Friday, 7 June 2013

Immigration; an economic argument

The immigration debate has been a long standing issue between economists and the general population. I have yet to encounter an economist who is against it, yet many in the general population fear it claiming that immigrants take away domestic jobs and/or social security benefits, in addition to lowering the average domestic wages (since they are prepared to work for less). In Bryan Caplan's excellent book "Myth of the Rational Voter" he stresses that the division of opinions on immigration is the largest between economists and non-economists (the second one is openness to trade, on similar principles really). Even though there exists a whole range of original research that has proven time and time again that immigration leads to better skills in the economy, more specialization, higher not lower wages, that immigrants tend to be more entrepreneurial than average, not to mention bring in more competition, I however feel that many in the population still fail to understand this as they get scared of more competition, which is, in a way, a natural human response. 

From a social point of view many arguments can be find against immigration (e.g. higher crime rates  in areas populated mostly by immigrants) however from a purely economic point of view, there aren't many against it. At least none that make sense. In his column for the NY Times a few months ago, Tyler Cowen wrote about egalitarianism of economics and economists, with a profound example on immigration: 
"One enormous issue is international migration. A distressingly large portion of the debate in many countries analyzes the effects of higher immigration on domestic citizens alone and seeks to restrict immigration to protect a national culture or existing economic interests. The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country. 
Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” ... He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers. 
Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized." 
From the aforementioned paper, the following table sums up some of the empirical estimates of efficiency gains from partial elimination of barriers to labour mobility: (I recommend the paper, it has a few very good intuitive points)
Source: Clemens, M. (2011) Economics and Emigration: Trillion-Dollar Bills
 on the Sidewalk? Journal of Economic Perspectives, Vol 25(3) pp. 83-106;
Table 2
As Cowen points out even if some of these figures are overestimated, and even if complete removal of barriers is in some cases unlikely or implausible, the estimated efficiency gains would still be positive and significant. And as Clemens suggests even the partial removal of barriers to labour mobility would initiate larger welfare gains than, for example, a removal of barriers to trade in goods or capital flows, thus implying that we are seriously underestimating our potential wealth. The graph below is a neat micro approach to show this total welfare gain: 
Source: Clemens, M. (2011) Economics and Emigration: Trillion-Dollar
Bills on the Sidewalk? Journal of Economic Perspectives, Vol 25(3)
pp. 83-106; Figure 1
Where D and D* are the labour demand curves, the two vertical horizontal lines represent wages in low-and high-wage countries, and the horizontal line (OO*) is the labour supply. As you can see from the description beneath the graph, the global welfare gain to society is the shaded area (sum of a+e). And this is not the case of completely free migration (which would equate the wage rates). No, this is just the effect of workers LL' migrating abroad. Their emigration has generated a slightly lower wage rate in high-income countries, and has slightly increased the wage rate in lower-income countries. Migrants gain, non-migrants gain in low-income country, lose in high-income country, while owners of factors of production - the opposite. The loses to non-migrants could be offset by downward shifts in demand curves. If labour demand becomes elastic in high-income countries then the total gain shrinks. 

There are indeed losses to non-migrant labour in high income countries (area d), but the net benefits to society significantly outweigh the losses. Think of this graph the same way you look at the graphs denoting gains from trade, or losses from tariffs or quotas. In a similar microeconomic setting, the theory teaches us that even though imposing tariffs on foreign imports will result in a benefit for the producers of the particular good, their gain is significantly less than the loss to society who has to pay a higher price for that good. The same reasoning is applied here. 

So how should we cope with the necessary loss of jobs of domestic non-migrant workers in high-income countries? The same way we cope with job losses in the West incurred by moving production abroad. The consequential loss of jobs wasn't immediate; it got held off until the current crisis had struck. And now the problem is structural. But in the entire decade before the crisis we could have observed this trend, and adapted to it. The reason why the economy didn't adapt to the new patterns of specialization (both international and domestic) was a series of constraints and interest group pressures that have prevented this then and are still preventing it now. Unfortunately the same forces would operate if barriers to labour mobility were removed (partially or completely). 

As for the wage stagnation problem in high-income countries, Greg Mankiw has a good comment:
I understand that not all workers in the United States will embrace foreign-born competitors with the same equanimity as a Harvard professor. That is especially true of those with fewer skills and opportunities.

Over the last several decades, for the most part, the wages of workers without any higher education have stagnated, while the wages of those with advanced degrees have risen. The main forces driving these trends are technological change, which tends to increase the demand for skilled workers relative to unskilled workers, and, to a lesser extent, international trade. But the immigration of unskilled workers from abroad may be a contributing factor, and one that is all too obvious when these immigrants vie for the same jobs as unskilled workers born in the United States.

The best solution to wage stagnation is to promote educational attainment among Americans. That’s easier said than done, but the task is imperative nonetheless. We won’t substantially help unskilled workers who are already here by denying the American dream to others who wish to pursue it.

8 comments:

  1. Your analysis is focused entirely on the benefits to the countries importing labour (for that is what immigration is, economically). What are the losses for the countries exporting labour, and are there any offsetting gains? After all, they don't get paid for their exports (unless the labour they export is slaves, of course).

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    1. At the graph above the area "c" is the total gain to low-income country non-migrants. However, the losses to owners of factors of production are "b+c", implying that the "brain drain" country experiences a net welfare loss.
      However, in the end the labour exporter country does benefit through remittances being sent back home, and even lower domestic unemployment (and hence lower pressure on the government budget). The example is Poland and its over 500,000 workers which have emigrated to Britain after 2004.

      One can however make the same argument vice versa. If the labour exporter country benefits in a number of ways, then the labour importer country must lose out. However, just as in trade this is not a zero sum game.

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  2. Great paper, thanks for the recommendation. It really does look like a typical international economics approach. As it should

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  3. I really don't see any of the gains from migration apart from the migrants themselves. The owners of factors play a zero-sum game, don't they? (if e=b)
    It would be wrong to conclude that more open borders would increase world output. Or am I missing something?

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    1. Yes the gain areas are equated but that doesn't mean that the owners of factors loose out. Think in terms of newly gained skills.

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  4. I think there are ideological blinders on this subject on both sides. It has long been known that there are economic advantages to immigrants but these tend to be long term advantages while the short term disadvantages are very real.

    I happen to live in a city which currently and for many years has been the recipient of massive immigration. Believe me it does cause problems. Social problems, crime problems. Use of social services, etc. In the long term yes there is a benefit if the workers assiminlate and move up into the middle class and pay more taxes.

    If, however they were to remain a permenant underclass living in shanty towns then the advantages would not accrue.

    I also blush at the "evidence" I see which states that cheap immigrant labor does not hold down local wages. I suppose that immigrants are magical beings able to put aside the laws of supply and demand. These studies are not valuable. They assume that the economic growth of a region is dependent upon the immigrants rather than the reality which is the opposite, the immigrants are drawn to the areas with high growth, and yes they do depress the wages from what they would otherwise be.

    Having said all of this I am not anti-immigrant. But I am anti-making ideological arguments parading as economics.

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    1. They certainly do depress the wages, this is what the paper claims, and this is what causes a net benefit to owners of factors of production in importing countries. From a purely economic perspective, measuring the entire net benefit area, the gains are significant. I do agree there are short-run social losses, particularly if low-skilled immigrants tend to cluster in areas where they only communicate one with another. We can try to think why this is so, and where are the incentives to behave in such a way coming from.

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    2. I agree with Kyle. High levels of immigration do tend to have short-term costs, even though in the long term the benefits are undisputed. But the issue at hand is assimilation of immigrants..

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