Symposium | The Hidden Keys to Growth

The Case for More Immigration

By Alex Nowrasteh

Tagged growthimmigrationJobsLaborwages

About 232 million people, roughly 3 percent of the world’s population, are immigrants. Just over 40 million of them are in the United States, accounting for just over 13 percent of the U.S. population. Immigrant flows between countries are largely driven by different levels of development. Immigrants leave poorer nations and move to richer ones where they can earn higher wages. Once the immigrants arrive in their destination countries, they impact the economy of their new homes in positive ways that boost long-run economic growth.

The connection between wages and immigration is crucial. Wages are a measure of marginal productivity—how much economic value a person can produce. People in developing nations earn low wages because they live in circumstances that render the fruits of their labor comparatively less valuable while those in richer countries earn higher wages because they live under more favorable conditions. There are many reasons why this is so. Among them are that the lower earners usually live in societies with predatory governments that arbitrarily confiscate wealth, are rent asunder by civil war and other armed conflicts, and lack the social, political, and economic institutions that are the foundations for economic growth, as well as numerous other factors. By contrast, residents of developed countries face fewer political and social barriers to economic growth, thus incentivizing the long-term accumulation of the machines, knowledge, and human capital that propel the economy.

The scale of differences in productivity between countries, and hence wages, is astounding. Controlling for all observable differences in wages across countries, the median worker from the developing world can expect a fourfold increase in wages by coming to the United States. Across the board, wage growth can range from a twofold increase for Dominicans to a 15-fold increase for Yemenis. Thus, just by moving to the United States, these workers will experience increases in income that few in the developed world can imagine. These gains do not come at the cost of Americans’ losses, but from the increased productivity of the immigrant workers themselves. Their immigration expands the size of the global economy.

The global economic growth effects of immigration are potentially so large that they could dwarf the benefits of nearly every other policy change. Economist Michael Clemens from the Center for Global Development compiled all the estimates of the effect that a global open borders policy could have on the worldwide economy. Since the global economy is massive, complex, and impossible to experiment with, economists build models on computers whereby they assume immigrants move from the developing world to the developed one until wages in the two locations are equalized. Once the models reach equilibrium, the result is a 50 to 150 percent increase in annual gross world product (GWP)—an increase of about $40 trillion to $120 trillion in annual output. These gains accrue annually, so the present value of such a radical global policy change is about $1 quadrillion.

Economist George Borjas dug in to those models and estimated that about 2.6 billion workers would have to move from the developing to the developed world for a fourfold wage difference to equalize, which would increase GWP by 57 percent. Of course, the nations of the world would never agree to changes this seismic; that level of movement would never be tolerated by developed countries or the countries where migrants come from. However, a policy shift that allows modest increases in immigration would create substantial economic growth, even if only a fraction of the potential.

Most of the economic gains described would be accrued by immigrants directly through higher wages earned via increased productivity. After all, it is hardly controversial that immigrants are the biggest beneficiaries of immigration. Immigrants, however, do not set first-world immigration policies. Most Americans and other citizens of developed nations are more interested in the myriad ways immigrants affect the economy and economic growth.

Because the global economy is huge, complicated, and impossible to experiment on, economists like Clemens build models to simulate the effects of various policies. The bedrock of understanding immigration’s effects on growth is the Solow model, which has been used to study those effects for decades, including by the Congressional Budget Office and the Bipartisan Policy Center to estimate the economic and fiscal impact of the immigration reform bill passed by the Senate in 2013. The Solow model, developed by Nobel Prize-winning economist Robert Solow, works, broadly speaking, by gauging how the factors of capital, labor, and increases in productivity (commonly referred to as technology) work together to boost economic output—the quantity of goods and services available. Growth can occur by expanding the stock of capital: by building more factories using increased savings, by adding more labor that can then work in the factories, by raising the productivity of capital or labor through the use of technology or better organizations that increase productivity, or any combination of the above. To break it down further, growth occurs by adding more workers or factories and by making those workers and factories produce more with less.

