1. Complete reduction of barriers would increase world GDP by between 67-147%. Even a small reduction in barriers would lead to welfare gains larger than the complete elimination of remaining barriers to goods and capital flows.
2. Migrants from the developing world themselves are the largest beneficiaries of migration. At the median, a migrant to the U.S. will experience a wage increase of around 4.11 times their pre-migration wage.
3. Immigration increases productivity and employment levels for all workers, including native workers.
4. No study has found large negative effects on GDP, wages, or government finances/service provision due to immigration.
5. Emigration from developing countries puts upward pressure on domestic wages, increases incentives for education, and leads to remittances. All of which make emigration a net benefit for poor countries.
Lower barriers to migration is indeed the most effective policy option for increasing economic growth and reducing poverty. Estimates of the economic gains from complete reduction of artificial barriers are between 67 – 147% of world GDP (see table 1). We could have a world around twice as rich as it is today, but for the restrictive policies we have in place. These gains require the migration of roughly half the current population of poor countries to rich countries, so if anything they would accrue gradually over time.
Yet even the gains from a small reduction of barriers (allowing for migration of 3-5% of poor country population) are greater than the gains from complete reduction of all artificial barriers to the flow of goods and capital. These numbers make intuitive sense: the global difference between prices of similar goods and capital instruments are relatively small; the global difference in wages between workers is massive.
The Migrants
The largest beneficiaries of migration from poor countries to rich countries are the migrants themselves. 80% of Haitians who escape poverty do so by moving to the United States. The main reason identified is the “Productivity Effect”. Simply put, rich countries have higher levels of, and more productive, capital (machines, tools, etc.) which increases the productivity of labor. A unit of labor in a poor country will be less productive than in a rich country for no other reason than lower capital. Owners of capital benefit from the increased productivity of poor country immigrants, but not as much as the workers themselves. This is true even for temporary migrants. The average person who has lived and/or worked in another country will receive a higher wage when returning home.
Migrants benefit most because they reap large wage gains from their increased productivity. Clemens, Montenegro, and Pritchett (2008) find that for 43 developing countries, the median wage increase for a migrant to the United States is 4.11x the wage of an observably identical[2] worker who does not migrate. There are three factors that make up the wage gap: artificial barriers, unobservable self-selection (the possibility that workers who are intrinsically more productive are motivated to move, they have more “pluck” or “gumption” or something), and geographical barriers.
Clemens et al. (2008) provides data on self-selection for 9 countries where enough data is available, and points out that no study has ever found self-selection to explain the majority of the wage gap. In fact, even when the highest estimate of the contribution of self-selection observed in any country is applied to all 43 countries, only in four of them is the wage gap less than 2x the poor country wage (see figure 3).
Geographical barriers are unlikely to sustain wage gaps above 1.6x. Wage gaps less than 1.6x are found between the U.S. its Pacific and Caribbean Island territories that enjoy free migration. The same is true of France and its off-shore departments. Therefore artificial barriers constitute the majority of the wage gap between a worker in a developing country and an identical worker in a developed country.
Re is the variable for wage difference between observably and unobservably identical workers. The graph provides for wage differentials at different percentiles of intrinsic productivity.
Immigration
But what about us? Immigration is good for the native population as well. It’s plainly impossible that migration could lead to such large increases in world GDP without benefiting the native population of rich countries, who make up nearly half of world GDP. And no study has documented large negative effects of immigration on GDP, wages, or government finances. Not to mention that placing barriers on immigration to prevent competition is logically and economically indistinguishable from past efforts at keeping women and non-white people from competing with white men.
Granted, standard theory supports the idea that, in the short run, increased immigration can reduce wages by increasing competition for jobs. This is due to time lags as employers increase capital to compliment the increased labor supply. There are also time lags in migrants finding employment, and in that employment leading to more production. If the labor supply increases faster than capital stock, wages can decline in the short run. The consensus of papers on the topic is that increased immigration has decreased wages anywhere between not at all to very slightly. In the long run, cheaper production due to lower wages would mean higher real wages for all other workers, increasing demand. Cheaper production and higher demand leads to increased production, higher demand for capital and labor, and upward pressure on wages. Immigrants also exercise their own demand, as one must consume to live, and employers increase production to meet it.
