_, using the estimated coefficients (</sup><sup>_βUS_)</sup> and her characteristics ( _Xj_<sup>_MX_</sup> ) from the ENOE data. When predicting migrant wages in the

> 3We use a Mexico PPP rate for 2018 of 7.17 based on Argente et al. (2023).

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US, we assume that Mexican migrants in the US are employed in the private sector (not working for the federal, state, or local government, and not in the armed forces). We also assume that all migrants are Hispanic, single (for work migration), and have no US citizenship or permanent residency status.

The expected earnings in the US of a Mexican migrant is thus obtained given that and where _σ_ ˆ<sup>2</sup> is the unbiased estimator of _σ_<sup>2</sup> as estimated from (10) (see Wooldridge, 2013).

We postulate that a migrant makes a migration decision assuming that his earnings in the US are functions of his specific human capital characteristics and his occupation in Mexico. Here, the migration decision is also a function of the migrant’s professional experience in his home country. A Mexican electrician plans to work in that occupation in the US, forming his wage expectations ( ˆ _wMX_<sup>_US_)basedoninformationaboutwagesofelectriciansintheUS.</sup> The other explanatory variables ( _Xi_<sup>_US_)includeinformationaboutage,gender,marital</sup> status, race, the highest level of education, citizen status, job classification, and whether a worker works full- or part-time. Figure 1 shows the distribution of predicted yearly earnings produced by the Mincer regression. As apparent in the graph, the expected earnings of Mexican migrants are heavily concentrated in the low range, with the distribution of wages for US nationals first-order stochastically dominating that of would-be Mexican migrants.<sup>4</sup> Three sources of limitation of the Mincer regressions are relevant to our simulations. First, there are likely to be unobservables that influence choices about participating in this market. A US citizen-worker with high latent productivity will expect good career prospects

> 4Note that, strictly speaking, first-order stochastic dominance is violated at the bottom of the earnings distribution. In the US, these consist of part-time jobs, which will be replaced by full-time jobs occupied by migrants in a market for work permits.

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<!-- Start of picture text -->
1.0 ~aee ee - - -<br>_ a<br>“7 -<br>Z -<br>.<br>oo<br>0.8 7<br>7<br>/<br>/<br>> /<br>2 06 /<br>ne}© /<br>g / ——— Earnings of US citizens<br>a / —-—-—-. Earnings of Memican migrants in the US<br>3 /<br>E3 04 n<br>O /<br>/<br>/<br>/<br>0.2<br>7<br>7<br>/<br>/<br>0.0 - Y<br>0 50000 100000 150000<br>Yearly earnings (US dollars)<br><!-- End of picture text -->
wage elasticity of labor demand. Our calculations assume that the distribution of earnings (wage rate times employment) does not change above the Basic Income Guarantee. This will hold if the wage elasticity of labor demand is -1. This seems to be a reasonable assumption for the average wage elasticity based on past research on labor demand in the US.<sup>7</sup> However, there is undoubtedly variation around this mean elasticity, so we can expect (positive and negative) effects on earnings for many “non-Basic-Income-Guarantee” workers not captured by our analysis. Third, it is of interest to see how the size of this market compares with the current count of undocumented migrants. However, this count is uncertain, with current estimates in the (wide) range of 11 million to 22 million. The lower bound is derived from the Census Bureau’s survey-based estimates of the total migrant population (foreign-born people who have not become naturalized citizens) after deducting the count of legal migrants based on administrative data.<sup>8</sup> There are naturally concerns that illegal migrants will be reticent to reveal this fact, and may instead report that they are citizens; some illegal migrants may also be outside the sample frame of the household surveys. The upper bound of 22 million is based on Fazel-Zarandi et al. (2018), who used a time-series accounting of flows with demographic modeling. There is a continuing debate on the size of the undocumented migrant population in the US.<sup>9</sup>

**Calibrating migration and other costs** Demand curve (3) depends on parameter Γ _id_ , which represents the out-of-pocket cost of moving to the US (travel expenses to the US and back and visa fees). A reasonable assumption for the out-of-pocket cost of moving (and returning) is US$4,000, covering the costs of obtaining a visa as well as travel and relocation costs.<sup>10</sup> In addition, Clemens et al. (2019) provide a useful clue to the plausible inner range of values for migration costs by comparing the wages in the mainland US of migrants

> 7See, for example, Beaudry et al. (2018), who find a wage elasticity of labor demand of -1 based on the variations across cities and industries over 40 years.

> 8The methods and results using this method are described in Passel and Cohn (2018).

