metadata: authors: 0: author: Lokshin,Michael M.
1: author: Ravallion,Martin
count: World
docna: 0: docna: The Missing Market for Work Permits
docty: Policy Research Working Paper
abstracts: cdata!: Citizens have a right to accept any job
            offer in their country, but that right is not marketable or
            automatically extended to foreigners. Yet, some citizens
            have useful things to do if they could rent out their
            right-to-work, and there are foreigners who would value the
            new options for employment. Thus, there is a missing market.
            A solution is to allow people to rent out their
            right-to-work for a period of their choice. On the other
            side of the market, foreigners could purchase time-bound
            work permits. The market would no longer be missing. This
            paper formulates and studies this policy proposal.
repnme: repnme: The Missing Market for Work Permits
display_title: The Missing Market for Work Permits
listing_relative_url: /research/2019/09/31402990/missing-market-work-permits
publishtoextweb_dt: 2019-09-12T00:00:00Z
no_of_pages: 18
author_keys: 0: author_key: 144523
1: author_key: 99002
model_extractions: Policy Research Working Paper 9005 The Missing Market for Work Permits _Michael Lokshin Martin Ravallion_ Europe and Central Asia Region Office of the Chief Economist September 2019
Policy Research Working Paper 9005

# **Abstract**

Citizens have a right to accept any job offer in their country, but that right is not marketable or automatically extended to foreigners. Yet, some citizens have useful things to do if they could rent out their right-to-work, and there are foreigners who would value the new options for employment. Thus, there is a missing market. A solution is to allow people to rent out their right-to-work for a period of their choice. On the other side of the market, foreigners could purchase time-bound work permits. The market would no longer be missing. This paper formulates and studies this policy proposal.

This paper is a product of 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 mlokshin@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
# The Missing Market for Work Permits

Michael Lokshin and Martin Ravallion<sup>1</sup>

**Keywords:** Work permits; right-to-work; international migration; universal basic income; social protection **JEL:** F22, J61, J68

> 1 <mark>The authors are with the World Bank and Georgetown University respectively. For their comments the authors thank Asli Demirguc-Kunt, Anna Maria Mayda, Alice Mesnard, Çağlar Özden and Dominique van de Walle. These are the views of the authors and need not reflect those of their employers, including the World Bank. Correspondence: mlokshin@worldbank.org and mr1185@georgetown.edu.</mark>
# **1. The missing market**

Barriers to international labor migration are clearly a major factor in explaining intercountry gaps in the marginal products of labor, implying large economic gains from reducing those barriers.<sup>2</sup> The main barrier is the restriction on the entry of foreigners to a country. Almost everywhere, a foreigner needs official permission—typically in the form of a work permit (WP)—to take up employment in a host country. Binding quotas on the supply of WPs (or work visas) create an excess demand globally for permission to work in high-wage economies among people living in relatively low-wage economies. The rationing of access to employment creates costs (including long and wasteful waits for visas) and strong incentives for illegal migration, including human smuggling.

An explicit WP is not required for citizens (or officially-recognized permanent residents). They already have a legally-recognized entitlement to accept any job offer in their own country. (Implicitly, the citizenship/residency document is the WP.) Once one reaches the specified working age, citizenship invariably comes with an unrestricted right to take up jobs offered—the “right-to-work.”<sup>3</sup> Currently, this right is not something that a citizen can relinquish. It is a nonmarketable entitlement.

Yet, alongside the global excess demand for jobs in high-wage economies, there are times at which citizens in those economies do not want to work in their country for the wage they can get, or simply cannot do so. They do not need their right to take up a job when offered, though it still has a value to others. So, at any one time, there are both foreigners who want jobs at the higher wage rates on offer in rich countries and people in those countries who have something they would prefer to do other than work for a wage. We have a missing market.

