IMMIGRATION, BENEFITS AND COSTS OF

There was a resurgence of immigration in the United States and in many other countries in the last third of the twentieth century. By the year 2002, about 175 million persons–or roughly 3 percent of the world's population–resided in a country different from where they were born. Nearly 6 percent of the population in Austria, 17 percent in Canada, 11 percent in France, 17 percent in Switzerland, and 10 percent in the United States was foreign-born. One central concern has motivated economic research on international migration: what is the economic impact of international migration on the host country ?

The Skills of Immigrants

The skill composition of the immigrant population, and how the skills of immigrants compare to those of natives, determines many of the economic consequences of immigration on the host country. Unskilled immigrants will typically compete for jobs with unskilled natives; skilled immigrants will compete with skilled natives. A host country benefits from immigration because it can import workers with scarce qualifications and abilities. Immigrants, though, make different demands than the native-born on the many programs that make up the welfare state, which tend to redistribute resources from high-income workers to persons with less economic potential.

Many studies have attempted to document trends in the skill endowment of the immigrant population in host countries, and to examine how that skill endowment adapts to economic and social conditions through the process of assimilation. The earliest studies used cross-section data sets to trace the age-earnings profiles of immigrants and native-born workers in the United States. A cross-section survey allows the comparison of the current earnings of newly-arrived immigrants (measured at the time of the survey) with the current earnings of immigrants who migrated years ago. Typically, these cross-section studies found that the earnings of newly arrived immigrants were substantially lower than the earnings of immigrants who had been in the host country for one or two decades. Researchers interpreted the cross-section data to mean that newly arrived immigrants lack many of the skills valued by host-country employers, such as language and educational credentials. As immigrants learn about the host country, their human capital grows relative to that of the native-born, and economic assimilation occurs in the sense that immigrant earnings "catch up" to the earnings of natives.

This "assimilationist" interpretation draws inferences about how the earnings of immigrant workers evolve over time from a single snapshot of the population. Suppose, however, that today's immigrants arrive with less skills than those who arrived twenty years ago. Because of these intrinsic differences in skills across immigrant cohorts, one cannot use the current labor market experiences of those who arrived 20 or 30 years ago to forecast the future earnings of newly arrived immigrants. If there are skill differentials among immigrant cohorts at the time they entered the host country, a cross-section survey yields an incorrect picture of the assimilation process.

Many studies, using either longitudinal data or repeated cross-sections, have calculated the rate of economic assimilation and measured the importance of cohort effects in host countries. In the United States, the immigrant waves that entered the country in the 1980s and 1990s were relatively less skilled than the waves that entered in the 1960s and 1970s. Immigrants in the United States do experience some economic assimilation, but the rate of assimilation is unlikely to be sufficiently high to permit recent cohorts to catch up to their native-born counterparts.

Labor Market Effects

Economic theory predicts that the entry of immigrants into a particular labor market will lower the wage of competing workers (workers who have the same types of skills as immigrants), and increase the wage of complementary workers (workers whose skills are more in demand because of immigration's effect on labor market conditions).

In many host countries, immigrants cluster in a limited number of geographic areas. In 1990, in the United States, 42 percent of immigrants lived in just five metropolitan areas–New York, Miami, Chicago, and Los Angeles and nearby Anaheim–but only 13 percent of the native-born U.S. population lived in those localities. Many empirical studies exploit this clustering to identify the labor market impact of immigration by comparing labor market conditions in "immigrant cities" with conditions in markets untouched by immigration. These studies typically correlate some measures of economic outcomes for native workers with a measure of immigrant presence in the locality, and usually report a correlation that is near zero. This evidence is then interpreted as indicating that immigration has little impact on the labor market opportunities of the native-born.

The short-run perspective of this type of research can be misleading. Over time, native workers and employers will likely respond to the entry of immigrants. Native-owned firms see that cities flooded by immigrants tend to pay lower wages, and often relocate to those cities. The flow of jobs to areas of high immigrant presence helps cushion immigration's adverse effect on the wage of competing workers in those localities. Similarly, workers living in areas not directly affected by immigration will choose not to move to the cities penetrated by immigrants, and some native-born workers living in the immigrant cities will seek better opportunities elsewhere.

Such effects on the internal migration of native-born workers and jobs within the host country spread out the impact of immigration across the entire host country. A comparison of the employment opportunities of native workers in different localities might show little or no difference because, in the end, immigration affected every city, not just the ones that actually received immigrants.

Because local labor market conditions may not provide valuable information about the economic impact of immigration, a number of studies have attempted to measure the impact at the national level. The factor proportions approach compares the host country's actual supplies of workers in particular skill groups to those it would have had in the absence of immigration, and then uses outside information on how wages respond to changes in labor supply to simulate the wage consequences of immigration. During the 1980s and 1990s, when the immigrant flow to the United States was relatively less skilled, the factor proportions approach finds that immigration had an adverse impact on the relative wage of native-born workers who are high school dropouts at the lower end of the skill distribution.