> 9Capps et al. (2018) question the Fazel-Zarandi et al. (2018) estimates. Rodilitz and Kaplan (2021) find similar results to Fazel-Zarandi et al. (2018) using data from Mexican surveys of prior illegal migrants to the US.

> 10We took an approximate amount of US$1,700 for processing of an H1B visa.

12
from Puerto Rico and Guam with their wages back home. Since there are no governmental restrictions on migration, the implied wage differential (in equilibrium) reflects migration costs. Clemens et al. (2019) obtain predicted wage differentials for Puerto Rico and Guam in the 1.3-1.5 region, indicating a psychic cost hovering between 20% and 30%.<sup>11</sup> For our main specification, we take a lower bound for the psychic cost _τid_<sup>_ψ_of 20%.Finally, we consider</sup> a tax schedule on earnings in the US, _{τid_<sup>_w}_,whichgoesfrom10%to37%.12</sup>

# **4 Results**

The results of our calibration are depicted in Figure 2, where we start with assuming no taxes on the work permits.

With the choice of parameter values described above, we find that the two curves intersect at a work permit price of around 20,000 dollars with 33 million permits traded (Table 1, column 1). To look at the margins of impact, we first look at the benefits to the permit sellers. First, permit sellers see their income increase by the price of the permit net of their current earnings. On the aggregate, US$656 billion are paid from buyers to renters, who then forgo US$394 billion in before-tax earnings. As a result, a market for work permits increases the monetary income of permit sellers by US$262 billion. To this tally, one should add the welfare gains from leisure, which, set at 10% of income, amounts to another US$39 billion. Thus, for permit sellers, the scheme roughly doubles their welfare.

On the immigrant side, their higher productivity allows a net increase in output of 6.7%

> 11Notice that we express migration costs as a share of the US earnings while Clemens et al. (2019) write them as a share of earnings at the origin. Following Clemens et al. (2019), let the earnings differential (US relative to Mexico) needed to compensate for the migration cost be 1 + _π_ for _π >_ 0. Then the migration cost as a share of US earnings is _π/_ (1 + _π_ ). The values for _π_ ˆ of 0.3-0.5 found by Clemens et al. (2019) based on wage differentials between Puerto Rico/Guam and the US mainland imply that migration costs as a share of US earnings of 0.23-0.33. On also allowing for out-of-pocket travel costs and rounding to the same order of accuracy as Clemens et al. (2019), the implied range for the total of the extra cost of living and the migration in our analysis is 0.2-0.3, as a share of US earnings.

> 12More specifically, we follow the IRS’ 2018 Tax Rate Schedule ( `https://www.irs.gov/publications/ p17` ) and use the following rate profile: 10% for yearly income below US$9,700; 12% for yearly income below US$36,475; 22% for yearly income below US$84,200; 24% for yearly income below US$160,725; 32% for yearly income below US$204,100; 35% for yearly income below US$510,300; 37% for yearly income above US$510,301.

13
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the price of the work permit increases to about US$25,000 with a market size of 45.5 million permits traded. The market for permits would then increase tax revenues by 6% and lead to a decline of the poverty rate by 4 _._ 1 percentage points. In column 3, we take the opposite approach by setting upper bound values of these cost parameters. Namely, we increase the cost of living to 20% and the psychic cost to 30%. As expected, the price of the work permit decreases to US$17,000 from the baseline of US$20,000, due to the decrease in the demand for permits; 26.6 million permits only are being sold in this scenario compared to 45.5 million in the benchmark case of column 1. Consequently, tax revenues drop to US$269 billion (i.e. an increase in tax revenues of 4%) and the poverty rate to 10% or a 2.3 percentage points decrease. Columns 4-6 show similar calibration results with parameter values within the range discussed thus far.

# **5 Work Permit Taxation and Poverty Targeting**

With a well-functioning market for work permits, we can now look at the government’s ability to regulate the market by setting a tax _τ_<sup>_p_</sup> on work permits.

There are many reasons for the policy maker to consider putting a tax. First, it raises revenues that can be used for other purposes. Second, it has the property of limiting the number of permits sold and hence affects the characteristics of the marginal buyer and seller. Thus, tax policy on work permits can be seen as a targeting instrument especially if the revenues from permit taxes are spent as lump sum (unconditional) subsidies to the poor.<sup>13</sup> For the sake of illustration, therefore, we contemplate several tax rates to achieve a target permit price and assume that the tax revenues are equally distributed to that same population of permit sellers. Admittedly, policy makers can adopt a more progressive redistributive scheme.

In Table 2, we present calibration results under various targeting scenarios. Column

> 13If tax revenues are spent as subsidies to permit sellers, then it will affect sellers’ incentives to sell in a way that would completely neutralize fiscal policy.