It is clear that immigration does not reduce employment. To drive the point home, Ottaviano, Peri and Wright (2012) perform a case study of 58 companies in the U.S. manufacturing industry. The authors look at both outsourcing and immigration. I focus on immigration now, but I have posted before about the benefits of outsourcing here. And Ottaviano et al. (2012) find that offshoring has no negative effect on native employment. The authors find that immigrants and natives[3] aren’t perfect substitutes, meaning one is not easily traded for the other. On average, immigrants employed in manufacturing are specialized at lower skill tasks than native workers. They are therefore complimentary; one increases the productivity of the other by focusing on what they do best. Increased productivity due to immigration leads to increased demand for both native and immigrant labor. True to the theory, immigration has a positive effect on employment in manufacturing, and does not decrease the employment share of native workers. Ottaviano et al. (2012) sum it up best:
The case for immigration reducing wages or employment is even weaker when dealing solely with skilled immigration. It is inarguable that a society can have too many educated people, or too many skills. Skilled immigration increases the productivity and job opportunities of all workers. Between 1995 and 2005 around a quarter of all new engineering and technology businesses in the U.S. were started by immigrants. And the more skilled people there are in an area the more likely it is that jobs requiring skilled labor will locate there.
Immigrant diaspora networks are often key to increasing trade between countries. A study by the Harvard Business School shows that U.S. companies with a greater proportion of Chinese-American employees have greater access to Chinese markets. Nearly 70% of Foreign Direct Investment into China passes through the Chinese Diaspora. A country that keeps Chinese immigrants out would keep itself out from such opportunities.
The argument that immigration is bad for government finances is equally weak. First, it should be noted that so long as the government is a net debtor, all residents of the United States, on average, consume more government services than they pay for. Legal immigrants are more likely to be employed than native workers, and make about the same, leading to higher tax revenue. Illegal immigrants are employed less and earn less but have less access to government services. Estimates vary, but between 50 – 75% of illegal immigrants pay local, state and federal taxes. And all illegal immigrants pay sales tax, gas tax, tolls, service user fees, etc. A study done in New York in 1999 found that illegal immigrants paid an effective tax rate of around 15%[4].
Considering this, the overall effect of immigrants on tax collection is very small. On the Federal level, the fiscal effect of immigrants is slightly positive. On the state level, the effect of immigrants is slightly negative. This is because more of the services immigrants use are offered on the state level. When it comes to illegal immigrants, in the vast majority of states and counties, the cost of services used by illegal immigrants is less than 5% of spending on those services[5]. Of that amount, between 42 – 86% of the cost is recovered through taxes illegal immigrants pay. Furthermore, much of the costs involved in an immigrant being illegal disappears if the immigrant is legalized. The take away message is that the overall effect of immigration on government finances is small, and its direction (positive or negative) is ambiguous.
Emigration
There are people who are concerned about the pace of migration because of negative effects emigration may have on a country, the specter of “Brain Drain” being chief among their concerns. The good news is that they need not worry, for again, the benefits outweigh the costs.
As with immigration, it is impossible that the large benefits from lower barriers to migration can occur without developing countries benefiting as well. While it is intuitive that a country could suffer from a reduced labor pool, it is common in developing countries for there to be so much labor per unit of capital that adding another unit of labor would not increase production at all. The mirror effect is that removing a unit of labor will not decrease production. Instead it should reduce the supply of labor and increase wages. A paper by Mishra (2007) finds that emigration from Mexico to the United States resulted in wage increases of 8% between 1970 and 2000. This is not always exactly true, especially in urban centers. But more capital investment and education would do far more to increase domestic production than barriers to emigration.
