Trends | Theory | Facts | Food
| Environment
| Aging | Elderly | Immigration
| Urbanization
| Family | Women
"What is the Long Run Effect of
Immigration on Receiving Countries"
Benjamin Russell
The topic of immigration is a sensitive subject
for both economists and politicians alike. More specifically, these professions
are in question about what effect immigration will have on the future economy.
Some economists have argued that immigration is a driving force in providing
long periods of substantial economic growth. Other economists believe that
immigration increases the labor force too much, thereby reducing real wages
for native workers. The impact that immigration has on economic growth in
the long run is a much more complex topic than its’ effects on the
current labor market. Static labor markets can be easily monitored but there
are so many factors that contribute in the long-term growth of an economy.
In that sense, it is difficult to single out solely immigration on whether
an economy has positive or negative growth in the long run. However, in
the end immigration certainly does not have a negative impact on economies
in long-term standards and may even boost an economy to achieve higher real
wages for all of its’ workers.
When dealing with economic growth, the essence behind the difference
in studying short-term versus long-term growth is based on the capital stock
of the economy. In the short run, the capital stock is predetermined and
therefore any increases in labor will result in diminishing returns to labor.
This will cause real wages to decline with the over-crowding of the labor
force. In the long run, capital stock will adjust and there can be either
constant or increasing returns to labor. It is this difference of whether
there will be a constant or an increasing return to labor with an increase
in the capital stock that will determine how much the economy will grow
in the long run. Brezis and Krugman lay out in their article "Immigration,
Investment, and Real Wages" how the economy will be affected in the
long run based on the assumption of increasing returns to labor. Conversely,
editors Smith and Edmonsten in their book, The New Americans, describe
the economic effects of immigration in the long run assuming constant returns
to labor.
Brezis and Krugman admit that a large inflow of labor will inevitably
seem like a huge economic burden at first. Initial waves of immigrants often
endure so many economic difficulties upon arrival that they may even deter
future immigrants from coming into the country. This was the case with former
Soviet residents when they stopped migrating to Israel because of the economic
problems so many immigrants were having there. Yet assuming that there are
increasing returns to the economy, wages will not be low for long. With
the assumed increasing returns, the percentage rise in the capital stock
due to the increase in the labor force will be more than proportional. This
means that in the long run the capital to labor ratio increases and there
is in effect an upward sloping demand curve for labor. This causes the eventual
increase in the real wage rate.
There are two types of immigration according to Brezis and Krugman, exogenous
and endogenous. Exogenous immigration can be thought of immigrants who are
rather indifferent to economic incentives and will migrate regardless of
the wage rates they expect to receive. An exogenous increase in the labor
force will initially reduce the real wage rate, as there is less capital
per laborer. As the price of capital in place jumps, there is a resulting
rise in the investment rate. When the level of the capital stock rises,
there is an increase in the real wage rate as well. The enlargement of the
domestic economy leads to production of a wider range of goods and the wage
rate recovers to levels higher than before the immigration. Exogenous immigration
will be beneficial to workers in the long run if they can just endure the
difficult transition. (Brezis, p. 88)
The second type of immigration is endogenous immigration. In reality,
this type of immigration is much more common. This concept is based on the
fact that most migrants make their decisions to stay in their own country
or move abroad based on economic opportunities that they foresee. They take
into account almost all factors of the economy they wish to move into. The
one factor that they cannot take into account however is the long run economic
opportunities that result from an increase in labor supply and capital stock.
This can most likely not be predicted prior to their migration. Endogenous
immigration takes on the principle that there is a potential pool of immigrants
but they will only come if the wage rate is equal to or above their desired
wage rate. There is the possibility of zero immigration in this case if
the wage rate is lower than everyone’s desired rate. If the wage rate
is higher than everyone’s desired wage rate then it is clear all of
the migrants would be persuaded to come and with them they would bring their
long-run capital stock. This will further increase the size of the economy
and drive their wages up past their desired rates. (Brezis, p. 89)
In order for an economy to succeed with endogenous immigration, much
pressure has to be placed on both investors and the government. Investors
must be convinced that other investors will put capital into the economy
as well because there must be enough funds to draw in the potential immigrants.
The government can help create this optimism amongst investors by keeping
the wage level at the desired level of the immigrants. If the government
attracts the immigrants and the investors provide the necessary capital
stock, an economy can be greatly benefited. Endogenous immigration differs
from exogenous immigration in that with endogenous, the immigrants need
to be drawn in. The government and investors must provide incentives and
be able to prove a future reward for migrants who choose to enter their
economy.
