The Economics of Immigration Policy

on Wednesday, 30 July 2003. Posted in Issue 33 Wanted: An Immigration Policy, 1998

Tom Giblin, SJ

December 1998

 

The possible impact of immigration on the economy of a country is much debated. In continental Europe, up to a decade ago, the impact of immigrant labour was not a matter of much concern. Immigrant workers were widely employed to carry out work for which it was very difficult to recruit native workers. For instance, in Germany large numbers of Turkish people were employed in this way. In recent times however, with unemployment levels high over most of Europe, there has been more concern about the impact of immigration on the economy. Because of increased immigration here, there is now some concern in Ireland about the issue.

 

A lot of the recent literature on the economics of immigration has been done in the United States. A good survey article of the developments in this area is one by George J. Borjas, who recently addressed a Conference on Refugees at University College Dublin.

It must be borne in mind that the flows of immigrants into the U.S. have been very large. A third of the increase in the U.S. population between 1981 and 1990, or 7.3 million people, were immigrants. This means that economic conclusions drawn from the American experience should be interpreted with care when attempts are made to apply them to Ireland. If immigration into Ireland was of the same scale as in the U.S. it would mean net immigration of about 19,000 per annum. In fact, the net immigration into Ireland for the past five years has averaged only 3,200. However in the past two years this picture has begun to change rapidly, and in 1997 the net immigration amounted to 15,000 (44,000 immigrants and 29,000 emigrants), which would, pro rata, approach current U.S. levels. It is accepted however that most of the immigration into Ireland is made up of returning Irish emigrants, often highly skilled, and this is quite a different situation from the U.S. Immigrants into Ireland seeking refugee status amount to only about 9% of total immigrant numbers.

The economic question is not the only, nor necessarily the most important, question to ask about immigration, though it seems to be the one the Department of Justice focuses on the most. Immigration policy is also shaped by political, ethical and social objectives which may override economic considerations. Economics asks a specific and limited question, namely, what are the economic gains and losses in allowing significant inflows of immigrants,

- to the immigrants coming to a nation?

- to native workers within that nation?

- to the country as a whole?

a) How well do immigrants fare?

In the early research in the U.S. there was no data which tracked groups of immigrants over time, so this work examined a snapshot of immigrants at one point in time. The research found that while recently arrived immigrants were typically starting off at much lower wages than native workers, immigrants who had been in the U.S. for about fifteen years had wages that were the same as those of native workers, while those who had been in the U.S. for longer than fifteen years had higher wages than native workers . This snapshot led people to believe that immigrants\' earnings must overtake those of native workers over time. Theories were elaborated claiming that those with the most initiative tended to immigrate, and that immigrants have more incentive to work hard and end up better off than domestic workers.

This initial snapshot proved to be misleading, however. Borjas has found it results mainly from the fact that the early generation of immigrants to the U.S. were more highly skilled and therefore more highly paid than the average native worker, while the later generations of immigrants tend to be a lot less skilled and less well paid than native workers. So while these early immigrants have done better than the average worker it is because they started with an advantage. Borjas\'s view is that recent generations of immigrants into the U.S. are unlikely to reach the same wage levels as earlier generations. In short, it seems that the relative education and skills base of immigrants has a strong bearing on how they will succeed after migrating.

b) How does immigration affect the wages and employment of native workers?

Another question that is asked is how the arrival of large numbers of immigrants affects the wages of the domestic labour force. There are difficulties in assessing this. At first glance immigrants appear to have little or no effect. For instance one U.S. city can have 10% more immigrants than another, and yet its wages are only 0.2% lower. There is some evidence in the U.S. that significant numbers of domestic residents leave areas where there is a big influx of immigrants, so instead of the influx adding to the labour force and depressing wages, the actual net change in the local labour force is much smaller.

In a highly significant study of the impact of the Mariel boatlift of 125,000 people from Cuba on the Miami labour market, David Card has shown that wages did not fall even in the year of the inflow, thus before any outflow of domestic residents could occur . A simple explanation for this is that it is hard to undercut local wage rates because contracts at these rates have already been set. Also, at the bottom end of the labour market, \'poverty wages\' are by definition hard to reduce simply because there is so little incentive to work for less. A similar study has been done on the influx of persons from Algeria into France in 196 . These \'natural experiments\' tend to support the overall evidence that immigration has little or no effect on native wage levels.

One segment of the labour market that may be vulnerable are those who drop out of school. Borjas noted that between 1980 and 1995, the average wages of school dropouts, relative to high school graduates, fell by 11%. He estimated that about half was accounted for by the impact of immigration. This estimate however, should be understood as the maximum possible impact of immigration. Firstly because simply adding in unskilled immigrants who are early school leavers to the group of domestic early school leavers, will cause the average relative wage rate of school drop outs to fall, and this without any change in the wage levels of domestic early school leavers. Secondly because we can assume that it is harder to substitute immigrants than domestic workers for many jobs because of their additional language and cultural training needs. Therefore the arrival of immigrants will have less impact on domestic wages than an increase of domestic workers.