Fiscal Impacts

Income differences across countries are the dominant influence on a person's migration decision. The most important of these are wage differences that arise in the labor market, but the safety net provided by the welfare state may also have an influence. Welfare programs can generate two distinct types of "magnet" effects, with potential implications for public expenditures: welfare programs may attract persons who otherwise would not have emigrated, and might discourage immigrants who are not successful in the host country's labor market from returning to their home countries. Despite the prominence given to these magnet effects in the immigration policy debate, there is little empirical evidence that either supports or refutes the existence of them.

Most of the existing studies have focused instead on documenting the extent of welfare use by immigrant households. In the United States, there has been a rapid rise in immigrant welfare use. In 1970, immigrants were slightly less likely to receive cash benefits than native-born people. However, by 1998, over 10 percent of immigrant households received cash benefits, as compared to 7 percent of native households.

Some studies have also examined the magnitude of the income transfer to the immigrant population that occurs through the welfare state. An influential 1997 study conducted by the U.S. National Academy of Sciences attempted to calculate the fiscal impact for two major immigrant-receiving states, California and New Jersey. The study included an item-by-item accounting of expenditures incurred and taxes collected, and calculated how immigration affected each of these entries. Immigration increased the annual state and local taxes of the typical native household by $1,200 in California and by $200 in New Jersey. Much of the short-run fiscal impact of immigration is in the form of expenditures in public schooling. Immigrant families tend to have more children than native families, and the schooling provided to immigrant children–such as bilingual education–is often more expensive than the schooling provided to natives.

Economic Benefits

The native-born benefit from immigration in many ways. Immigrants buy goods and services, and native-owned firms and native-born workers profit by providing these to new consumers. Immigration may also increase the productivity of some native workers. Less-skilled immigrants, for example, can perform many of the service tasks in a modern industrialized economy, freeing up time for native-born workers to engage in activities where they are more productive. Immigration can also lower the price of many goods and services, benefiting consumers in the host country.

It is difficult to calculate these measurable benefits from immigration unless one has a model of the host country's economy detailing how the various sectors are linked. Such a model could simulate how the economy changes when the labor market is expanded by large numbers of immigrant workers, and would record the ripple effects of immigration on other sectors of the economy.

A number of studies use the "textbook model" of a free-market economy–in which wage and employment levels are set by the interplay between the supply of workers and the demand for workers–to examine the economic benefits from immigration. This model isolates two main effects of immigration. First, because immigrants increase the number of workers, there is additional competition in the labor market and the wage of native workers falls. Second, at the same time, native-owned firms gain because they can now hire workers at lower wages, and many native consumers gain because the lower labor costs eventually lead to cheaper goods and services. It turns out, however, that the gains accruing to the persons who use or consume immigrant services exceed the losses suffered by native-born workers, and hence society as a whole is better off. The difference between what the winners win and what the losers lose is called the "immigration surplus," and reflects the gain in national income accruing to the native-born as a result of immigration.

Applied to the United States, however, this model suggests that the net benefit from immigration is quite small. If a 10 percent increase in labor supply lowers the wage by 3 percent, the immigration surplus is on the order of 0.1 percent of gross domestic product (GDP)–about $10 billion in 2002. Moreover, this small average net gain disguises the fact that there may be substantial wealth transfers from native-born workers to the capitalists who employ the immigrants.

Effects on Source Countries

Although much of the existing research focuses on how immigrants alter economic opportunities in the host country, they also alter economic opportunities in the source countries. Emigration might drain certain types of workers from particular countries. (The highly-skilled component of such migration is popularly labeled the "brain drain".) Against this, immigrants transfer substantial funds from the host to the source countries. Despite the sizable impact that international migration might have on the global distribution of wealth, the economic effects on the source countries have not been studied systematically.

See also: Cost of Children; Immigration Policies; Migration Models.

bibliography

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Borjas, George J. 1985. "Assimilation, Changes in Cohort Quality, and the Earnings of Immigrants." Journal of Labor Economics 3: 463–849.

——. 1995. "The Economic Benefits from Immigration." Journal of Economic Perspectives 9:3–22.

Borjas, George J., Richard B. Freeman, and Lawrence F. Katz. 1997. "How Much Do Immigration and Trade Affect Labor Market Outcomes?" Brookings Papers on Economic Activity pp. 1–67.

Card, David. 1990. "The Impact of the Mariel Boatlift on the Miami Labor Market." Industrial and Labor Relations Review 43: 245–257.

Chiswick, Barry R. "The Effect of Americanization on the Earnings of Foreign-Born Men." Journal of Political Economy 86: 897–921.

Smith, James P., and Barry Edmonston, eds. 1997. The New Americans: Economic, Demographic, and Fiscal Effects of Immigration. Washington, D.C.: National Academy Press.

George J. Borjas