There is more of a case for negative effects of skilled emigration on a country’s economy. However, recent literature finds that the negative effects are small, and again outweighed by the benefits. Clemens (2011) points out that African countries with the largest emigration of skilled health workers have the best healthcare systems on the continent. This is because the prospect of emigration to a rich country, however likely, increases the expected return on education. The higher the expected return, the more people will invest.
Additionally, migrants to the developed world send billions of dollars to their families back home. These intra-household transfers totaled around $400 billion a year in recent years. Giovanni et al. (2011) finds that the negative effects of emigration are outweighed by the benefit of remittances alone in all but a few large middle-income countries. Because skilled workers get higher wages, skilled emigration means larger sums of money are sent back. And increasing shares of migrants eventually return home, bringing their skills and higher wages back with them.
Conclusion
The conclusion is simple: allowing for more immigration will greatly improve the lives of potential migrants. They will reap huge wage increases, just by changing the location where they work. Natives of developing countries will also benefit, their wages will increase, employment will increase, and government finances will not be negatively affected in aggregate. The people migrants leave behind will benefit, and new business networks will be created. Families will receive billions of dollars in remittances that would otherwise not be earned, and students will have a greater expectation in being rewarded for investing in their education. The benefits of freer migration are enormous, and they will make us all better off.
The largest beneficiaries of migration from poor countries to rich countries are the migrants themselves. 80% of Haitians who escape poverty do so by moving to the United States. The main reason identified is the “Productivity Effect”. Simply put, rich countries have higher levels of, and more productive, capital (machines, tools, etc.) which increases the productivity of labor. A unit of labor in a poor country will be less productive than in a rich country for no other reason than lower capital. Owners of capital benefit from the increased productivity of poor country immigrants, but not as much as the workers themselves. This is true even for temporary migrants. The average person who has lived and/or worked in another country will receive a higher wage when returning home.
Migrants benefit most because they reap large wage gains from their increased productivity. Clemens, Montenegro, and Pritchett (2008) find that for 43 developing countries, the median wage increase for a migrant to the United States is 4.11x the wage of an observably identical[2] worker who does not migrate. There are three factors that make up the wage gap: artificial barriers, unobservable self-selection (the possibility that workers who are intrinsically more productive are motivated to move, they have more “pluck” or “gumption” or something), and geographical barriers.
Clemens et al. (2008) provides data on self-selection for 9 countries where enough data is available, and points out that no study has ever found self-selection to explain the majority of the wage gap. In fact, even when the highest estimate of the contribution of self-selection observed in any country is applied to all 43 countries, only in four of them is the wage gap less than 2x the poor country wage (see figure 3).
Geographical barriers are unlikely to sustain wage gaps above 1.6x. Wage gaps less than 1.6x are found between the U.S. its Pacific and Caribbean Island territories that enjoy free migration. The same is true of France and its off-shore departments. Therefore artificial barriers constitute the majority of the wage gap between a worker in a developing country and an identical worker in a developed country.
Re is the variable for wage difference between observably and unobservably identical workers. The graph provides for wage differentials at different percentiles of intrinsic productivity.
Immigration
But what about us? Immigration is good for the native population as well. It’s plainly impossible that migration could lead to such large increases in world GDP without benefiting the native population of rich countries, who make up nearly half of world GDP. And no study has documented large negative effects of immigration on GDP, wages, or government finances. Not to mention that placing barriers on immigration to prevent competition is logically and economically indistinguishable from past efforts at keeping women and non-white people from competing with white men.
Granted, standard theory supports the idea that, in the short run, increased immigration can reduce wages by increasing competition for jobs. This is due to time lags as employers increase capital to compliment the increased labor supply. There are also time lags in migrants finding employment, and in that employment leading to more production. If the labor supply increases faster than capital stock, wages can decline in the short run. The consensus of papers on the topic is that increased immigration has decreased wages anywhere between not at all to very slightly. In the long run, cheaper production due to lower wages would mean higher real wages for all other workers, increasing demand. Cheaper production and higher demand leads to increased production, higher demand for capital and labor, and upward pressure on wages. Immigrants also exercise their own demand, as one must consume to live, and employers increase production to meet it.
