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Economists and politicians have often debated the long term social and economic effects of immigration on the countries that, like America, open their doors to immigrants from all over the world. The average American probably believes that immigrants serve to displace American workers and in doing so drive down the national wage rate. The effect of immigration is much more complex and affects different sectors of the economy in a diverse manner. However, many economists now believe that, all though in the short-run immigration can cause a temporary drop in the wage rate, an increase in immigration can have a beneficial effect on the economy of the country that receives them. The overall net economic effects of immigration depend greatly on the skill-level and composition of the immigrants themselves. One also can not forget that although the process of immigration does effect both the sending and receiving countries, those who are most profoundly effected by immigration are the immigrants themselves. We will examine the macroeconomic short-term effects of immigration briefly before focusing on the overall long-term macroeconomic effects on both the domestic labor market and the economy of the receiving nation as a whole.
The most basic initial impact of immigration on the receiving country is an increase in the labor supply. This exogenous increase in the national labor supply serves to reduce the demand for labor leading to a short-term increase in unemployment and a complementary decrease in the real wage rate. This temporary reduction in the real wage rate occurs because, in the short-run, the capital stock of a country is fixed or predetermined and unresponsive to short-term fluctuations in the labor market. Since the capital stock is predetermined, the supply increase in the labor market leads to a decrease in the capital to labor ratio or worker productivity because of the diminishing returns of labor.
However, in the long run the capital stock is not predetermined and is flexible enough to adjust to long-run fluctuations in the labor market. Brezis and Krugman concluded in their 1995 study of a one-time increase in the labor supply of Israel caused by an exogenous, or unresponsive to expected real wage, immigration that: “the impact effect of the rise in the labor force is….the price of capital in place jumps, and there is a resulting rise in the investment rate. As the capital stock rises, real wages will rise as well, eventually surpassing their original level” (p. 88). In the long-run, the capital stock of nation is able to adjust and increase to a level that serves to increase real wages to such a level as to negate the initial drop in the wage level. Brezis and Krugman acknowledge that ability of the capital stock of an receiving country to increase enough to maintain or increase labor productivity depends on the ability and willingness of the host government to implement policies designed to accommodate increases in the labor force. “Investor confidence, and possibly an active government program to promote investment, may be crucial if a potential destination for large immigration is to fulfill that potential” (p. 92).
At the most basic level, the impact of immigration on the different sectors of domestic labor market of the receiving country depends on the skill-level of both the native and immigrant workers. At first, we will work with the assumption that the majority of those of who immigrate to the United States are relatively low-skilled workers as defined by their level of education and management experience. The low-skilled native workers for whom immigrants serve as substitutes, meaning those workers who have comparable skill levels when compared with the skill-level of the immigrants, will be worse off. The wage rate of these workers for whom immigrants can serve as substitutes will decrease as they are forced to compete with immigrants to keep their jobs. Immigration often serves to increase the supply of low-skilled labor, thereby reducing the demand and placing downward pressure on the wage rate of these workers. However, the closest substitutes, in terms of skill-level, for new immigrants are often prior immigrants, which serves to dampen the impact of immigration on native workers.
The sectors of the domestic labor market of the receiving country who benefit from an increase in immigration, characterized by an increase in the supply of unskilled labor, are those workers whose high-skill level makes them complementary with immigrants. In economic terms, a worker whose skills are complementary with respect to an unskilled immigrant is not easily replaced by an immigrant worker and therefore not forced to compete with the immigrant. “For a simple example, think of supervisors and production workers. Suppose that, for every 50 production workers, we need one supervisor. If we increase the number of production workers, we will need more supervisors and their wages will rise” (Smith and Edmonsten p. 137). An increase in unskilled laborers caused by immigration will lead to an increase in the demand for skilled managerial workers and a subsequent increase in the wage rate of these skilled, mostly native, workers.
Whether the net gain in wages experienced by those workers whose skill level makes them complementary factors with respect to immigrant laborers is enough to offset the decrease in the wage rate of those native workers whose skill-levels are similar to those of the immigrants and are forced to compete for jobs with the new foreign-born laborers, depends on the relative skill-level of the immigrants themselves. If immigrants were markedly less-skilled then the majority of native workers making them complements to most of the native labor force, then immigration would improve the economic position of almost all natives and would result in a net economic gain for the domestic labor market of the receiving country. The U.S. Bureau of the Census found in a 1993 study that there existed “a large proportion of immigrants with less than nine years of schooling, 23.4 percent in the United States and 28.6 percent in California, who may be complimentary with most native American workers” (Smith and Edmonsten, p. 142).