The Solow model is simple, but does a remarkably good job of describing the effects of increased immigration. Investments in capital goods respond rapidly to increases in the number of workers, thus compensating for the decrease in wages, just as the model predicts. The Solow model is also correct about immigration’s direct long-run impact on wages. Most academic papers on this topic find small wage effects all clustered around zero in the longer term, which is exactly what Solow predicts, because of how capital markets adjust. However, the details of why the wages of Americans are mostly unaffected by immigration are more complex than the Solow model makes it appear.

The Solow model assumes that immigrants will just add to “labor,” a factor enormously varied in the real world. From low-skilled to high-skilled, from inexperienced to experienced, and from occupation to occupation, workers are tremendously varied and specialized. As a result, most immigrants have skills, educations, and experiences very different from the average American. This means that most workers in the two skill groups do not directly compete for the same jobs. Immigrants are more likely to be either highly skilled or low-skilled compared to native-born Americans. Lower-skilled immigrant landscapers or higher-skilled software engineers do not lower the wages of American accountants because the skills required differ. Those differences between immigrant and native workers limit labor market competition, attenuating much of the negative wage effect that the Solow model predicts before the capital markets expand.

Even when immigrants and American workers have similar education or skill levels, other differences often prevent them from competing with each other. For instance, lower-skilled immigrants generally have poor English language skills compared to natives. As a result of those differences, less-skilled Americans change their behavior in two important ways that shield them from competition with lower-skilled immigrants. First, they acquire more skills through increased education. Second, lower-skilled Americans specialize in jobs that require English communication, which also tend to be higher paying. Lower-skilled immigrants then specialize in manual labor occupations that do not require much spoken English. The result is that low-skilled immigrants often push native-born Americans up the occupational ladder into higher wages. Occupations where immigrants tend to cluster do experience wage declines because of the increased supply of workers, but Americans change their occupations in response to that downward wage pressure, often resulting in higher wages for lower-skilled Americans.

The skill difference between immigrants and natives is often so large that labor market complementarities emerge that raise the productivity and hence the wages of U.S.-born workers. When American and immigrant workers are complementary, an increase in the number of one type of worker can increase labor market demand for the other type of worker—raising wages in the process. An increase in the number of immigrant doctors, for instance, will drive wage increases for nurses, physician assistants, and other medical support personnel who can only work in cooperation with a doctor. This occurs because workers, managers, and others in the economy are constantly working together, and so the productivity of these individual workers can depend on the productivity of the other workers in the chain of production. More productivity in one link of that chain incentivizes businesses to hire additional workers and pay higher wages to the other links in the chain to take advantage of the gains in the first link. More doctors who can treat a greater number of patients will demand more nurses and other support staff to handle the additional caseload. Confirming the existence of complementarities between natives and immigrants, economists Gianmarco Ottaviano and Giovanni Peri found that immigrants from 1990 to 2006 increased the relative wages of native-born American workers by just 0.6 percent.

Know-nothings believed the Irish would destroy the republic. That silliness still lingers today.

In contrast to the findings from Ottaviano and Peri, George Borjas looked at data from 1960 to 2000 and found that a 10 percent increase in the number of immigrant workers generally lowered the wages of Americans by about 4 percent. While recent research has challenged Borjas’s findings, they are the largest negative wage effects of immigrant workers claimed by economists. The rest of the academic literature finds very small wage effects clustered near zero.

Besides inducing increased investments in capital goods, low levels of competition in the labor market, and complementary skills, immigrants also increase the demand for workers merely by consuming goods and services. According to economists Gihoon Hong and John McLaren, this increase in consumer demand means that each immigrant creates 1.2 jobs for local workers in the United States. Most of those new jobs are in the nontraded service sectors of the economy where many lower-skilled natives work. New demand for labor in the nontraded services sector helps prevent wage declines in the economic sectors most likely to compete directly with immigrants.

