Noah Smith on immigration economics

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Noah Smith on Immigration Economics.

Noah Smith is a Bloomberg View columnist and formerly a professor of finance at Stony Brook University. Today, he joins the show to talk about his journey into the economics blogosphere and some of his recent work on immigration into the United States. . David and Noah discuss some of the false narratives surrounding immigration as well as the impact of immigration on native workers’ wages, labor markets, and the broader economy.

Immigration with Art Carden

An interview from the Libertarian Christian Institute with economist Art Carden about immigration.


THE LIBERTARIAN CHRISTIAN PODCASTEp 16: Immigration with Art Carden

Yes, a lot of economists do agree on somethings,

and one of those things is the benefits that immigrants to a country bring. The following is the text of An Open Letter from 1,470 Economists on Immigration (pdf).

Dear Mr. President, Majority Leader McConnell, Minority Leader Schumer, Speaker Ryan, and Minority Leader Pelosi:

The undersigned economists represent a broad swath of political and economic views. Among us are Republicans and Democrats alike. Some of us favor free markets while others have championed for a larger role for government in the economy. But on some issues there is near universal agreement. One such issue concerns the broad economic benefit that immigrants to this country bring.

As Congress and the Administration prepare to revisit our immigration laws, we write to express our broad consensus that immigration is one of America’s significant competitive advantages in the global economy. With the proper and necessary safeguards in place, immigration represents an opportunity rather than a threat to our economy and to American workers. We view the benefits of immigration as myriad:

• Immigration brings entrepreneurs who start new businesses that hire American workers.
• Immigration brings young workers who help offset the large-scale retirement of baby boomers.
• Immigration brings diverse skill sets that keep our workforce flexible, help companies grow, and increase the productivity of American workers.
• Immigrants are far more likely to work in innovative, job-creating fields such as science,
• technology, engineering, and math that create life-improving products and drive economic growth.

Immigration undoubtedly has economic costs as well, particularly for Americans in certain industries and Americans with lower levels of educational attainment. But the benefits that immigration brings to society far outweigh their costs, and smart immigration policy could better maximize the benefits of immigration while reducing the costs. We urge Congress to modernize our immigration system in a way that maximizes the opportunity immigration can bring, and reaffirms continuing the rich history of welcoming immigrants to the United States.

Sincerely,

Migrants and the making of America

A new NBER working paper entitled Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration, by Sandra Sequeira, Nathan Nunn, Nancy Qian, looks at the effects of historical migrant on economic prosperity today.

And the effects are good.

The paper's abstract reads:

We study the effects of European immigration to the United States during the Age of Mass Migration (1850-1920) on economic prosperity today. We exploit variation in the extent of immigration across counties arising from the interaction of fluctuations in aggregate immigrant flows and the gradual expansion of the railway network across the United States. We find that locations with more historical immigration today have higher incomes, less poverty, less unemployment, higher rates of urbanization, and greater educational attainment. The long-run effects appear to arise from the persistence of sizeable short-run benefits, including greater industrialization, increased agricultural productivity, and more innovation (Emphasis added).

Firm outcomes and local migrant worker supply

Immigration ,and its effects on labour markets, is a hot topic these days. While there have been numerous studies exploring how immigration affects local labour markets, there is much less evidence on the impact of immigrants on firms’ productivity levels. Productivity being important for things like wages in firms. A new column, written by Cristina Mitaritonna, Gianluca Orefice and Giovanni Peri, at VoxEU.org uses detailed, firm-level data from France, to explore how firms react to an increase in the supply of immigrant workers. It finds that provinces that has a large increase in immigrant supply experienced higher productivity growth, especially among firms that were initially less productive. This suggests immigration can promote convergence in firm size and productivity levels.

The productivity effects of immigrates,

A 10% increase in the supply of immigrant workers in the province implies 1.7 and 2.7 log-points increase in the TFP and in the domestic market share of the average firm, respectively. But firms’ heterogeneity matters – initially less productive and smaller firms benefit more from increases in the migrant labour supply. For firms with TFP initially below the median, a 10% increase in the local supply of immigrants implies increases of 3.6 and 8.2 log-points in TFP and domestic market share, respectively. Similarly, for firms with initial employment below the median, a 10% increase in the local supply of immigrants is associated with increases of 2.9 and 8.8 log-points in TFP and domestic market share, respectively.

One of the more controversial aspects of immigration is the employment/wage effect of an increase in immigrants

Finally, higher productivity, higher investment in physical capital, and lower exit probability should help native workers in affected firms. While immigrants may in part compete with natives for jobs, the effects described above will help existing workers, especially those in initially less-productive firms. Using the same empirical strategy, we show that an increase in the immigrant share in the province has a positive effect on the average wage of natives in the firm – a 10% increase in immigrants is associated with a five log-point increase in native wages in the average firm. This effect is slightly smaller (but still positive) for firms with low initial productivity or small initial size. Mobility and selection of native workers across firms, in response to immigrants, may explain this result – while firms with initially low TFP attract highly skilled immigrants (who in turn increase their productivity), highly skilled native workers move to firms that do not hire immigrants (those with initially high TFP). This composition effect explains why the average wage of native workers increases more in firms with smaller increase in immigrant workers (i.e. initially less-productive firms).

