The topic of immigration is a central concern in all industrialized nations of the world. While a broad range of people across many nations oppose the current policies in their respective countries, they do so without knowledge of the facts and with a vague perception of how immigration can influence net nation income. It is not out of the ordinary to hear people from countries such as America mention that immigrants hurt their personal standard of living and native economy. This paper however does not intend to take a stance on the issue of immigration. The purpose of this paper is to review previous literature that examines the short-run economic effects of immigration on receiving countries, particularly on labor markets. Looking at this issue from an economic standpoint is a beneficial approach in that it reveals what a country must give up in allowing immigrants and furthermore can determine whether immigration is or is not valuable for the economy.
Before divulging the economics behind this highly debatable issue, it is necessary to highlight some facts that are of particular interest to the topic at hand. Currently, about 100 million live and work in foreign countries. While the majority of immigrants will settle in the United States, Canada or Australia, they are not the only countries that witness the arrival of foreign people. In fact, from 1980 to 1991, immigrants as a percentage of the population were on the rise for all Western European nations (Friedberg 25).
For the United States, immigration played an important role in population growth over the past forty years. In 1960, immigrants accounted for 13 percent of growth, to 19 percent in 1970 and all the way to 25 percent of growth by 1980. These large increases are mainly due to the Immigration and Nationality Act amendments of 1965 that effectively abolished the quota system previously in place since the 1920’s. The U.S. also witnessed a tremendous shift in the national origins of immigrants throughout these years. For nearly most of this nation’s history, immigrants entering the U.S. hailed from all parts of Europe. Since 1950, however this trend has reversed. Now the majority of immigrants come from outside of Europe. For example, 40 percent of current immigrants in the U.S. are Asian-born, and about the same come from South America and Mexico combined. In comparison, only 18 percent are from somewhere in Europe (Friedberg 27). In addition, there are a significant number of illegal immigrants coming to or presently residing in America, with the majority of these illegal aliens coming from Mexico and living in the state of California. The levels of education among these immigrants are also relevant in the broader investigation in that years of schooling often determines the level of skill in that worker. George Borjas found that in 1970, the average immigrant in the U.S. had 11.1 years of schooling compared to 11.5 years of schooling for natives. By 1990, it was found that the years or schooling scarcely changed for immigrants to 11.9 while that of natives grew to 13.2 years of schooling. Furthermore, the welfare participation rate of immigrant households climbed to 9.1 percent in 1990 from 5.9 percent in 1970 (Borjas 4).
With these facts in place, it is now necessary to investigate the literature on the short-run economic impacts from immigration. The economic belief held by many professionals is that the short-term effects will generally benefit the economy of the receiving economy. James Smith and Barry Edmonsten of the National Research Council share this view in their study published in 1997, which is “written to provide the “best professional judgment about which models accurately capture the most salient impacts of immigration in labor markets” (Smith 135). To arrive at the idea that immigration is economically beneficial, the authors “take a very simple and highly aggregate view of the economy” that combines two inputs; the first being one for which immigrants are substitutes and the second for which immigrants are complements (Smith 136). This model is under the assumptions that the economy is closed to international trade and that these aforementioned inputs have perfectly inelastic supply curves.
As immigrants enter the country and find jobs, the initial effect is that the supply of labor is increased. Thus, more goods and services are produced. Next, there is an effect on the prices of inputs, specifically the factors of production. The inputs for which the immigrants are substitutes will find that their prices will suffer. For instance, if an unskilled immigrant enters the labor force in America, the wage rate of native unskilled laborers will naturally decline as the labor supply shifts outward. This is the substitution effect from immigration. As a result of this rise in employment, there exists the possibility that a native’s wage is reduced to the point that he is forced to find a new, or secondary job. Thus, immigration can have this “displacement” effect on workers, increasing transitional costs for the entire country to contend with.
But immigration’s effects are not detrimental to all types of people. Specifically, those people for whom immigrants are complements will generally benefit from their presence in the labor force. For example, say that the unskilled laborer from the above example will expand the labor supply. Next, more managers or supervisor positions become necessary to monitor the increased workforce. In effect, the wages rates of these supervisors will rise as immigrants continue to find jobs in the receiving country. It is for these types of workers (supervisors) that immigrants are complements. The general movement in this situation is that “an increase in immigration flows will lead to higher incomes for productive factors that are complements with immigrants, but a lower income for factors that compete with immigrants” (Smith 137).
Rachael Friedberg and Jennifer Hunt also use this economic theory to find the impacts of immigration on the wages of natives. Friedberg and Hunt note that the impact of immigration on native’s wages will depend upon the type of model that is used. They insist that the operative decisions in a model are whether the economy is opened or closed and the degree of substitutability between immigrants and natives (Friedberg, 28).
Although the baseline analysis of the economic effect from immigration has already been established, the situation in an open economy has yet to be discussed. In the open economy, if technology is assumed to be the same across all countries, trade is driven by factor endowments. Countries with large labor endowment will generally produce more labor-intensive goods. This type of country, for this case is taken to be more of a developing country. Other countries are those that have a large capital endowment, such as in America. This creates a cross-country differential in wages and an incentive exists for those people who are making lower wages to migrate into a more capital-endowed economy. Thus, immigration will change wage levels as seen in the closed scenario, but the prices of goods on the world market will also change in an open economy. Despite the economy being open to international trade, the effects on the receiving countries will not be significantly different from those in the closed economy model (Friedberg 29).