Friedberg and Hunt conclude "that a 10% increase in the fraction of immigrants in the population reduces the native wage by at most 1%. But again, this is in the context of large- scale low-skilled U.S. immigration patterns. The evidence suggests therefore that the impact of immigration on native wages will be small, even for the most vulnerable groups.

c) How does a country as a whole benefit from immigration?

At least theoretically, national income should be increased most by inflows of immigrants into areas of skill shortage in the native labour force. This could be either low-skilled or high-skilled workers.

It is obvious that if immigrants are in employment they will generate tax revenue for the State rather than imposing a welfare cost. If immigrants correspond to skill shortage areas, they are more likely to be employed. One might also expect skilled immigrants to be less likely to be living on social welfare. It must be remembered however that the skill criterion for admitting immigrants is a narrow economic one which does not take into account the political and social concerns that should motivate an immigration policy as a response to the human need of immigrants.

Attempts to calculate the benefit or cost of immigrants in the U.S. economy have been fraught with difficulty. On the one hand, it is easy to calculate the taxes paid and the welfare benefits received by immigrants. On the other hand, is very difficult, to cost the services other than welfare benefits, such as education, that immigrants use. The studies have been done, even those which assume that native wages fall because of immigration, still suggest that the US economy benefits from immigration by about $8 billion annually.

Furthermore, calculating the impact of increased immigration on government spending does not consider the potential benefits of immigration to an economy over a longer period. There are grounds for arguing that an increase in the labour force allows an economy to grow at a higher rate while avoiding inflation. Indeed in Ireland today it is arguable that immigrants from Europe and returned emigrants have a significant impact in avoiding excessive wage inflation caused by a shortage of particular skills. Immigration then is equivalent to free imports of human capital particularly of younger people. Fitzgerald and Kearney , for example, argue that now that the fertility rate in Ireland has fallen below natural replacement, an argument could be made for immigration in promoting long-term balance between the young and old in the population.

So there are economic grounds for suggesting that a modest policy of immigration even for less skilled workers will have little or no effect on native Irish wages or employment prospects, and may even help the Irish economy to continue to grow. Fitzgerald and Kearney argue that the mobility of labour both into and out of Ireland had had an important impact on the performance of the economy in recent years. It has made the supply of labour in Ireland significantly more elastic (i.e. expanding and contracting according to demand) than it would be in a closed economy. At times when the economy is growing rapidly, such as today, it has helped to relax capacity constraints allowing more rapid growth than would otherwise have been possible. In June, a report from National City Brokers predicted that the Irish economy will be capable of absorbing labour force increases of about 40,000 per annum for the foreseeable future.

Writing in the Irish Times Oliver O\'Connor suggests that with such growth there will be a demand for both higher and lower skilled workers. In fact, he states, the more success we have at generating high-skilled jobs, the more demand there will be for services that are lower skilled, and demand for these jobs may exceed the level the Irish workforce will supply, as has happened in Germany and elsewhere. He warns however against the creation of an immigrant underclass, stressing the importance of increasing social mobility in our society, and giving the children of low-skilled immigrants the chance to move up socially and economically. The fact is however, that most of the asylum-seekers coming to Ireland at present tend to be middle-class and thus not in the low skilled group. Of course many cannot use their qualifications because they find it difficult to have them recognised.

In the article quoted earlier, Borjas makes the point that the permitted level of immigration need not be an immutable constant, but should be linked to the business cycle. More immigrants can be admitted when the economy is strong, and fewer when it is weak.

Fitzgerald and Kearney also make the point that the current net immigration is having an indirect effect on the economy through increasing pressure on the physical infrastructure. This is especially true of the housing market. While those emigrating are mostly leaving from their parents\' homes, most of the immigrants, whether Irish or foreign, need independent accommodation. Fitzgerald and Kearney estimate that net immigration has added almost 6,000 to the annual demand for additional dwellings. It is unlikely that asylum-seekers are contributing very significantly to this demand, since many of them are being accommodated in guest houses. In the longer term, at current levels of inflow, and if almost all were granted refugee status, they might contribute to about 10% of the increase in demand for housing. The impact of this on house prices would very much depend on where these refugees were to live i.e. in an area like Dublin or Galway where housing is in short supply, or elsewhere.

Conclusion

In conclusion then, from a purely economic point of view it is clear that Ireland is at present benefiting from returned emigrants and also immigration from other EU countries. Moreover, there is a credible economic case that allowing a modest inflow of non-EU immigrants would also be beneficial economically. There would be some costs of course perhaps in some welfare payments or increased housing demand. However the benefits of increased tax revenue and increased labour supply by non-EU immigrants would in all likelihood outweigh any such costs. Economic studies also suggest that fears about the impact of such an inflow on domestic wages are exaggerated.?