Scholars' Blog

18 August 2019
Sharon Chau
Sharon Chau

What does economics tell us about the benefits and costs of immigration? What policy should we adopt?

Few things are more controversial than immigration1; it has polarised and poisoned politics like no other issue. This is because economists’ consensus is that the economy benefits overall from immigration, but distributes benefits in a way that creates winners and losers2. In light of this, countries have adopted a variety of policies to capture the benefits while minimising the harms. Spain, for example, has liberal immigration policies and immigrants have created more than half of all new jobs in the EU over the past five years3. Other countries like Japan have designed strict immigration laws to prevent immigrants from coming to and remaining within the country.4 In this essay, the economic benefits and costs of immigration and a range of immigration policies adopted by different countries will be critically evaluated, and a conclusion reached about the best policy to adopt.

There are a number of benefits to immigration. Firstly, it ameliorates the problem of ageing populations. As most immigrants are in their twenties or thirties5, immigration reduces the dependency burden on the ageing population, especially in the developed world. This is achieved through an increased labour force and a larger pool of taxpayers which contribute to government income. The younger generation hence feels less pressure to support the elderly within their family and society. Secondly, immigration creates new jobs and businesses. Immigrants often bring valuable skills with them6, creating a “brain gain” of innovation7. They enrich the native country’s economic, intellectual, social, and cultural life, contributing to the vibrancy of their economic development8. They start new businesses, patent novel ideas, and create jobs9. In the U.S., immigrants are a significant driving force in the creation of new businesses and intellectual property10. Thirdly, immigration can lead to higher labour market participation among locals. Low-skilled immigrants create a supply of nannies and maids in major cities, which leads to increases in labour supply among well-educated native women and a decrease in the time native women spend on household work11. It might also lead natives to move from manual labour jobs into service-industry jobs as many immigrants take up blue-collar jobs12. At the same time, immigration benefits certain skilled professions. Many immigrants are less skilled and tend to come from developing countries. The elite in the native country, such as lawyers, journalists, and ministers13 benefit widely. Their jobs are not threatened because language is often a barrier to their occupations - to be a lawyer or a journalist you not only have to be able to speak the language of the country where you intend to work, you have to master it in all its details and nuances. In addition, citizenship is always a requirement to be an attorney or judge. This shows that when immigrants are sufficiently different from the stock of native productive inputs, natives benefit from immigration14. Hence professionals reap the benefits of immigration while suffering no harm to their job security. Hence, this paragraph shows how immigration brings broad benefits.

Other than benefits to the country immigrants move into, immigration also creates benefits for the immigrants themselves. The immigrants earn a much higher salary than they otherwise would have compared to the country they moved out of. They enjoy social services by the state, including healthcare and education. Their children can enjoy increased educational opportunities in a developed country with a generally more well-rounded curriculum and a higher quality of teaching. These are economic benefits to these individuals which cannot be ignored.

On the other hand, immigration creates multiple harms. The main problem is immigration’s broad costs but concentrated benefits. The benefits accrue to small groups of successful immigrants who get good jobs and businesses that gain the skills of new arrivals15. However, low-skilled native workers will have depressed wages. This is due to the skewed education distribution of immigrants leading to a concentration of them in low-skilled occupations, displacing existing native labour16. This is supported by empirical data - immigrant inflows between 1980 and 2000 reduced the average wage of natives who had not completed high school by 9%17. A thesis to explain this is how immigrants are often willing to work harder and for less than natives. In addition, immigration leads to substantial negative employment effects among black men18 and youth19. This is especially problematic due to already ongoing trends of declining real wages among blue-collar jobs and rising wage inequality20. Lastly, taxpayers worry about a drain on public resources as immigrants become eligible for social welfare. This is a legitimate concern, as this might require higher taxes on the native population.

Apart from costs to the native country and its workers, there are multiple costs to the immigrants themselves. Many first-generation immigrants do not lead a good life. By most measures of economic and educational achievement, black and Latino children of immigrants still lag well behind Asians and whites21. In addition, many immigrants report experiencing discrimination. For dark-skinned children of immigrants, negative encounters with the police are common and a source of considerable frustration and alienation22. This is evidenced by victims in the city's most well- known incidents of racial violence; for example, the attacks in Howard Beach and Bensonhurst and the police shooting of street vendor Amadou Diallo were immigrants.

However, arguments against immigration have been subject to fierce rebuttal. In response to the argument of immigrants displacing native labour, it has been shown that immigrants often take up jobs from a completely different sector which has minimal effect on natives’ jobs. For example, Mexican migrant workers taking up manual farm work in the U.S. almost does not affect native employment in that field of employment at all. This means that the Mexican workers raised productivity while creating minimal harms to employment23. Immigrants are additionally more likely to work in risky jobs because of differences in educational attainment and language skills24. This again demonstrates minimal harm to sectors in which most blue-collar workers work. The argument of job displacement also assumes that the number of jobs is static, which is untrue, as an economy creates more jobs when it expands25. Another response is that lower wages for workers can be beneficial, as it leads to lower costs for businesses and lower prices for consumers. This benefits everyone including low-skilled workers, who are also consumers of vast amounts of products. These two responses demonstrate first, how immigrants might not displace native labour; and second, that even if they do, it can bring benefits even to those who appear to be victims. As for fears about the fiscal impact on the state, empirical data demonstrates they are unfounded. Research has shown that EU immigrants made a net positive fiscal contribution to Denmark26 and the United Kingdom27, and that in 1980-2015, international migration had a net positive impact on the economic and fiscal performance of OECD countries28.

