Work Permit Markets: A New Model for Social Protection and Economic Growth

Researchers from the World Bank propose a market for tradable work permits, allowing citizens in migration-destination countries to rent out their right to work to migrants. This system could finance a basic income for citizens, enhance economic productivity, and reduce poverty while offering migrants access to higher-paying jobs.

A recent paper by Quy-Toan Do, Michael Lokshin, and the late Martin Ravallion, researchers from the Development Research Group and the Europe and Central Asia Region of the World Bank, explores the feasibility of a market-based system for addressing economic inequality and migration challenges. The proposal envisions allowing citizens in migration-destination countries to rent out their work permits, granting migrants the right to work domestically for a limited period. The income generated from renting out these permits would serve as a basic income guarantee for citizens, while enabling migrants to access higher-paying jobs. Through theoretical modeling and a case study focused on the United States and Mexico, the researchers demonstrate the potential of such a system to benefit both destination and origin countries. The proposed system seeks to address concerns about migration’s impact on local labor markets while providing an innovative framework for poverty reduction and economic development.

Mutual Gains for Citizens and Migrants

Under this system, low-income citizens in the U.S. could monetize their work permits, earning income without participating in the labor market. At the same time, Mexican migrants would purchase these permits to access the U.S. labor market, where their productivity and earnings potential are significantly higher. Simulations estimate that approximately 33 million permits would be exchanged annually at an average price of $20,000 each, leading to substantial financial benefits for both groups. Permit sellers would experience an average net income increase of $10,000 annually, while migrant workers would earn approximately $50,000 per year. These financial transfers would result in a 5% increase in fiscal revenues for the U.S. economy and a reduction in poverty rates by three percentage points. The system is designed to self-target the most vulnerable workers, ensuring that those who benefit the most from the income guarantee are those who need it the most.

Regulation as a Tool for Equity

The study highlights the role of government regulation in fine-tuning this market. Taxes on work permits could act as a policy lever to manage market participation and enhance the redistribution of benefits. For example, a higher tax rate would reduce the number of permits sold, concentrating financial benefits among a smaller group of permit sellers while increasing revenues. In one scenario, a 140% tax on work permits could shrink the pool of sellers but redistribute the proceeds as lump-sum transfers, raising the annual basic income guarantee to $24,000 and reducing the U.S. poverty rate to just 2.9%. These findings demonstrate the potential for targeted poverty alleviation through a combination of market mechanisms and tax policies. The redistribution of tax revenues offers an opportunity to provide a robust safety net for the poorest citizens while maintaining economic productivity.

Data-Driven Insights and Simulations

The researchers calibrated their model using extensive data from U.S. and Mexican labor markets, including wage differentials, migration costs, and living expenses. They estimated that Mexican migrants would earn an average of $50,000 annually in the U.S., after accounting for costs such as visa fees, travel expenses, and the non-monetary psychological toll of migration. Despite these costs, the financial incentives for migration remain strong, especially when migrants can participate legally in the labor market through the proposed permit system. For U.S. citizens, the system would offer an opportunity to monetize their work permits, with the poorest citizens being the most likely to participate. The model predicts significant poverty reduction, particularly for those at the bottom of the income distribution, as well as increased economic output and fiscal revenues.

Challenges and Opportunities

While the potential benefits of the system are substantial, the researchers also acknowledge several challenges. A major concern is the enforcement of labor and migration laws. Without effective enforcement, informal labor markets could undermine the formal permit market, reducing demand and incentivizing irregular migration. Additionally, native workers might sell their permits while continuing to work informally, distorting the intended benefits of the system. To address these challenges, the authors suggest implementing eligibility criteria, such as requiring a minimum period of prior employment before citizens can sell their permits. Another potential limitation is the integration of formal and informal labor markets, which could create unintended consequences for wage rates and employment patterns. Despite these challenges, the researchers argue that the system offers a promising framework for addressing migration and inequality issues in a sustainable and equitable manner.

A Vision for Equitable Migration Policies

This proposal reframes the right to work as a tradable asset, offering mutual benefits for migrants and native workers. By allowing migrants to legally access higher-paying jobs and providing citizens with a basic income guarantee, the system has the potential to transform migration policies. The simulations highlight the economic potential of such a market, with gains in productivity, fiscal revenues, and poverty reduction. However, the researchers emphasize that the results are illustrative and depend on key assumptions, such as effective enforcement, the absence of major distortions in labor markets, and the willingness of participants to engage with the system. By addressing these factors, the proposed market for work permits could represent a significant step toward more equitable and efficient migration policies, benefiting both destination and origin countries. It offers a vision of migration that prioritizes social protection and economic opportunity, making it a valuable contribution to the global conversation on migration and inequality.