15
1 replicates our baseline scenario from Table 1, column 1. Under that no-tax scenario, 33 million permit sellers receive an annual rent of US$19,700. By setting the tax to 13% (column 2) and increasing it to 141% (column 5) we can see how tax policy can improve targeting by reducing the number of “beneficiaries” and henceforth increasing the basic guaranteed income of the targeted group.

For instance, with a 13% tax, the market shrinks to 31 million permit sellers and the price of the work permit drops to US$18,000. Yet, they receive the revenues from the tax amounting to US$2,300 per person and per year. The basic income guarantee, therefore, goes up to US$21,000 and poverty decreases by an extra 1.2 percentage point to 8.1%. Increasing the tax up to 141% further targets the 15 million poorest by reducing the permit price down to US$ 10,000. However, with the tax revenues hence generated, such a scheme allows a basic income guarantee as high as US$24,000 per year. Such a policy would bring the poverty rate down to 2.8% from a baseline of 12.3%.

# **6 Informal Labor Markets and the Limits of a Market for Work Permits**

We have proposed a market for work permits as a mechanism to redistribute part of the benefits of migration from migrant to native workers to compensate them for the risk of being displaced and for the potential loss in earnings. The illustration using data from the US-Mexico migration corridor gives estimates that suggest the market price for working permits would constitute a sizeable basic income guarantee for native workers who decide to sell their right to work.

The plausibility of the quantitative results hinges on the model’s assumptions. In particular, we assume the perfect enforcement of immigration and labor laws. Imperfect enforcement would result in informal markets that alter the agents’ incentives. It would primarily incentivize irregular migration pathways when the regular alternative, i.e. buying a work permit, 16
is more costly. These consist of irregular border crossing or migrant workers entering legally with a permit and then overstaying their visas. These two effects move the demand for work permits in opposite directions with an ambiguous net impact. In addition, the informal labor market could alter the incentives of native workers who might sell their right to work but still earn wages on the informal market, resulting in an increased supply.

The magnitude of these effects, and their impacts on the size of the market and the prevailing price of work permits, depends on the extent to which informal and formal labor markets are integrated. Law enforcement, which could be partly financed by the tax on work permits, would then determine the _tax_ associated with informal work as well as the _cost_ of taking an irregular migration pathway. Admittedly, the ability of governments to regulate the informal labor market depends on the initial size of that market. This would ultimately determine whether such markets are viable and be an effective instrument to provide social protection to native workers.

Another implementation issue that the model does not consider is the existence of a sizable share of the population that is unemployed or inactive. Data from the US Bureau of Labor Statistics suggest that only 62 percent of the working-age population is actually working, implying that 95 million US citizens would add to the supply of work permits (Bureau of Labor Statistics, 2018). For our suggested scheme to be viable, therefore, eligibility provisions would need to be implemented. For instance, mirroring unemployment insurance eligibility requirements, minimum prior employment duration could be a prerequisite for a worker before she can sell her work permit.

# **7 Conclusion**

The paper has assessed the scope for financing a basic income guarantee for working-age citizens by creating and regulating a market for temporary work permits in the labor markets of destination countries.

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The main finding of the paper is that assuming seemingly plausible allowances for migration costs, the market for work permits could support a basic income for the citizens of the destination countries at a similar or higher level to that found in recent policy discussions about a universal basic income. The simulation of the market is confined to the US and Mexico. With low tax rates on the work permits, we expect something around 30 million participants in the market at a single work permit price.

Our results point to the potentially important role of the tax rate on work permits in managing the market and targeting beneficiaries. Increasing the tax rate would reduce the size of the beneficiaries of the work permit scheme and, at the same time, increase fiscal revenues. These revenues, in turn, can be spent as social protection transfers, increasing the size of the basic income guarantee scheme. A regulated market for work permits can, therefore, provide a substantial social safety net for the native population, while allowing immigrant workers to access economic opportunities to not only increase the productivity of the destination country, and contribute taxes, but also generate income for them and their origin communities.