Restrictions on international migration for work are the root cause of the missing market. Without those restrictions, citizens would still not be able to sell their right-to-work, but that would be a moot point since nobody would have an interest in buying that right. There would be no missing market. However, removing all such restrictions is a tall order. There is another policy option—to create the missing market. Exploring that possibility is the aim of this paper.

> 2 See, for example, Clemens et al. (2019) and the estimates surveyed in Clemens (2011).

> 3 This term has different meanings. Here we do not refer to a right to actual employment but simply the right to take up employment if offered.

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# **2. Creating the missing market**

Why does this missing market need to be missing? Instead, we can allow any citizen to sell the right to take up employment—to rent out that right for a desired period. We propose that all working-age citizens should be free to rent out their right to accept a job and in doing so create new WPs. In equilibrium, when any citizen decides to rent out her right to accept work it will be purchased in the form of a WP. The person who buys that WP is then free to take up any job offer in that country, if admitted by other criteria deemed relevant. The market prices of these new WPs will be conditional on the stipulated length of time and start date (and the country of citizenship, if more than one country introduces this market). Once that period ends, the seller gets back her right-to-work. The marketable WP is fully disembodied from the person selling it, and also independent of who is buying it. The market is anonymous.

A version of one side of this proposal has been around for a while. Gary Becker proposed that the US government should sell citizenship rights to foreigners, rather than requiring quotas and long queues (Becker, 1992; Becker and Becker, 1997; Becker and Lazear, 2013).<sup>4</sup> Selling visas has also been suggested as a means of controlling human smuggling (as in Auriol and Mesnard, 2016). The revenue from selling work permits has also been seen as a means of compensating those native workers who are vulnerable to competition from migrant workers, as in Weinstein’s (2002) proposal for reforming migration programs.

The idea of selling citizenship or WPs—either at fixed prices or using a “visa auction” (as discussed by Zavodny, 2015)—does not seem to have been popular historically. One survey for a US city some 20 years ago did not find that the idea was generally viewed favorably (Borna and Stearns, 2002). However, this seems to be changing with various “cash-for-passport” programs emerging (Sumption and Hooper, 2014).<sup>5</sup> Objections have been raised to these programs, centered on a view that simply paying money is an ethically objectionable route to the honor of citizenship, and that these programs have targeted a global elite of the very rich, with undesirable implications for global inequality (Tanasoca, 2016; Shachar, 2017).<sup>6</sup>

> 4 An earlier proposal along similar lines had been mentioned by Chiswick (1982).

> 5 Some but not all of these programs require that one makes an investment, but this is still owned by the applicant. Here we refer to the subset of programs in which the purchaser makes a payment to the government (Sumption and Hooper, 2014).

> 6 As Tanasoca (2016, p.178) puts it, the “conferral of citizenship would recognise robust relationships (social, political, _and_ economic) to a community of citizens.”

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We are not proposing a “cash-for-passport” policy. There are two important differences. First, we are proposing that a time-bound WP can be purchased, not citizenship per se. (Temporary migration may eventually lead to the desire for citizenship, and acceptance by the host country, but that is not what is being purchased in our proposal.) While cash-for-passport programs have been in large part striving to attract very rich individuals, and have come with high prices, what we have in mind is a scheme with competitive prices that would have broader appeal across the distribution of income.

Second, in our proposal, there is a supply side for the WPs in that working-age citizens who do not want to work at the going wage sell their right-to-work for the period of their choice. The payments made for WPs by foreigners fund the payments to such citizens plus any other taxes or charges deemed necessary. (The final incidence of these taxes will fall in part on the citizens selling their right-to-work; we return to this point in Section 3.) The citizen is free to sell her right to accept employment for any period, although it would be sensible to impose an upper bound consistent with their age and expected working life span.

Like the old “selling citizenship” idea, our proposal helps address host-country resistance to migrants by requiring a payment from them. Part of that resistance has stemmed from the expectation that migrants will take the jobs of citizens—an externality. (There are other external costs, such as in providing public services to migrants.) The policy proposed here would help relieve this concern given that the citizen has the new option of selling the right to accept work for a desired period—providing scope for internalizing the externalities associated with migrants, including through taxes levied on WPs. Native workers who want to stay employed but whose wage rates fall due to competition with migrants will not benefit directly. Revenue from taxing the transactions in the new market could, in principle, be used to help compensate these workers.

