26 June 2017

Why the world needs more immigration

By Luis Pablo de la Horra

In his classic work, The Myth of the Rational Voter, Bryan Caplan identifies four systematic biases about economics held by the average citizen:  make-work bias (an inclination to overestimate the disadvantages of temporary job destruction due to productivity increases), anti-market bias (a tendency to overlook the benefits of the market as a coordination mechanism), pessimistic bias (an inclination to underestimate the present and future performance of the economy), and anti-foreign bias (a tendency to underestimate the economic benefits of interaction with foreigners).

These widespread biases are far from harmless. Wrong ideas held by voters usually lead to catastrophic policies: politicians undertake those policies that they deem popular in order to get reelected. If those policies beget pernicious consequences for the economy, harmless beliefs turn into lower living standards for all.

The most potentially harmful bias is the anti-foreign one. This manifests itself politically in two main ways: protectionism and anti-immigration policies. Despite the recent surge of protectionism in some developed countries, free trade is now the rule rather than the exception in most parts of the world.

But when it comes to immigration, only a few steps have been taken in the direction of liberalisation (even though the consensus about the benefits of more open borders in the economics profession is probably as strong as the consensus around free trade).

Anti-immigration policies, however, reduce the well-being of both potential immigrants and host societies and even a partial liberalisation of  restrictions would, in the long-term, improve the standards of living globally.

The economic case against less restrictive immigration policies rests on shaky pillars. The most common arguments are related to the supposedly negative effects that immigration has on the host country’s labour market, and more specifically, its impact on employment and wages. According to those in favour of restrictions, immigrants do not only take natives’ jobs but they also have a depressive effect on wages.

However, economic theory does not support these assertions. First, the economy is not a zero-sum game: the numbers of jobs available is not finite. As pointed out by Alex Tabarrok (here and here), immigrants are not only producers but also consumers: an increase in demand triggered by the expansion of the immigrant population goes hand in hand with an increase in total employment.

Secondly: contrary to conventional wisdom, it’s not only highly qualified immigrants who create positive externalities on host economies. Low-skilled immigrants tend to take lower productivity jobs (as they often either lack higher education or do not speak the language), allowing the native-born to access higher-productivity jobs (assuming a flexible labour market).

Indeed, this is borne out by the evidence. After World War II, the US labour force increased dramatically due to immigration and the massive entry of women into the labour market. It moved from 60 million in 1950 to around 150 million workers in 2007. And yet, the unemployment rate in 2007 was as low as 4.6 per cent, near full employment.

The same logic also applies to wages. The law of supply and demand says that an increase in the supply of labour would inevitably cause lower wages. However, more immigrants also generate a higher demand for goods and services, which results in a higher demand for labour thus preventing a generalised decrease in salaries. Even in those cases when wages in a particular sector are temporarily pushed down, lower wages lead to lower costs for companies, which usually results in lower prices for consumers.

Immigration-friendly policies are also useful when it comes to tackling the demographic problem that many developed countries are experiencing. The progressive ageing of the American population is already having a deleterious impact on the US social security system.

According to the Population Reference Bureau, the number of Americans over 65 years old will have increased from 15 per cent in 2014 to 24 per cent of the population by 2060. As a result, the worker-to-beneficiary ratio will decrease by 32 per cent, from 3.4 in 1990 to 2.3 in 2030. This could be mitigated by adopting a more flexible immigration policy to increase the working population, reversing the trend that will otherwise end up with significant spending cuts in social security benefits.

Indeed, this benefit directly contradicts one of the other strongly held views about immigrants: that they pose a burden on the host economy. Their net fiscal impact (defined as taxes paid by immigrants minus public services and benefits received) is thought to be overwhelmingly negative when compared with the fiscal impact of natives. Yet the evidence does not support this idea. As pointed out in 2011 a survey paper on the economic effects of immigration, Sari Pekkala Kerr and William R. Kerr stated:

“It is very clear that the net social impact of an immigrant over his or her lifetime depends substantially and in predictable ways on the immigrants’ age at arrival, education, reason for migration, and similar […] The estimated net fiscal impact of migrants also varies substantially across studies, but the overall magnitudes relative to the GDP remain modest […] The more credible analyses typically find small fiscal effects.”

Therefore, there are no good reasons to impose tough restrictions on labour mobility in the name of fiscal sustainability.

Nor is immigration just of benefit to the host countries. Immigrants usually send a portion of their income back home with the aim of economically supporting their families and friends there. These remittances are flows of capital from developed to developing countries that vastly assist in the economic development of the home country.

But the main beneficiaries of eliminating barriers to labour mobility are, of course, immigrants themselves. This is due to the concept of Place Premium. This concept, first introduced by Michael Clemens, Claudio E. Montenegro, and Lant Pritchettin in a 2008 paper, refers to the automatic increase in earnings (PPP adjusted) that a worker experiences by moving from a low-productivity country to a high-productivity country, without increasing the worker’s human capital.

The factors behind this phenomenon are multiple: differences in capital accumulation, quality of infrastructures, technology, proximity to high-productive workers, different legal frameworks, etc. Wage differences among countries due to Place Premium are immense. The corollary is simple: more open borders would bring about a substantial reduction in poverty levels across the world.

In his paper Economics and Immigration: Trillion-Dollar Bills on the Sidewalk, Michael Clemens, senior fellow at the Center for Global Development, concludes that if all barriers to labour mobility were to be removed, world GDP would increase in the range of 50 per cent to 150 per cent. To use a more localised example: a worker from Guatemala or Nicaragua could triple her earnings simply by relocating to the US.

Even partial liberalisations would bring about considerable gains. For instance, a reform that allowed 7 per cent of the population to emigrate to higher-productivity countries would result in an efficiency gain of 10 per cent of world GDP.

To put this into perspective, if all remaining trade barriers were eliminated, world GDP would grow by just 2 – 3 per cent.

Surely the path to take is clear: immigration benefits everyone. Relaxing restrictions would mean more people could reap the benefits of capitalism – and the lives of millions of people across the globe would be improved.

Luis Pablo de la Horra is a Spanish finance graduate