The Economics of Immigration

Given the interest and policy relevance (as well as Miles Kimball’s immigration tweet day), I thought I’d write a post on the theory and empirics of the effects of immigration in the labor market.

A simple starting point for thinking about the labor market effects of immigration begins with the supply and demand for labor.

immigration1

Supply:
An increase in the number of immigrants increases aggregate labor supply. You can see this in the chart as a rightward shift in labor supply (from S to S’) since the number of people who are willing to work for a given wage increases for all wages. Based partially on this simple framework, some believe that immigration decreases wages. Prominent economists in the immigration literature such as George Borjas espouse this “labor demand is downward sloping” view of immigration and argue that increased immigration adds to the supply of workers and depresses the wages of natives (say from W0 to W’).


immigration2

Demand:
However, increased immigration does more than shift supply right, it also increases demand. David Card is among the most prominent economists who have emphasized the idea that “demand also shifts out.” This view of immigration holds that the effect of immigration on natives’ wages is ambiguous – it depends on the relative size of rightward shifts in supply and demand. Here are a few reasons why demand shifts out:

  • Consumption: Immigrants consume goods and services and increase demand (and thus labor demand) for those products.
  • Long-run K/L Ratio: Common production functions predict a constant capital to labor ratio, which predicts that higher L will eventually mean more investment and thus more labor demand (since the value of each worker is larger when more machines are around).
  • Trade enables local production (and local labor demand) to exceed local consumption.
  • Productivity: Immigrants could help increase productivity, which can do many great things for the economy. Increases in productivity will not only increase labor demand directly, but it will also spur more economic activity through the first channel mentioned above. In a recent paper that I posted, Peri et al roughly estimate that an influx of foreign STEM workers can explain a quarter of productivity growth in the 1990-2000 decades. So this productivity channel can be huge, especially for high skilled immigrants. In addition, having more domestic customers increases the size of product markets and may encourage new investments and innovation as potential profits and “addressable markets” expand in size.

So where does that leave us? Immigration causes outward shifts in both supply and demand – knowing which shift is bigger and hence whether wages go up or down is an empirical matter.

immigration3

Empirics:

Taking this simple model to the data, where we would try to estimate how inflows of immigrants affect wage changes, requires thinking hard about a few issues:

  1. How do we define the labor market? Should we have separate figures for low and high skilled groups? How do these markets complement one another? Are low skilled natives and low skilled immigrants full substitutes? What about different geographies? These issues matter for interpreting how big the increase in supply is since adding 1 person to a 100 person market is much more important than adding 1 person to a million person market.
  2. What would have happened to wages otherwise? If immigrants come to places that have thriving labor markets, then observing little effect on natives wages may be misleading if natives wages would have increased 5% otherwise. We need good counterfactuals to have good estimates of the effects of immigration.

I don’t have time today to write a full review of this literature, but this nytimes magazine article has a nice account of some of the key papers and their estimates of the impacts of immigration on wages and employment. Finally, I should mention that Peri et al find that an influx of STEM workers of 1% of total employment raises the wages of college educated workers (both STEM and non-STEM) by 4-6%. An overly simplistic way to think about why STEM and college educated natives could be complements is that finance and legal work complement the high-tech industry. Finally, below find two sets of estimates (that reflect the Supply and Demand views respectively) from the Hamilton Project:

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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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3 Responses to The Economics of Immigration

  1. Dave Francis says:

    None of the politicians or the preponderance of them show no sympathy for the 23 Americans either completely jobless, destitute, or the part time employees or those who have given up hope of finding work? All they seem interested in is highly skilled workers or the agricultural Guest worker. As I have always said, much of this illegal immigration to the United States would never have happened, if illegal entry was enacted as a Felony? That the genuine 2006 secure double layer fence law had been in place and adequately funded? That the 1986 Immigration Control and Reform Act (ICRA) had strictly been enforced, instead of the questionable move by big corporations and all businesses to gain the upper hand by buying of lawmakers, so interior enforcement was next to nothing. So over these 3 decades the unconcerned legislators have turned a blind eye to the millions who crossed the poorly, undermanned borders, or never tracked the 46 percent airline passenger overstays who joined the illegal immigration invaders. The original 1986, 3 million who gained citizenship has broadened; bringing in family members through family unification migration, which has led to President Obama’s Dream Act for years of conceiving children on the taxpayer’s dime. If you are disposed to believe the 11 million illegal alien populations that is already settled here, or as most people have illustrated well over 20 million that seems more plausible as far as I’m concerned? To me that just prove to me that there has been no inclination to stop those who could reach our border, because miles of open areas still remain?

    Certain skilled workers who benefit America, is an advantage in this global market. And even a well regulated system to contract AGworkers, who are here strictly on a temporary basis? But non skilled labor, which has an overall advantage on millions of low income Americans, should not be tolerated without exception. If employers paid fair wages, most citizens and legal green card holders would be able to find a job, except the deadbeats that that have used the welfare system to support them. However President Obama and his czars have decided that the future of the Liberal Progressives, depend on generations of illegal migrants and immigrants as new citizens to vote them into Congress for years to come? This plan doesn’t just effect Republicans, but every citizen and all other legal nationalities, skin color and every class of worker. Not too many Americans see any advantage to a path to citizenship, because substantial amounts of money will be needed for retirement and pensions, no to exclude the processing cost. Both parties have already signed onto illegal aliens receiving Social Security, but where is the money coming from? Same with this child rebate tax controversy, which the IRS has ignored even though the estimate going to illegal aliens is now 7 Billion dollars.

    Two main laws that can at least scratch the service of illegal alien payments is THE LEGAL WORKFORCE Bill, that can reverse illegal aliens getting jobs by using the federal computer detection program, that could become mandatory for all workers and prosecution for tough business owners The essential law would be a simple amendment to end the contentious BIRTHRIGHT CITIZENSHIP BILL, so only children of a U.S. citizen could claim citizenship. So no more smuggled unborn or infants as associated with the Anchor Baby, would be able to gain citizen advantage to collect hundreds of billions of dollars in entitlement programs. However, without the blast of angry voice of the people, these policies sit in dormant, dusty filing cabinets in Washington. Research this information by checking out Judicial Watch, TEA PARTY.ORG and NumbersUSA and learn how the Liberal Democrats are splitting the country to forward their agenda.

    Incidentally, I heard today that the term Illegal Immigrant is politically incorrect by Democrat Rep. John Conyers Well—Sorry an illegal alien is the correct terminology, because only people who are inspected, have a visa or permission to enter a port of entry are legal immigrants? Just like the honest immigrant that awaits in faraway places to gain admittance is a legal immigrant.

    In concluding, Los Angeles County (just one county) spends over $1.Billion dollars annually in financing illegal alien welfare, states city administator Michael D. Andronovich.

  2. Pingback: The Labor Market Is Not Zero Sum: EPI, Immigration, & Labor Market Misconceptions | owenzidar

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