The demand side seems clear enough.<sup>7</sup> What about the supply side? One can think of many examples of valuable things that people could finance by renting out their right-to-work for some period. Imagine the following stylized cases:

> 7 <mark>The demand would not be confined to foreigners, though they would be the bulk of it given how many people want to migrate internationally for work. As in any free market, anyone can buy a WP that is freed up by a citizen renting out their right-to-work. This includes fellow citizens; someone may have rented out their WP for two years (say) but decided after one year to rent it back.</mark>

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- You are a young person who has reached the minimum age for paid work. Renting out your right-to-work for a limited period would help to finance extra schooling or skilltraining.

- To help raise your children or provide home-care for a loved one in need, you would like to leave the workforce for a period, but you still need money. Then rent out your right-towork.

- On losing your specialized job in a company town (such as due to automation), you can rent out your right-to-work for a period to cope with the unemployment, while re-training and/or migrating. (Section 4 discusses the insurance benefits further.)

- You would like to set up a new business or do some unpaid community service, or you want to take up employment for some period in a different country to the one in which you are a citizen. Or just take a long vacation. You do not need your right-to-work, so why not sell it for that period?

- You want to retire early. Fine, sell your right-to-work (though subject to the expected working life).

- You get seriously ill or become disabled. Again, renting out your right-to-work will help you cope.

The idea of our proposed policy is to eliminate the inefficiency that arises from the current market failure that prevents one from renting out the right-to-work in each of these examples. By tailoring the number of WPs issued to foreigners to the amount of work that citizens do not want to do, one removes the current imbalance—the disequilibrium that stems from the missing market—without a change in total employment. (The government would also be free to issue more WPs, such as to address specific skill shortages.)

# **3. Model of the equilibrium price**

We start with a simple expository model that seems to accord well with how one might think about this proposal. The model suggests a high price of WPs—above the median wage in high-wage economies. We then show that more realistic assumptions suggest a lower price.

A single high-wage country introduces this scheme. Let the equilibrium price for a WP in that country be ω. (This depends on the time period for renting out the right-to-work, t, so we might write it as ω�t�, but we do not do so to keep the notation simple.) In the high-wage 5
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right, then selling that right can be no more problematic than selling other rights. The key step is acknowledging the property right.<sup>10</sup> It is also notable that WPs are already being monetized in the form of (legal and illegal) payments to intermediaries (including human smugglers). The present system is essentially one of formal quotas and (largely informal) side payments. The difference here is that our proposal will eliminate the quotas and channel the payments from people who could benefit from access to the high-wage segment of the global labor market to citizens who can probably make good use of the money in some other activity.

The policy is likely to have potentially important redistributive and insurance roles for the countries involved. We focus initially on the host country, without which the policy cannot be implemented.

People living in rich countries but with low current wages would presumably be more willing to participate in this market and gain more from doing so. This would put upward pressure on wages for low-skilled workers, reducing poverty and inequality in rich countries. This assumes that the scheme is introduced on top of existing social protection schemes, such as unemployment allowances. The extra benefits (including insurance) arise from the fact that anyone can rent out their right-to-work at any time. There may be some displacement of existing private transfers, such as support from other family members. On balance, net gains can be expected.