It is clear that immigration does not reduce employment. To drive the point home, Ottaviano, Peri and Wright (2012) perform a case study of 58 companies in the U.S. manufacturing industry. The authors look at both outsourcing and immigration. I focus on immigration now, but I have posted before about the benefits of outsourcing here. And Ottaviano et al. (2012) find that offshoring has no negative effect on native employment. The authors find that immigrants and natives[3] aren’t perfect substitutes, meaning one is not easily traded for the other. On average, immigrants employed in manufacturing are specialized at lower skill tasks than native workers. They are therefore complimentary; one increases the productivity of the other by focusing on what they do best. Increased productivity due to immigration leads to increased demand for both native and immigrant labor. True to the theory, immigration has a positive effect on employment in manufacturing, and does not decrease the employment share of native workers. Ottaviano et al. (2012) sum it up best:
“We have found…during our period of observation, manufacturing industries with a larger increase in global exposure (through offshoring and immigration) fared better…in terms of native employment growth”.
The case for immigration reducing wages or employment is even weaker when dealing solely with skilled immigration. It is inarguable that a society can have too many educated people, or too many skills. Skilled immigration increases the productivity and job opportunities of all workers. Between 1995 and 2005 around a quarter of all new engineering and technology businesses in the U.S. were started by immigrants. And the more skilled people there are in an area the more likely it is that jobs requiring skilled labor will locate there.
Immigrant diaspora networks are often key to increasing trade between countries. A study by the Harvard Business School shows that U.S. companies with a greater proportion of Chinese-American employees have greater access to Chinese markets. Nearly 70% of Foreign Direct Investment into China passes through the Chinese Diaspora. A country that keeps Chinese immigrants out would keep itself out from such opportunities.
The argument that immigration is bad for government finances is equally weak. First, it should be noted that so long as the government is a net debtor, all residents of the United States, on average, consume more government services than they pay for. Legal immigrants are more likely to be employed than native workers, and make about the same, leading to higher tax revenue. Illegal immigrants are employed less and earn less but have less access to government services. Estimates vary, but between 50 – 75% of illegal immigrants pay local, state and federal taxes. And all illegal immigrants pay sales tax, gas tax, tolls, service user fees, etc. A study done in New York in 1999 found that illegal immigrants paid an effective tax rate of around 15%[4].
Considering this, the overall effect of immigrants on tax collection is very small. On the Federal level, the fiscal effect of immigrants is slightly positive. On the state level, the effect of immigrants is slightly negative. This is because more of the services immigrants use are offered on the state level. When it comes to illegal immigrants, in the vast majority of states and counties, the cost of services used by illegal immigrants is less than 5% of spending on those services[5]. Of that amount, between 42 – 86% of the cost is recovered through taxes illegal immigrants pay. Furthermore, much of the costs involved in an immigrant being illegal disappears if the immigrant is legalized. The take away message is that the overall effect of immigration on government finances is small, and its direction (positive or negative) is ambiguous.
Emigration
There are people who are concerned about the pace of migration because of negative effects emigration may have on a country, the specter of “Brain Drain” being chief among their concerns. The good news is that they need not worry, for again, the benefits outweigh the costs.
As with immigration, it is impossible that the large benefits from lower barriers to migration can occur without developing countries benefiting as well. While it is intuitive that a country could suffer from a reduced labor pool, it is common in developing countries for there to be so much labor per unit of capital that adding another unit of labor would not increase production at all. The mirror effect is that removing a unit of labor will not decrease production. Instead it should reduce the supply of labor and increase wages. A paper by Mishra (2007) finds that emigration from Mexico to the United States resulted in wage increases of 8% between 1970 and 2000. This is not always exactly true, especially in urban centers. But more capital investment and education would do far more to increase domestic production than barriers to emigration.
