Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Why do people risk their lives to cross


borders?

Every year tens of thousands of people risk their lives trying to enter Europe illegally. They often pay people traffickers large sums to facilitate the dangerous journey. Those same traffickers typically send dangerously overcrowded and unsafe boats across the Mediterranean. Tragically, every year, thousands don’t make it.

The simple model we present in ‘Getting Out What You (Marginally) Put In’ gives some idea about why people risk their lives to enter another country. A distinct pattern applies to the flow of people across the world, legally as well as illegally. Unsurprisingly, people want to move from countries with relatively low wages to countries with relatively high wages. After all, who wouldn’t want a higher standard of living?

But we can also go a step deeper and say why one country has higher wages than another.

We start with the equilibrium labour market condition:

where MPL is marginal product of labour. This equation says that a person’s wage w is equal to his marginal revenue product of labour (MRPL). Economists often call w the nominal wage, because it’s the amount of cash that the worker is paid. Economists, however, think that
people should really care about their real wage: the amount of goods they can actually buy with their wage. Conveniently, we can easily convert someone’s nominal wage into his real wage. When we divide both sides of the equation above, we get:


w/p is the real wage (how much stuff you can actually buy with your cash wage of w). For example, if your nominal wage is w = £10, and you work for a chocolate factory selling chocolate at a price p = £2, your real wage is w/p = 10/2 = 5: you’re paid the equivalent of 5 chocolate bars. Obviously, you don’t have to spend all your wage on chocolate – but you can if you want to! To earn the real wage of ‘5 chocolate bars’ your MPL must be exactly 5 chocolate bars. That is, you working for the chocolate factory means that it can produce 5 more chocolate bars.

Therefore, to get a high real wage you need to have a high MPL. The question is: why is the MPL higher in relatively rich countries such as those in the EU? The answer lies in the production function f(K,L):

Rich countries tend to have high levels of capital (K): They have lots of high quality machines/factories/offices/computers. They also tend to have relatively few people – low levels of labour (L). When K is large and L is small, the MPL is large. Think about it: if you work for a firm with a lot of sophisticated equipment, your MPL is likely to be large. Furthermore, if not many people work for your company, your personal input is also likely to be particularly important – again increasing your MPL.


Poor countries tend to have low levels of capital (K): They have few high quality machines/factories/offices/computers and tend to have a lot of people – high levels of labour (L). When K is small and L is large, the MPL is small. If you work for a firm with little equipment, your MPL is likely to be small, but if many people work for your company, your personal input is unlikely to be particularly important – again lowering your MPL.

In short, people tend to want to move to countries with high levels of capital and not many people, because their MPL will be high, assuring a relatively high real wage.