In the prior section we looked at how productivity and trade affect employment. Both cause changes in employment between sectors of the economy. Productivity increases lead to lower costs for goods such as manufactured items and agricultural products, but the increased productivity means that fewer people must be employed to produce the same level of output^[1]. While it is hard to argue that increased productivity is “bad”, it can, and does, force workers to change jobs, and does cause changes to relative incomes and wealth. The same can be said for trade. Overall, trade has net benefits, often substantial, but again it creates economic winners and losers. We will look at who the winners and losers are in Part II, but it is not too much of a spoiler to note that they are often the same for both automation and trade.  

How does immigration affect the economy? Does it have net benefits or costs? Does it also create winners and losers?

The economics of immigration bear some similarities to the economics of trade, but instead of importing goods from another country, labor is “imported” directly. Labor is clearly being imported in the case of temporary workers hired to pick crops or skilled workers brought in to fill “shortages” in high tech industries. But one can also think of immigrants, legal or otherwise, as being like imported labor in the short run and from an economic perspective.

If we remember that average productivity per worker determines the overall level of income in a country at full employment, we have a yardstick by which to measure the effects of immigration. Again, let us remember that, under full employment, trade can’t lower the overall level of productivity and hence cannot lower the aggregate level of income. Is that also true of immigration?

A couple of thought experiments will help. First let us suppose that a modest number of legal immigrants come to a country, and they have exactly the same skill distribution as the native population. Like native born children entering the workforce, these immigrants will both take jobs and become consumers themselves. They will require houses and cars and food and furniture and pay taxes exactly like the native population. This increased demand will cause industry to increase output by investing in more capital such as factories which will generate an increase in the same mix of jobs as before the immigrants came. In short nothing will change except for a growth in GDP which is proportional to the number of immigrants.

In a second thought experiment, let us suppose that a larger number of “low skilled” immigrants come to the country^[2]. In the long run it is reasonable to assume that these immigrants, or their children, will acquire the same skills as the native population, which came over in prior waves of immigration, at least in the US.  In the long run then it is reasonable to assume that these new immigrants will be assimilated economically, and the long run result will be a growth in GDP proportional to the growth in population and with no change in productivity relative to what would have occurred in the absence of the wave of immigration.

However, as in the case of productivity changes and trade, there most certainly will be short-term effects. Even though economists sometimes speak of a long-term equilibrium, real world economics is constantly in a state of flux.  The new immigrants, coming from low wage countries, will be willing to work for low wages and will compete with native workers for laboring jobs that don’t require strong native language skills. The increased supply of labor will result in lower wages for such jobs, for both immigrant and native workers. Lower labor costs in turn will drive down prices for some goods and services, and as in the case of both productivity and trade, lower prices will benefit those whose wages are not affected. 

Again, we see that there are winners and losers from immigration. Winners get the benefits, losers have to deal with increased competition, lower wages, and unemployment. The benefits to the country from “less skilled” immigration include:

• Lower prices for some goods and services. For example, low cost boneless and skinless chicken breasts are largely available because the meat packing industry was able to shift from domestic unionized workers to immigrant labor^[3].
• Immigrants may provide some goods and services that might not be performed at all otherwise.
• Lower labor costs and a predictable source of labor induce businesses to expand and invest, increasing output. This in turn can increase the need for native labor with good language and managerial skills.
• As is the case for any population growth, immigrants create demand for goods and services. For example, rents may go up, and home building may increase as a result of demand from immigrants.  Again, these increases in demand for goods and services benefit some natives but can hurt others.
• Paradoxically, importing cheap labor can reduce the demand for goods and services from low wage countries by making domestic manufacture of these items cost competitive.

There is one group that benefits enormously from immigration, and that is the immigrants themselves. Immigrants often come from poor countries and their material standard of living dramatically increases when they migrate to a rich country. Since the migrants go from a country with relatively lower productivity to one with higher productivity, world productivity and per capita income increase. Countries however have to regulate immigration to accommodate home country business (usually pro-immigration because it keeps the labor supply growing and wages down) and home country labor (including those negatively affected by immigration who tend to want to limit in-migration). That worldwide productivity increases when people move from poor countries to rich ones is not a factor in determining a country’s immigration policy.

Two other factors that countries do consider in migration policy include the demographics of the workforce and humanitarian considerations. In much of the “developed world” the workforce is aging, and the next generation will have to pay for the care of their elderly baby-boomer parents. Fertility rates in Europe and Japan are well below the replacement rate of 2.1 births per woman^[4]. According to one estimate, approximately 533,000 immigrants would need to enter Germany every year to keep the population, and workforce, from falling^[5]. Clearly politicians in Germany have an incentive to welcome immigrants, the vast majority of whom are young. The US also has an aging population and a birthrate of less than 1.8 children per woman. Our population would be falling if not for immigration.

There are also humanitarian considerations when it comes to immigration. In addition to economic migrants, there are now, as there have been throughout history, many people who are forced to flee for their lives due to wars, genocidal attacks, or imminent starvation. Many countries accept such immigrants on a priority basis. It is sometimes difficult to separate economic migrants from those who are really in danger of losing their lives “back home”, but a mistake can be a death sentence. The United States had a total of about 360,000 resident refugees (also known as asylum seekers) in 2020, while Germany hosted over 1,000,000 and Turkey 3,650,000^[6]. The US has a total of around 44 million foreign born residents presently and admits around 1,000,000 new legal immigrants a year. Refugees are a small fraction of those admitted each year in the US, the allotment has been well under 100,000 for years and as low as 15,000^[7].

Finally, we noted that economic migrants tend to be high or low skill with relatively few in the middle. Low skilled migrants are unlikely to improve a country’s overall productivity much at first, but the same is not true of high skilled migrants such as scientists and engineers. Some countries, such as Canada, prioritize highly skilled immigrants, as does the US.

We will try to sort out the data on the economic effects of immigration in part II, but most studies show that immigration doesn’t have much effect on per capita GDP one way or the other in the United States. However, immigration, like productivity increases and trade, creates winners and losers and increases income inequality.

^[1] By the “law” of supply and demand, lower prices increase demand for those goods, but often not enough to keep employment from falling.

^[2] I hate the term “low skilled” but there are few alternatives. Immigrants fall primarily into two groups: highly skilled – think programmers and scientists, or “low skilled” meaning with less than a high school education. However, my personal experience tells me that a lot of “low skilled” migrants actually often have manual skills such as masonry, plastering, and welding which take time and talent to acquire.

^[3] National Center for Farmworker Health. 2014. “POULTRY WORKERS.” http://www.ncfh.org/uploads/3/8/6/8/38685499/fs-poultryworkers.pdf. See details later in this book, Part II: migration.

^[4] The replacement rate of 2.1 births per woman over her lifetime applies to developed countries. In countries with higher mortality for women before the end of their reproductive lives, the replacement rate is slightly higher, up to about 2.3 births per woman.

^[5] “Aging Workforces and the Politics of Immigration.” 2017. Grayline Group. June 14, 2017. https://graylinegroup.com/aging-workforces-and-the-politics-of-immigration/.

^[6] “Refugee Population by Country or Territory of Asylum.” n.d. Accessed February 16, 2022. https://data.worldbank.org/indicator/SM.POP.REFG.

^[7] “The Current State of Immigration in the United States.” n.d. Accessed February 16, 2022. https://www.immigrationhelp.org/learning-center/the-current-state-of-immigration-in-the-united-states.