In thinking about the redistributive aspect in the host country, it is of interest to consider how this policy compares to one of the most talked about social policies today, namely a Universal Basic Income (UBI). There are some similarities. Like a UBI, our proposal provides a new income source for people who presently have little or no option but to work and in doing so must forgo personally and socially valuable pursuits. Like a UBI, there is no explicit targeting mechanism; since our proposal relies on a competitive market mechanism, in equilibrium, everyone (rich or poor) has this new opportunity and everyone faces the same price schedule for

> 10 We are reminded of past land and housing policy in many countries whereby these assets had previously been administratively assigned to individuals (such as agricultural land in Vietnam or housing in China or the Russian Federation) without the right to sell the asset. Thus, an important asset for many poor people was not marketable, reducing their wealth. Subsequent reforms made these property rights marketable, and active markets emerged in these assets. For an analysis of the efficiency and equity implications of this reform in the context of Vietnam, see Ravallion and van de Walle (2008).

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renting out their right-to-work. Thus, like a UBI, our proposal can be expected to have broader appeal, and hence be more sustainable politically, than finely targeted transfers.

There are some important differences. Our proposal will probably have a more pro-poor incidence than a UBI; specifically, it will bring both direct (first-order) gains to poor people who take up the option of renting out their right-to-work—a “self-targeting” mechanism—and indirect gains to others via the likely tightening in the low-wage labor market. UBI has been advocated as a means of addressing job-loss due to automation (as in, for example, Yang, 2018). But why would one give the transfer to everyone, including those who stay working? Our scheme would directly help those who lose their job due to automation. Also, unlike a UBI, it is self-financing. This overcomes a widespread concern about UBI proposals that require higher domestic taxes or are only available as an option to existing welfare programs, thus reducing the net gains to poor people from the UBI.

The policy also shares some of the concerns about other social protection policies. For example, the same concern arises about a UBI discouraging work.<sup>11</sup> If the equilibrium price is very high, then there will be concerns about so many people dropping out of the workforce in rich countries. Given that there can be many good reasons why they do not want to work, it is not clear how much we should be concerned about this. A similar point has been made about UBI; for example, see the discussion in Bregman (2017).

The distributional impacts in low-wage economies may well be more complex. There will be first-order gains for people in low-wage economies, who cannot otherwise get a permit to work in a high-wage economy. Those gains will be greater for those with a potentially higher wage in the destination country. The scheme would probably not attract many low-skilled workers in low-wage economies, but nor would it matter much for the highly skilled who can probably gain access anyway. Rather, introducing this new market seems more likely to attract middle-level skills to high-wage economies. The wage gains depend mainly on both their skills (determining realized wages in the host country) and foregone earnings (or other costs of migrating). So, our expectation is that the gains will tend to be in the middle of the income distributions in the low-wage economies. This can be modified by a number of other factors with bearing on the distributional outcomes, including access to credit for purchasing the WPs and the incidence of remittances.

> 11 For further discussion and references, see Ravallion (2019).

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There may be concerns about brain drain from developing countries. A selection effect is evident in the fact that the new WPs come at a price, and (as we have seen) it might be quite high, though possibly not as high as one might imagine. Note, however, that this is temporary migration. There will be remittances generated. And the returns to education in developing countries will almost certainly increase. The scheme will probably also reduce the widespread problem of the educated unemployed in developing countries that has been seen as stemming (in part at least) from queues generated by restrictions on international migration (Fan and Stark, 2007). (To the extent that the scheme draws heavily on the educated unemployed currently waiting for WPs in low-wage economies, this will imply lower foregone income and hence a higher equilibrium price, in keeping with equation (2).) Improvements in credit markets in developing countries (possibly with the help of external development assistance) could help broaden access to the new opportunities for migration.

There may also be global political-economy and coordination implications, as multiple rich countries might want to create this market. In our model, if additional rich countries do so (a higher n� and lower n�), then the equilibrium price of the WPs will fall.

There are other questions related to the design that we note briefly, though none seems to pose insurmountable challenges:

- Can any working-age adult be allowed to sell their right-to-work? We should be wary of adding constraints, as they can readily generate welfare costs. For example, the option of renting out your right-to-work may be confined to people who have previously been employed as wage-workers for some period. This may be considered desirable behaviorally—to assure that the person is making a well-informed decision. It can also be supported from the perspective of reducing inequality as it would restrict the “idle rich” from selling their unused right-to-work. However, exceptions could reasonably be allowed for those who have only just reached the minimum working age. They could be allowed to rent out their right-to-work for a designated period, such as to help finance schooling.