The mobility of highly skilled native workers towards firms that hire fewer immigrants may be an important channel of positive spillovers within a province. Firms that do not hire immigrants may experience part of the benefit via an increase in their set of skilled employees.

In summary,

The immigration of highly skilled workers to France over the period 1995-2006 promoted some convergence in size and productivity levels across firms. Provinces with a large increase in immigrant supply experienced higher productivity growth of firms that were initially less productive. We find that this may be due to the fact that smaller, less productive firms were more likely to hire immigrants in order to cut costs and/or adopt new technologies, improve efficiency, and invest in capital and methods that complement the skills of immigrants. This is an interesting and previously unexplored, effect of immigration on local economies.

UK migration: separating fact and fiction

From the Royal Economic Society website comes a piece on UK migration: separating fact and fiction. Perhaps the most interesting part of the article is

For the UK, the existing evidence does not indicate a clear impact of immigration on employment, and only very modest effects on wages at the low end of the wage distribution, but positive effects further up the distribution. He illustrated that migrants tend to upgrade their labour status over time, often starting in work which is below their skill and educational attainment and moving up into more appropriate skill level employment over time.

Also interesting is the comment that in fact economic issues have little impact on people's views on immigration. The finding of the research discussed is that

When discussing attitudes to immigration, Dustmann noted that economic factors were not a key determining issue. Social and cultural factors are much more important, as his research with David Card and Ian Preston has shown.

Part of the problem with whole immigration debate is lack of knowledge.

He pointed out that it is quite typical that people do not know basic facts about migration, and he illustrated that by showing that individuals vastly overestimate the numbers of immigrants in their country, with higher overestimates the lower someone’s educational level.

What of the the fiscal consequences of migration? What of the cost of publicly provided services?

Finally he presented evidence for the UK that immigrants are less likely to claim benefits or live in social housing than the native population. Further detailed analysis of the fiscal contribution of immigrants shows that those who came to the UK after 2000, and in particular those from EU countries, made a substantial net fiscal contribution.

Perhaps this last result isn't too surprise if we think that immigrants are not a random selection from their home country, but are more likely to be risk-takers and entrepreneurs.

Overall the effect of immigration, on the UK at least, looks positive. We should keep such results in mind when discussing immigration into New Zealand.

Does immigration hurt natives? (updated)

Immigration continues to be a hotly debated topic in many countries, including New Zealand. A number of New Zealand politicians express somewhat negative, shall we say, views on the matter, in much the same way as they do on foreign investment in this country. These politicians play on fears that immigration takes jobs away from natives and imposes significant costs on taxpayers. Such ideas continue to shape electoral campaigns and policy discourses in many countries.

Economists have not been able to steer this debate much. Economic models emphasising the benefits of immigration for natives have typically neglected unemployment and redistribution – precisely the things voters are most concerned about. What happens if we introduce issues such as these into economic models of immigration? A new column at VoxEU.org by Michele Battisti, Gabriel Felbermayr, Giovanni Peri and Panu Poutvaara considers How immigration benefits natives despite labour market imperfections and income redistribution. Just from the title you can guess that Winston Peters wouldn't be bring this piece up during the election campaign.

Battisti, Felbermayr, Peri and Poutvaara write,

In our recent working paper (Battisti et al. 2014), we have introduced wage bargaining, search frictions, and a redistributive welfare state into a framework that still includes skill complementarities between immigrants and natives in production. Hence the traditional, and important, channel of gains for natives (skill complementarity) is introduced in a much more realistic world of frictions and redistribution that can make immigrants costly for natives. We have then calibrated the model to match the average statistics that we observe for 20 OECD countries. We have also simulated two ‘counter-factual’ scenarios:

(i) How does native workers’ welfare compare between the status quo and a situation with no immigrants (closed borders), and
(ii) What has been the effect on native welfare of immigration during the last 10 years?

They then go on to discuss "The relative labour-market performance of immigrants".

Looking at the wages of natives and immigrants of similar skills across the 20 countries considered, some interesting regularities emerge. First, immigrants are usually paid less than natives with similar educational attainments. Second, unemployment rates are usually higher among immigrants.

Table 1. Migrants versus natives: Cross-country heterogeneity within the OECD

Rows 3 and 4 of Table 1 show that, within education groups, immigrants receive lower wages than natives, and the gap is particularly important in the low-skilled segment. Moreover, as shown on rows 5 and 6, high- and low-skilled immigrants alike are also more likely to be unemployed. These differences – even allowing for reasonable differences in productivity – suggest that:

(i) Migrants have worse outside options than natives, and so obtain lower wages through bargaining, and
(ii) They are more likely to be hit by job destruction shocks, and so are more often unemployed.