Immigrants also tend to spur productivity growth, much of which comes from improvements in technology, engineering, and the sciences. According to one estimate, 50 percent of productivity growth in the United States between 1950 and 1993 could be attributed to growth in the share of scientists and engineers, areas where the foreign-born excel. In 2010, immigrants were 15.8 percent of the U.S. adult population with at least a bachelor’s degree, but held 21 percent of college degrees in the sciences and engineering. Skilled immigrants boost productivity.

The higher rate of immigrants filing patents is related to greater innovation and inventiveness that increases productivity, thus allowing the economy to produce more goods and services with fewer inputs. Economists Jennifer Hunt and Marjolaine Gauthier-Loiselle found that a relative 1 percentage point increase in the population of college-graduated immigrants increases patents per capita by 9 to 18 percent. Additionally, William Kerr and William Lincoln found that a 10 percent increase in workers on the H-1B visa—which are granted to high-skilled temporary workers in specialty occupations—in a particular American city corresponded with a 0.3 to 0.7 percent increase in the total number of patents granted to people from that city.

Looking at productivity more broadly, economists Giovanni Peri, Kevin Shih, and Chad Sparber attempted to measure how immigrants who worked in science, technology, engineering, and mathematics across 219 American cities affected productivity. They found that an increased number of H-1B workers were responsible for between 10 and 25 percent of aggregate productivity growth from 1990 to 2010. Skilled immigrants contribute mightily to productivity growth in OECD countries.

Immigrants increase both the supply and demand sides of the economy, while also boosting productivity growth. The physical capital that plays such a big role in the Solow model was worth about $45 trillion in 2012 compared to the $750 trillion value of human capital. The body of empirical economics research and theory does not indicate that native-born Americans will see large costs from current levels of immigration, and there are not good reasons to suspect that a liberalized system would be worse, especially since nations with far higher levels of immigration are growing rapidly. In 2013, 13.1 percent of the United States population was foreign-born compared to 28.3 percent in Switzerland, 27.6 percent in Australia, and 20 percent in Canada. Those other nations also emphasize skilled immigration more than the United States, but Canada has an extensive temporary migration program for lower-skilled immigrants as well.

The potential danger of vastly liberalized immigration comes from immigration’s impact on American culture, political, and economic institutions. Borjas, the Harvard economist, warned that immigrants could bring with them the ideas, cultures, or institutions that impoverished their home countries. Those characteristics could take root here and eventually slow down or reverse economic growth, making immigration a net negative, and thus killing the goose that lays the golden eggs. Fortunately, there is no evidence of this occurring.

Immigrants as a whole and native-born Americans share very similar opinions on political ideology and policies, from the optimal size of government to the extent of the welfare state. Small differences in opinions will not shift policy. According to the Economic Freedom of the World index, a common measure of institutional quality, more immigration in the past led to improvements in the quality of institutions going forward. Whether the immigrants came from rich or poor countries did not affect the outcome. Founding Father John Jay wanted a “wall of brass around the country for the exclusion of Catholics,” who he thought would undermine the Constitution. In the nineteenth century, increased worry over Irish Catholic and German immigrants prompted an entire nativist and Know-Nothing movement that was convinced that those immigrants and their descendants would destroy Republican government. Looking back, those concerns are silly and misplaced, but they linger in different forms today. While researchers should be vigilant and monitor this potential problem, the current state of the evidence suggests that immigration improves the quality of institutions that support economic growth and that all past concerns on this point were erroneous.

Liberalizing the immigration system would produce unambiguous economic benefits. A larger flow of workers and entrepreneurs across all skill categories will boost economic growth. In the future, different sectors of the economy will grow, while others will shrink relative to what exists currently. Entirely new industries, as unimaginable to us as the Internet would be to someone in the Victorian era, will rise and fall, providing wonderful new products and services to Americans. A more open immigration system will allow workers with in-demand skills to flow to opportunity, no matter where it arises, in turn letting our economy grow.

From the Symposium

The Hidden Keys to Growth

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Alex Nowrasteh is the immigration policy analyst at the Cato Institute.

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