- To obtain current employment, citizens will need to show that they have not rented out their right-to-work. This should not be difficult. Even now, employers in the United States (for example) check work eligibility through the Social Security number. This can indicate that a person is not eligible to work because he rented out his right-to-work.

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- A market exchange would have to be created—a website at which the permits are sold and bought, which we discuss in more detail in Section 5. The administrative costs could be covered by a tax on transactions. The optimal tax on transactions may well be more than that given other external costs of migrants. Raising the tax rate will impact the likely skill profile of migrants, but (given the pass on through the equilibrium price of the WP) it will also alter the skill profile of those choosing to sell their right-to-work (in the opposite direction). Given it retains the power to tax these transactions, the host government will not lose control over the number of people entering the country.

- The sectoral/occupational composition of aggregate employment could well be affected. This could generate internal social conflicts and political resistance, although it should be noted that our proposal does have an in-built (financial) compensation mechanism for those in occupations or sectors that experience declining domestic demand. These structural changes in the economy could be managed by creating occupational WPs, with separate market price and taxes. We do not consider that to be an obviously desirable step, but it can be considered by policy makers.

# **5. So how might it work in practice?**

There is more than one way to implement this proposal. One option is to create a webplatform for online double auctions of WPs—a natural analogue to the economic model of a competitive market in Section 3. This would be managed by the government of the host country, which retains its monopoly over the supply of WPs. A separate bank account would be maintained for deposits and withdrawals associated with the new market.

The government (acting as auctioneer) first announces a discrete schedule of WPs, each stipulating a start date and duration. (The durations could be bounded by the host country’s existing practice for issuing WPs.) A citizen would register on the site, go through background checks, and provide some legal documents that verify his eligibility to trade on the site (for example, to verify his age).<sup>12</sup> Once cleared, a citizen submits his offer to sell one (or more) of the

> 12 If another high-wage economy introduces this market, there may need to be a coordination mechanism to address migrants between the two countries who face little or no restriction on migration, and so should not be eligible for selling their right-to-work.

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WPs, with a stipulated duration and start date.<sup>13</sup> The potential seller provides a minimum acceptable asking price. At the same time, potential buyers submit their maximum bids.

The canned software <mark>then finds the market clearing price ω for each WP such that the counts on the two sides of the market are in balance (at least approximately; some local averaging may be required). Under regular conditions a unique price, or range of prices, will exist. The equilibrium price schedule is then announced. All those citizens who said they are willing to sell their right-to-work for at least ω will take the offer, while a similar number of people wanting a WP but willing to pay no more than ω (plus stipulated taxes and charges) take it up. I</mark> t is the responsibility of the buyer to provide the full bid amount to complete the transaction. Once bought, the WP cannot be resold.

This is not the only possible way of implementing our proposal. A variation on the scheme would entail the seller selecting a (more or less) continuous vector of characteristics as well as an asking price (rather than the government setting this schedule of characteristics initially, though possibly revising it later). The double-auction mechanism for finding the equilibrium would then be more complicated computationally, but not any more so than some of those found in practice.<sup>14</sup> An optional design that may well be more popular for citizens of the host country (for its familiarity as well as transparency) is similar to the auction site _eBay_ . Once cleared for using the site, a citizen submits his offer to sell a WP, specifying the conditions (notably the desired duration and start date) and the price he wants to get. A seller should be able to monitor the ongoing prices for the similar WPs and set up the price for his WP accordingly. After the WP is listed on the site, anybody in the world can bid for that as a WP, with the appropriate taxes and charges added. A particular WP will go to the highest bidder.

