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More Evidence of the Place Premium

+ Brandon Fuller

Peruvian workers willing to work in the United States can earn more than twice as much as they can make in Peru. Filipino workers can earn more than three times as much; Haitian workers more than seven times as much. The same worker with the same skills working the same job enjoys a significant place premium by working in the United States. Claudio Montenegro, Lant Pritchett, and Michael Clemens, the economists responsible for these estimates, point out that greater labor mobility could do much to reduce global poverty.

In his latest BloombergBusinessweek column, Charles Kenny points to a new working paper by Orley Ashenfelter that provides further evidence of the place premium. The paper:

compares the wages earned by staff working at McDonald’s (MCD) franchises around the world. Ashenfelter studies what McDonald’s employees earn against the cost of a Big Mac in their local franchise. The Big Mac is a standard product, and the way it’s made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet, depending on where they live, crew members from all parts of the world earn dramatically different amounts in terms of Big Macs per hour.

In the U.S. a McDonald’s crew member earns an average of $7.22 an hour, and a Big Mac costs an average of $3.04. So the employee earns 2.4 Big Macs per hour. In India a crew member earns 46 cents an hour while the average Big Mac costs just $1.29. Still, the employee earns just one-third of a Big Mac for each hour worked. Same job, same skills—yet Indian workers at McDonald’s earn one-seventh the real hourly wage of a U.S. worker.

Work by Michael Clemens suggests that the place premium is not unique to relatively low-skill workers in the service sector, it’s also substantial for high-skill Indian workers in the software sector. Kenny suggests that differences in the quality of governance between countries helps to explain the place premium:

It’s those better-functioning institutions and [road and electricity] networks which allow people with the same skills to get paid so much more here [in the U.S.] than in India.

Lant Prtichett’s work suggests that modest adjustments in immigration policy could have dramatic impacts on human welfare. As Kenny describes it:

Increasing the labor force of the OECD club of rich countries by just 3 percent through migration from the rest of the world would benefit people in poor countries to the tune of $305 billion a year. Compare that with an $86 billion annual payoff from the removal of all remaining trade barriers or the $125 billion the rich world already spends on aid to developing countries.

Yet, restrictive immigration laws keep most of the workers who would like to work in a reasonably well-run country like the United States from actually doing so. Understanding and addressing voter opposition to immigration in rich countries could therefore have important implications for global development.

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