There is more of a case for negative effects of skilled emigration on a country’s economy. However, recent literature finds that the negative effects are small, and again outweighed by the benefits. Clemens (2011) points out that African countries with the largest emigration of skilled health workers have the best healthcare systems on the continent. This is because the prospect of emigration to a rich country, however likely, increases the expected return on education. The higher the expected return, the more people will invest.
Additionally, migrants to the developed world send billions of dollars to their families back home. These intra-household transfers totaled around $400 billion a year in recent years. Giovanni et al. (2011) finds that the negative effects of emigration are outweighed by the benefit of remittances alone in all but a few large middle-income countries. Because skilled workers get higher wages, skilled emigration means larger sums of money are sent back. And increasing shares of migrants eventually return home, bringing their skills and higher wages back with them.
Conclusion
The conclusion is simple: allowing for more immigration will greatly improve the lives of potential migrants. They will reap huge wage increases, just by changing the location where they work. Natives of developing countries will also benefit, their wages will increase, employment will increase, and government finances will not be negatively affected in aggregate. The people migrants leave behind will benefit, and new business networks will be created. Families will receive billions of dollars in remittances that would otherwise not be earned, and students will have a greater expectation in being rewarded for investing in their education. The benefits of freer migration are enormous, and they will make us all better off.
1. Which is: Output (q) is a function of Capital (K) and Labor (L). So q = f(K,L). Aren’t you glad you bothered to read this one?
2. “Observably identical” means a person of the same country of birth, same country of education, same level of education, same age, same gender, and same classification of dwelling as “rural” or “urban”
3. Immigrants are defined as all foreign born workers who were not citizens at birth, natives being all other U.S. workers
4. As in more than Mitt Romney and similarly rich people pay
5. California spends the most on services to illegal immigrants, at just under 10% of the cost of providing said services.
Though it is not my habit, here is a list of the sources I directly took data from.
Clemens, Michael A., Claudio E. Montenegro, and Lant Pritchett. 2008. The Place Premium: Wage Differences for Identical Workers Across the US Border. Center for Global Development Working Paper 148.
Clemens, Michael A.. 2011. Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?. Journal of Economic Perspectives. (Summer): 83 – 106.
Congressional Budget Office. 2007. The Impact of Unauthorized Immigrants on the Budgets of State and Local Governments. Washington, D.C.: Government Printing Office.
Economist. 2011. The Magic of Diasporas. 19 November: 13.
Economist. 2011. Weaving the World Together. 19 November: 72 – 74.
Giovanni, Julian di., Andrei A. Levchenko, and Francesc Ortega. 2012. A Global View of Cross-Border Migration. Center for Research and Analysis of Migration, London.
Kennan, John. 2012. Open Borders. Department of Economics, University of Wisconsin, Madison.
Mishra, Prachi. 2007. Emigration and Wages in Source Countries: Evidence from Mexico. Journal of Development Economics, 82(1): 180–99.
Ottaviano, Gianmarco I.P.. 2012. Immigration, Offshoring and American Jobs. Center for Economic Performance Discussion Paper No. 1147. London School of Economics and Political Science.
Giovanni, Julian di., Andrei A. Levchenko, and Francesc Ortega. 2012. A Global View of Cross-Border Migration. Center for Research and Analysis of Migration, London.
Kennan, John. 2012. Open Borders. Department of Economics, University of Wisconsin, Madison.
Mishra, Prachi. 2007. Emigration and Wages in Source Countries: Evidence from Mexico. Journal of Development Economics, 82(1): 180–99.
Ottaviano, Gianmarco I.P.. 2012. Immigration, Offshoring and American Jobs. Center for Economic Performance Discussion Paper No. 1147. London School of Economics and Political Science.
No comments:
Post a Comment