In light of these benefits and harms of immigration, there have been a diverse array of immigration policies adopted by countries around the globe. The most controversial of these is free immigration. It is a policy advocated by many free-market economists on the grounds that economics is not a zero-sum game and that free markets are the best way to create a fairer and balanced economic system, increasing the overall economic benefits to all parties29. It is also supported by human rights activists, who point to Article 13 of the Universal Declaration of Human Rights and invoke the right to freedom of movement and the right to leave one’s country30. Free immigration is currently adopted internally within places such as European Schengen Area, the Eurasian Economic Union and externally in Svalbard, a Norwegian archipelago. These areas adopt free immigration policies due to their wish of attracting talent and facilitating better movement of labour. In the Schengen Area, for example, a lot of nurses working in U.K. hospitals are from Poland, filling in the employment void in the U.K. as well as providing more desirable jobs for the Polish nurses.

Another widely-used immigration policy is prioritising immigrants based on skill. The most well-known example is the United States, which uses this “Einstein Principle” in their H1-B scheme to attract overseas talents. The U.S., however, only grants probationary status to these immigrants. In contrast, countries like Canada and Australia guarantee skilled migrants the guarantee of gaining permanent residence status, providing a stronger incentive of stability31. Several European Union nations have introduced fast-track admission processes for highly skilled professionals, such as the “blue card” by the European Council, a competitive tool for attracting and retaining knowledge migrants from outside Europe. This competition for talented labour is not limited to the West. The more dynamic Asian economies, such as the “talent capital” Singapore, Taiwan and South Korea all recruit globally. China and India, known as the major sending countries for skilled migrants in science and technology, are increasingly trying to lure back home their best minds rather than see them remain abroad in talent-recruiting nations through the phenomenon of brain drain.

The rationale behind skill-based immigration policies is to boost the national economy, and attract individuals with the potential to make significant contributions and enhance the country’s innovation and competitiveness32. This would increase the odds for prosperity down the road. A further reason behind this scheme is to screen out low-skilled immigrants who many believe to potentially pose a problem to the native country’s economy.  The government bears the brunt of the fiscal impact of low-skilled immigration, because they fund many welfare and public education programs33. Following this logic, it appears sensible to only allow immigrants who are certain to bring economic benefits into the country. Empirically, skill-based immigration has been successful. High-skilled immigrants represent an increasing share of the United States workforce, particularly in science and engineering fields. Foreign-born individuals account for nearly 28% of doctorate-level workers in the U.S. and more than 45% of those with PhDs employed in science and engineering34. Not only do foreigners take up a large share of employment, but they also produce tangible economic results. Foreign-born scientists account for about a quarter of U.S. innovative outputs35. All this empirical data demonstrates how skill-based immigration is likely to benefit the native country immensely. This is a particularly salient strategy as many developed countries face the problem of an ageing population. As the workforce ages and baby boomers retire, the importance of skilled immigration has the potential to increase significantly36. This is why Japan, which has consistently adopted a strict immigration policy, has loosened its requirements in recent years to ease their serious labour shortage.

Skill-based immigration thus appears to be the best policy for countries to adopt. It ameliorates the ageing population problem that haunts many developed countries. In addition, countries do not have to indiscriminately accept all immigrants - they can choose those based on skills they prioritise, or delegate this task to companies for employees best suited for them. This means that the native economy can benefit in terms of productivity and innovation, which is especially crucial for countries aiming to be the pioneers of technological development. Skill-based immigration further increases political capital, as people are more likely to support high-skilled talents than low-skilled immigrants who in their eyes benefit from social security nets but fail to make valuable contributions, even displacing many native workers. All these reasons mean that skill-based immigration is the policy to adopt which best balances out the benefits and costs to immigration.

In conclusion, immigration is a multi-faceted issue. It brings a plethora of benefits, including ameliorating the ageing population issue, creating new jobs and businesses and bringing vibrancy to the native economy, increasing labour participation, as well as increased economic and social opportunities for the immigrants themselves. Even though there appear to be harms of labour displacement and fiscal burdens on the government, these fears are either empirically not supported or not as dire as are painted. In light of this, the best immigration policy to adopt would be a skill-based policy like the United States’ H1-B scheme, which achieves the best of both worlds.

About the author
Sharon Chau, Kwok Scholar 2020, is a student at Westminster School, she will be reading Philosophy, Politics and Economics at the University of Oxford.