James Smith and Barry Edmonsten look at the issue of immigration and
its long-run effects on the economy in a different manner than Brezis and
Krugman. They look to the potential moves of generations and centuries so
see whether immigration plays a significant role in altering trajectories
of native per capita incomes. Smith and Edmonsten refer to a model to show
economic growth that is based on the idea that goods are produced using
three inputs: physical capital, skilled labor and unskilled labor. Certain
assumptions have to be made with this model. For one, technology is seen
as the set of rules that will determine the amount of goods that can be
produced given specific levels of the inputs listed above. Secondly, if
all inputs change in a certain proportion than the output will change with
that proportion as well. The main difference between Smith and Edmonsten’s
model is that they assume constant returns to labor while Brezis and Krugman
based their findings with the assumption of increasing returns to labor.
The model laid out by Smith and Edmonsten has several implications for
immigration. If immigration is confined to a limited period of time, output
will grow faster during the periods of immigration but will soon revert
back to its normal growth rate once the immigration ends. Immigration has
no effect on the ratios of inputs of the factors of production and therefore
has no effect on output per person or distribution of income. The economy
will be a bigger economy but the average income will remain unchanged. If
immigration can be sustained permanently, then it will affect both the level
and growth rate of GDP but will still leave income per capita unchanged
because there is no long-run impact on the ratios of inputs for production.
Assuming constant returns to scale, as Smith and Edmonsten do, immigration
will not affect long-run growth in per capita incomes of natives if immigrants
are just like the native born workers.
The next factor to look at is whether or not there is general assimilation
of new immigrants. Evidence has proven that the fertility rates of immigrants
and their descendants converge towards the national norm within two generations.
If the children of immigrants are just like the children of natives then
we are back to the case in which there is just an increase in the size of
the economy without any change in per capita income. The only way that increased
immigration could have an effect on long-term growth paths is if assimilation
is never complete. Although there will be initial static effects based on
immigration, generation assimilation will eventually mitigate all changes.
When assimilation occurs, immigrants will be just like natives in terms
of skill ratios and therefore their long-run effect on economic growth are
virtually non-existent. In the long-run, per capita income will not be affected
due to immigration because immigrants adopt native fertility rates and work
skills and therefore production rates and growth rates are never increased.
Smith and Edmonsten prove that immigrants are important in many research
and development sectors here in the U.S. The system of post graduate education
in this country is widely recognized as the best in the world and many graduate
students from other countries come here to complete their final schooling.
Those students who end up staying here in this country, as opposed to returning
to their own country, are important to sustaining economic growth. Another
way in which immigration may affect growth involves those immigrants who
exhibit extraordinary entrepreneurial skills. Successful entrepreneurs can
create wealth and jobs beyond their numbers and help to maintain the economic
growth we have come to expect. However, there is no evidence that would
suggest that the entrepreneurial ability of immigrants is better than that
of the natives in this country.
Neither resource presented above mention a single negative long-run result
of immigration. Brezis and Krugman admit to short term detrimental effects
of immigration but prove that in the long run that all workers, both native
and foreign born, will be better off because of the immigration. Per capita
incomes rise in the long run assuming increasing returns to scale because
the capital stock is raised with the increase in population. In the long
run, real wages will actually be higher than they were before the immigration.
Smith and Edmonsten take more of a neutral stance on the future economic
impact of immigration in terms of per capita incomes. They do believe that
economies gain from immigration but that it is unlikely that immigration
will have a huge effect on relative earnings or on gross domestic product
per capita. There are many other factors that play a more vital role on
the growth of the economy. The national savings rate is one of the leading
issues determining economic growth and immigration is a very unlikely vehicle
for increasing this rate. Immigrants only represent about 8 percent of the
population and therefore the difference in savings rate between immigrants
and natives would have to be enormous in order to alter aggregate savings.
Immigrants can only affect rates of economic growth if they drastically
differ from native born and never attempt to assimilate. If immigrants enter
an economy with a different mix of skills than the natives they have the
ability to affect growth. However, this will only continue if the differences
persist over each new generation. Immigration is in no way detrimental to
an economy in the long run. It can stir economic growth creating a larger
economy or even increase gross domestic product per capita with an increasing
return to labor economy.
References
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
.