Once the transaction is confirmed, the seller (a citizen) receives the money to his bank account and a note is made in his profile (linked, for example in the United States to his Social Security number) indicating the period when that person is not eligible to work in his own country. From that moment, the seller has no obligation either to the buyer or to the authorities. On the expiration date of the WP, the work status of the seller is reset to an original state and he again becomes eligible to work.

> 13 The price of the WP that starts tomorrow would probably be lower than the price of one that starts in 2 months; the price of the longer-term WPs will differ from the prices of the shorter-term WPs, etc. 14 An overview of the options can be found in Haeringer (2017).

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The buyer (most likely a foreign national) receives an official confirmation from the host country’s government that he has purchased a work permit for the specified period. This confirmation becomes a document supporting the buyer’s petition to obtain an entry visa to that country. The confirmation would not guarantee that the entry visa is granted, as there could be other reasons (notably security) why that individual might not be allowed into the country. (Nor does the confirmation guarantee that on arrival the buyer will find a job.) If the visa is issued, a buyer enters the country and looks for a job. The start and end day of the visa will be linked to the dates of the WP (assuming some grace period). A foreigner with the purchased WP could stay in the country for the duration of the WP plus some extra time for relocation.

A secondary market might develop to provide services and support both to the buyers and sellers. The legal services could be offered assisting sellers with the preparation of the necessary documents to confirm their eligibility to sell the right-to-work. The services for buyers would be more extensive. Because not all foreigners will be able to pay for the WP upfront, commercial banks (most likely in the receiving country) could provide loans to buyers to pay for the WP. The loan application will include checking the applicant’s qualifications and will be given based on the likelihood of the buyer finding a job in the country, possibly in a form of an employment contract or binding employment offer. Legal and immigration support might also be privately provided. Insurance instruments could be developed to insure buyers against the events of not obtaining a visa or failing to find a job while in the country.

There are other details on implementation that we have not discussed. <mark>How should the payments received by those selling their right-to-work be treated for tax purposes? Are employers in host countries allowed to buy WPs? How should some of the more atypical cases be treated, such as the incarcerated population? Are the migrants fully eligible for existing welfare benefits in the host country? Do we allow migrants under this scheme to bring their families with them? Should the host country want to provide public services to these families? What are the prospects for such migrants to get a permanent residence? Existing tax and migration policies in host countries will have something to say about many of these details.</mark> 13
# **6. Conclusions**

It is widely agreed (at least among economists) that there are likely to be substantial efficiency and equity gains globally from freer international migration. As Clemens (2011) puts it, there are “trillion-dollar bills on the sidewalk.” Yet freer international migration is not a very popular idea; indeed, some people are extremely hostile to it.

This paper has pointed out that restrictions on international migration generate a missing market in work permits. The policy we have proposed for creating that market would help capture the gains from removing those restrictions, while keeping the host government in control of the migration flows and (hence) domestic employment. This policy would also relieve the public’s concerns about freer migration, by helping to internalize the externalities in the host countries generated by migrants (or at least perceived to be).

There have been past proposals for selling visas, and some examples in practice. However, we have argued that these past proposals have been incomplete in an important respect: they have not eliminated the underlying market failure. Alongside the current excess demand for work permits, there is a potentially large supply side, namely all those workers in high-wage economies who would be happy to rent out their right to take up work when offered it as long as they are adequately compensated. There is much they could then do, including financing education or training, homecare of loved ones, or taking a long vacation. The host country will benefit from adopting this policy in several ways: Relatively low productivity workers who currently have little option but to join the labor market would be replaced with high productivity workers, raising GDP and tax revenues. The former workers would have new opportunities, including raising their future returns in the labor market or taking up selfemployment activities. The scheme can be designed to avoid changing the total number of jobs in the host country. There would be important complementarities with social protection goals.

The solution we propose is an anonymous market exchange at which any working-age citizen can rent out their right to take a job when offered, while someone else pays for a (taxable) work permit. The currently missing market would no longer be missing. This can be seen as a social protection policy as well as an efficient policy for managing immigration. And freer international migration would surely become a more popular idea.

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