The next issue Battisti, Felbermayr, Peri and Poutvaara turn to is "How immigration can spur job creation".

The introduction of job creation by firms – an important feature of our framework – generates two important effects of immigration. In particular, if firms cannot discriminate between natives and immigrants in the search process, but can pay immigrants lower wages (as is the case in the data), then the presence of immigrants drives up the average return from job creation. This encourages firms to create more jobs, some of which will be filled by natives. However, if matches with immigrants are more likely to break (as implied by their larger unemployment rate), the expected return to job creation is lower and firms will create fewer jobs. Which channel dominates depends on the relative strength of each mechanism. This can be simulated by our model once we have carefully calibrated its parameters on the data.

Figure 1. Native welfare changes in two migration scenarios, %

We calibrate our model to match the empirical moments for the 20 OECD countries shown in Table 1. Besides the relative labour market performance of immigrants, we also match facts on public spending, letting the government finance public goods and unemployment benefits by proportional taxation. We also match GDP per capita and average job durations for both educational groups.

Figure 1 presents results from two main scenarios. In the first, we calculate the difference in welfare (which can be also thought of as the difference in real post-tax income) between the status quo observed in 2011 and a hypothetical situation with no immigrants (closed borders). We find that the native welfare gains from immigration are positive in 19 out of 20 countries. In all countries but Switzerland (where the effect is essentially zero) natives have, on average, gained from immigration, and sometimes the gain is rather large (up to 2% of after-tax income). In the second scenario, we compute the difference in welfare of natives between the status quo in 2011 and a hypothetical situation in which the immigrant share had been kept at the level of 2000. We find a positive gain from this recent immigration in 16 countries.

In 14 out of 20 cases, the existing stock of immigrants makes both skill-groups of natives (college and non-college educated) better off. In the canonical model without labour market imperfections, these Pareto gains would be impossible. Moreover, even incumbent immigrants are found to be better off with immigration. Again, in the canonical framework this is extremely unlikely, as new immigrants are more closely substitutable with incumbent immigrants than with natives. The reason for these somewhat surprising results is the job-creation effect described above. Namely, immigration can grease the wheels of the labour market by affecting job creation incentives.

So what, you may ask "What explains the cross-country heterogeneity in benefits?"

The comparative statics from our analysis reveal that the following country characteristics increase the native immigration gains from a one-percentage-point increase in the immigrant labour force share:

(i) Higher native–immigrant wage gaps, regardless of the skill group;
(ii) A lower native–immigrant unemployment gap for the low-skilled;
(iii) More generous unemployment insurance;
(iv) A higher share of tertiary-educated workers amongst immigrants;
(v) Lower government expenditures.

The intuition is as follows. Lower bargaining power for immigrants implies that they have lower wages, and this encourages firms to create more jobs. Also, lower job-destruction rates for immigrants make hiring an immigrant more valuable for firms and encourage firms to create more jobs. A more generous unemployment insurance system makes immigration more beneficial for natives because higher unemployment benefits reduce job creation, and immigration helps to alleviate this distortion. In other words, the greasing-the-wheels effect and its lowering of the unemployment rate are particularly valuable when distortions are large. A higher share of tertiary-educated immigrants and lower government expenditures increase the benefits because they lower the extent of redistribution from natives to migrants.

So what conclusions can we draw from this?

Our analysis shows that immigration into imperfectly competitive labour markets need not be worsening labour market outcomes for natives. Instead, it can improve the job creation incentives of firms. Thus, measures that aim at eliminating the immigrant–native wage gap may hurt natives. This positive effect is threatened if immigrants are too often unemployed or if too many of them are unskilled. Policies reducing the rate of job loss for immigrants would therefore help natives. Finally, in contrast to widespread belief, immigrants do not seem to hurt low-skilled natives, even in the more realistic framework developed here. This is because immigration is often balanced between more and less educated, because its job-creation effect can help, and because redistribution towards immigrants is not as large as often suggested in the debate.

So, in short, immigration can be good for you. It also suggests that some kinds of inequality (the immigrant–native wage gap in this case) can have positive effects and, perhaps most importantly, immigrants do not seem to hurt low-skilled natives. Just don't tell Winston.

Ref.:

• Battisti, M, G Felbermayr, G Peri, and P Poutvaara (2014), “Immigration, Search, and Redistribution: A Quantitative Assessment of Native Welfare”, NBER Working Paper 20131.

Update: At the Economics New Zealand blog Donal Curtin notes that a recent survey of UK economists concluded "there is overwhelming support for the view that migration will increase the average income of current UK inhabitants". So immigration is good for you.