The finding suggests that many immigrant workers do not serve as substitutes for American workers and therefore increase the wages of the majority of American workers whose skills make them complements to the unskilled labor provided by these immigrants. “It is only because immigrants and native workers differ from one another that immigration yields a net national gain. These differences between natives and immigrants, which may well be a legitimate source of concern about the ability of immigrants to assimilate socially and culturally, are the very reasons why the nation gains economically from immigration” (Smith and Edmonsten p. 141). The overall net economic gain that a domestic economy experiences as a result of an increase in immigration is dependent on the ability of immigrant workers to serve as substitutes for native workers. The lower the skill level of the immigrants that come to a country, the higher the percentage of native workers whose skills allow them serve as complements to the immigrant workers and therefore benefit from the increase in demand for their services and subsequent wage increases caused by the influx of complementary laborers.
As we have seen, immigration has distribution effects on the economy of the receiving country, unskilled laborers who are forced to compete with immigrant workers experience a net loss, while skilled domestic laborers benefit from immigration. Expanding on the distribution analysis of the effects of immigration on the receiving country allows us to observe that consumers of those goods produced by immigrant laborers will benefit from a reduction in the cost of immigrant-intensive products. As the price of labor decreases due to the increase in supply caused by immigration, a consumer of those goods will benefit from the reduction in the production cost for the same reason the unskilled native worker does not. Those Americans who consume goods that are not produced by immigrant workers will not experience gains from immigration and may even witness an increase in the relative price of those goods as the cost of skilled labor increases. “By having immigrants specialize in the production of goods requiring a lot of low-skilled labor, it allows us shift our domestic production toward those goods in which natives are relatively efficient and away from those that can be produced more cheaply by immigrants” (Smith and Edmonsten p. 145). In effect, immigration and international trade have a similar effect on the productive capacity and efficiency of nation, by allowing a nation to take advantage of its comparative advantage by shifting production towards those goods in which native laborers are relatively more efficient.
Immigration also serves to expand the possibilities of domestic production, allowing a nation to produce goods that it previously would have had to import. Immigrants often specialize in activities or the production of goods that would not have existed domestically without their presence or expertise. Smith and Edmonsten use the example of the impact of immigrants on the garment industry in the U.S. to explain how immigrants can use their expertise to reduce imports. “Absent immigration, the garment industry in the United States might be much smaller or even not exist. The immigrant-induced increase in import-competing activities should reduce imports of textiles…this would raise the value of the dollar on world markets, since we would demand less foreign currency to purchase imports. The terms of trade would thus shift in our favor” (Smith and Edmonsten 148). Immigrants can possess a variety of skills and knowledge that had previously not existed in the country to which they immigrate. These new skills can expand the domestic production of goods which had previously been imported.
Although some sectors of domestic labor market, who are forced to compete with immigrant labor may suffer an economic loss; the overall effects of immigration on the domestic economy of the receiving country appear to be positive. “The most plausible magnitudes for the impact of immigration on the economy are modest for those who benefit from immigration, for those who lose from immigration, and for total GDP. The domestic gain may run on the order of $1 to $10 billion a year. This gain may be modest relative to the size of the U.S. economy, but it remains a significant positive gain in absolute terms” (Smith and Edmonsten p. 153). Immigration does place a short-term upward pressure on unemployment and downward pressure on the real wage rate, yet the long term economic benefits of immigration serve to outweigh these temporary fluctuations in the labor market. Economists have long debated the overall effects of immigration which are inherently difficult to quantify as evidenced by the $9 billion dollar range which Smith and Edmonsten cite in their attempt to put a number on the gains from immigration. Many politicians attempt to play on the xenophobic tendencies of the native workers who blame the loss of their job on an influx of low-skilled immigrants, yet these politicians fail to consider the overall long-run benefits of immigration on the economy as a whole. The size of the economic gain experienced because of immigration depends on the degree of difference between the skill-levels of native and immigrant workers. It is undeniable that some people stand to gain from immigration and others will lose, but in the long-run, government policies designed to increase investment and integrate immigrants into the domestic economy of the receiving country, can serve to ensure that the country experiences a net economic gain from immigration. Immigration can serve to increase the long-term capital to labor ratio and make the domestic economy more efficient and less dependent on imports.
1. Elise S. Brezis and Paul Krugman, "Immigration, Investment and Real Wages", Journal of Population Economics, Vol. 9, 1996, pp. 83-93.
2. National Research Council, "Immigration's Effect on Jobs and Wages: First Principles (Growth and Immigration)" in The New Americans: Economic, Demographic and Fiscal Effects of Immigration, edited by James P. Smith and Barry Edmonsten, National Academy Press, Washington, D.C., 1997, Chapter 4, pp. 153-165.