The general sense in the aforementioned theory deems immigration to be an asset more so than it is a drag on the economy of receiving countries. If its impact is plainly beneficial, then why is there typically negative feelings exhibited by natives on those immigrants entering the country? What this economic theory fails to capture are the magnitude of immigration’s gains and the redistribution effect on wealth that they bring forth. Thus, a closer analysis of the basic economic model is indeed necessary to reveal the true picture of immigration in countries such as the United States.
Assuming that all capital is owned by natives, all workers are perfect substitutes in production and that the supplies of capital, native and foreign born labor all perfectly inelastic is the first step in revealing these hidden effects. The result then, when immigrants intrude on the workforce, is that national income increases due to the immigration surplus that is created. This surplus however, can only be created when the wages of natives suffer and the size of the surplus depends upon how much natives’ wages do fall. In other terms, the immigration surplus will only arise due to the “complementarities that exist between immigrants and native-owned capital” (Borjas 8).
The size of the resulting immigration surplus must also be considered. George Borjas uses empirical evidence on labor demand in receiving countries to pursue this question on the size of the immigration surplus. Citing Hamermesh (1993), studies indicate that in the United States the elasticity of factor price for labor is roughly -.3 percent, meaning that a 10 percent increase in the size of the workforce will reduce the wage rate by 3 percent. The corresponding immigration surplus in this situation would be .1 percent of GDP. Thus, if the U.S. was a $7 trillion economy, the immigration surplus translates to only a $7 billion gain. Furthermore, if the elasticity of factor price were –1, meaning that a 10 percent increase in labor supply reduces wages by 10 percent, the immigration surplus would be on the order of $25 billion (Borjas 7). In comparison to the size of the U.S. economy, these gains are relatively small. Furthermore, there are even larger economic impacts due to immigration that may more than offset these miniscule gains.
One effect from immigration that is hidden among the creation of the immigration surplus is the redistribution of wealth that occurs. Obviously, immigrants receive a large portion of the income that they help to create as the labor force swells. Native workers, in addition to their decline in wages, see a large portion of their income shifted into the pockets of capitalists employing those immigrants. As in the previous example, when the elasticity of factor price is -.3, natives will lose 1.9 percent of GDP ($133 billion) while the employers of immigrants will gain 2.0 percent ($140 billion) of GDP (Borjas 8).
Aside from the distributional issue, an evaluation of the fiscal costs of immigration are also worthy of attention. The net fiscal costs, the cost of services provided to immigrants subtracted from the taxes paid by immigrants, while not affecting workers directly, are of great significance. The estimations of net fiscal costs tend to differ on whether they are positive or negative, depending on what data is incorporated into the projections. Passel and Clark (1994) find that immigrant taxes are a net benefit to the economy on the order of about $27 billion. In contrast to this projection, Borjas (1994) found that services to immigrants are an expense in government “means-tested” programs by about $16 billion.
Further studies in this field show that the type of immigrant, skilled or unskilled, will affect the economy in the short-run to different degrees. Due to the complementarities existing between capital and skills, there remains a strong notion that a greater influx of skilled immigrants would bring about an enlarged immigration surplus. The theory behind this is there is a very negative elasticity of factor price for skilled labor implying that skilled workers are more complementary with other factors of production than unskilled workers. Furthermore, the immigration surplus (in a model with capital) is at a minimum when “the immigration flow is mixed in terms of skilled and unskilled workers” (Borjas 16). Thus, it might be in the best interest of policymakers to implement “skill filters” that would only allow in skilled immigrants. But the case changes when the majority of workers in the host country are skilled. In this situation the benefits from permitting skilled workers might be outweighed by the gains from admitting unskilled workers (Borjas 17). This analysis demonstrated that the most beneficial immigrants to the economy are those whose skills differ from natives.
The impact that immigration has on the economy in the short-run depends upon a variety of factors including the type of immigrant, the degree of substitutability in the workforce, the elasticity factor price for labor and the type of natives (skilled or unskilled) that are more common in the workforce. One effect that economists are certain about is that the wages of some natives will decline while others may increase, depending on the size and type of the immigrant class. Generally, the current trend is that host countries see a number inflow of unskilled immigrants that will decrease the wages of unskilled laborers. Furthermore, immigration has a definite redistribution of wealth from the workers to capitalists, which further agitates the working classes of natives. Additional research in this field will certainly help policy makers define what type of immigration is most beneficial to the economy.
1. George J. Borjas, "The Economic Benefits from Immigration" in Journal of Economic Perspectives, Vol. 9, No. 2, Spring 1995.
2. National Research Council, "Immigration's Effect on Jobs and Wages: First Principles (Labor Market Effects)" 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.
3. Rachel M. Friedberg and Jennifer Hunt, "The Impact of Immigrants on Host Country Wages, Employment and Growth" in The Journal of Economic Perspectives, Volume 9, Number 2, Spring 1995.