1 Hero, R., & Preuhs, R. (2007). Immigration and the Evolving American Welfare State. American Journal of Political Science 51: 498-517.

2 Orrenius, Pia M., & Zavodny M. (2012). The Economics of US Immigration Policy. Journal of Policy Analysis and Management 31: 948-56.

3 Tremlett, G. (2006). Article on Spanish Immigration. London: Guardian.

4 Japanese Immigration Policy: Responding to Conflicting Pressures. Migration Information Source.

5 C. E. G. (1991). The Benefits of Immigration. The American Journal of Economics and Sociology 50:156.

6 Ibid.

7 West, D. (2010). Brain Gain: Rethinking U.S. Immigration Policy. Washington: Brookings Institution.

8 Herman, R. & Smith, R. (2010). Why Immigrant Entrepreneurs Are Driving the New Economy and How They Will Save the American Worker. NJ: John Wiley & Sons.

9 West, D. (2011). The Costs and Benefits of Immigration. Political Science Quarterly 126:427-43.

10 Wadhwa, Rissing, Saxenian, & Gereffi. America's New Immigrant Entrepreneurs.

11 Cortes, P., & Tessada, J. (2011). Low-skilled immigration and the labor supply of highly skilled women. American Economic Journal: Applied Economics, 3, 88-123.

12 Peri, G., & Sparber, C. (2009). Task specialization, immigration, and wages. American Economic Journal: Applied Economics, 1, 135-169.

13 Borjas, G.J. (1995). The economic benefits of immigration. Journal of Economic Perspectives 9:3-22.

14 Ibid.

15 Freeman, G. (2012). Winners and Losers: Politics and the Costs and Benefits of Migration in Messina, A., West European Immigration and Immigrant Policy in the New Century (CT: Praeger)

16 Orrenius, Pia M., & Zavodny, M. (2012). The Economics of US Immigration Policy. Journal of Policy Analysis and Management 31:948-56.

17 Borjas, G. (2006). Native internal migration and the labor market impact of immigration. Journal of Human Resources, 41, 221-258.

18 Borjas, G., Grogger, J., & Hanson, G. (2006). Immigration and African-American employment opportunities: The response of wages, employment, and incarceration to labor supply shocks. NBER Working Paper No. 12518. Cambridge, MA: NB

19 Smith, C. (2012). The impact of low-skilled immigration on the youth labor market. Journal of Labor Economics, 30, 55-89.

20 Autor, D. H. (2010). The polarization of job opportunities in the U.S. labor market: Implications for employment and earnings. Washington, DC: Center for American Progress and The Hamilton Project.

21 Waters, M.C. & Kasinitz, P. (2010). Discrimination, Race Relations, and the Second Generation. Social Research 77 1:101-132.

22 Ibid.

23 Clemens, M.A. (2017). The Effect of Occupational Visas on Native Employment: Evidence from Labor Supply to Farm Jobs in the Great Recession. IZA Discussion Papers (10492).

24 Pia P.M. & Zavodny, M. (2009). Do Immigrants Work in Riskier Jobs?. Demography. 46 (3): 535–551.

25 Borjas, George J., & Marta Tienda. The Economic Consequences of Immigration. Science 235, no. 4789 (1987): 645-51.

26 Martinsen, D. & Pons Rotger, G. (2017). The fiscal impact of EU immigration on the tax-financed welfare state: Testing the 'welfare burden' thesis. European Union Politics.

27 The Fiscal Impact of Immigration in the UK. Migration Observatory.

28 d’Albis, H. & Boubtane, E. (2018). Immigration and Government Spending in OECD Countries.

29 Clemens, M. (2011). Economics and Immigration: Trillion Dollar Bills on the Sidewalk?. Journal of Economic Perspectives.

30 Pécoud, A. & de Guchteneire, P. (2007). Migration Without Borders. Essays on the Free Movement of People New York: Berghahn.

31 Shachar, A. (2011). Highly Skilled Immigration: The New Frontier of International Labor Migration. Proceedings of the Annual Meeting (American Society of International Law), 105, 415-419.

32 West, D.M. (2011). The Costs and Benefits of Immigration. Political Science Quarterly 126, 3: 427-43.

33 Orrenius, P.M. & Zavodny, M. (2012). The Economics of U.S. Immigration Policy. Journal of Policy Analysis and Management 31, 4: 948-56.

34 Kerr, W., & Turner, S. (2015). Introduction: US High-Skilled Immigration in the Global Economy. Journal of Labor Economics, 33(S1), S1-S4.

35 Kerr, W. (2013). US high-skilled immigration, innovation, and entrepreneurship: Empirical approaches and evidence. NBER Working Paper no. 19377, National Bureau of Economic Research, Cambridge, MA.

36 Kerr, S., Kerr, W., & Lincoln, W. (2015). Skilled Immigration and the Employment Structures of US Firms. Journal of Labor Economics, 33(S1), S147-S186.