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|**Table 1: Policy simulations for a one-year work permit u**|**nder various**|**assumptions**|||||
|---|---|---|---|---|---|---|
||**1**|**2**|**3**|**4**|**5**|**6**|
|**Parameters**|||||||
|Tax on purchase of Work Permit (%)|0|0|0|0|0|0|
|Extra cost of living in U.S. (% of U.S. earnings)|10|0|20|0|10|20|
|Migrant premium on net earnings in U.S. (%)|20|0|30|10|10|20|
|**Simulation results**|||||||
|Price of Work Permit ($)|19,759|25,195|17,008|22,447|19,800|17,594|
|Average earnings of renters ($)|10,300|14,500|9,200|12,400|10,300|9,300|
|Expected earnings of buyers in the U.S. ($)|50,100|48,600|51,700|49,000|49,900|51,700|
|Number of renters (buyers) (M)|33.240|45.560|26.640|38.270|34.640|27.600|
|Total earnings of migrants ($B)|1,666|2,247|1,376|1,875|1,716|1,426|
|Earnings of migrants net of foregone earnings of U.S. workers as %|6.7|8|5.6|7|7|5.8|
|of U.S. GDP (%)|||||||
|Tax revenue from migrants’ earnings ($B)|327|440|269|364|337|282|
|Revenue from taxes on WPs ($B)|0|0|0|0|0|0|
|Net gains for renters ($B)|262|451|190|349|263|205|
|The U.S. poverty rate (excluding migrants); base=12.3%<br>Notes:_Extra cost of living in the U.S.:_percent of the migrant’s earnings i|9.3<br>n the U.S. he ne|8.2<br>eds to spend to c|10<br>over his living|9.1<br>expenses (food|9.3<br>, clothing, hou|9.9<br>sing, etc.);|

<mark>Notes:</mark> _<mark>Extra cost of living in the U.S.:</mark>_ <mark>percent of the migrant’s earnings in the U.S. he needs to spend to cover his living expenses (food, clothing, housing, etc.);</mark> _<mark>Migrant premium:</mark>_ <mark>monetary equivalent of required compensation for risk, disutility of leaving one’s friends and family, and ill-treatment at the destination;</mark> _<mark>Tax on purchase of Work Permit:</mark>_ <mark>the tax rate imposed by the U.S. government on the purchased WP;</mark> _<mark>Average earning of renters:</mark>_ <mark>average earning of the U.S. citizens who find it optimal to rent out their WPs;</mark> _<mark>Expected earnings of buyers:</mark>_ <mark>earnings that an average Mexican migrant who purchased the WP might expect to earn in the U.S. (assuming a certainty of finding a job);</mark> _<mark>Number of renters</mark>_ <mark>- number of the U.S. citizens who decide to rent out their WP under the tax regime of a given scenario;</mark> _<mark>Total earnings of migrants:</mark>_ <mark>number of Mexican migrants who purchased a WP times the average yearly earnings of a migrant in the US;</mark> _<mark>Total earnings of migrants net of total earnings of natives</mark>_ <mark>: as stated;</mark> _<mark>Tax revenue from migrants’ earnings:</mark>_ <mark>amount of tax revenue collected from migrants in the U.S. assuming that migrants pay the standard U.S. income taxes (Appendix, Table A1);</mark> _<mark>Revenue from taxes on WP:</mark>_ <mark>amount of revenue collected by the U.S. government from Mexican migrants by taxing the purchase of WPs;</mark> _<mark>Net gain for sellers:</mark>_ <mark>total amount of money the renters of WP gain from renting out their WPs, compared to their current income;</mark> _<mark>The U.S. poverty rate (excluding migrants)</mark>_ <mark>: the poverty rate in the U.S. that would result from the introduction of the market for the WPs under the particular scenario.</mark>
# **<u>Table 2: Tax rates required to attain various levels of a basic income</u>**

||1|2|3|4|5|
|---|---|---|---|---|---|
|**Parameters**||||||
|**Basic income guarantee ($/year)**|19,759|20,340|21,900|22,920|24,100|
|Extra cost of living in U.S. (% of earnings in the US)|10|10|10|10|10|
|Nonpecuniary premium (%)|20|20|20|20|20|
|**Simulation results**||||||
|Tax on purchase of Work Permit (%)|0|13|46|91|141|
|Average earnings of renters ($)|10,300|9,800|8,400|6,600|5,400|
|Expected earnings of buyers in U.S. ($)|50,100|50,700|54,600|59,800|63,900|
|Number of renters(buyers) (M)|33.2|31.6|23.5|18.1|14.6|
|Total earnings of migrants ($B)|1,666|1,612|1,322|1,088|932|
|Earnings of migrants net of foregone earnings of U.S. workers as<br>% of U.S. GDP|6.7|6.6|5.6|4.8|4.2|
|Tax revenue from migrants’ earnings ($B)|327|319|272|234|204|
|Revenue from taxes on WPs ($B)|0|74|162|197|206|
|Net gains for renters ($B)|262|215|145|90|62|
|**The U.S. poverty rate (excluding migrants); base=12.3%**|9.3|8.1|6.0|4.7|2.8|
|Note:_Basic income guarantee_($/year) is the desired amount of BIG;|see Notes to Ta|ble 1.||||