Immigration Makes Economic Sense, Say Researchers

In the aftermath of the 2007 recession, the debate around immigration has primarily concentrated on the way immigrants affect economic opportunities for native-born residents. Likewise, most research about the economic impact of immigration has also focused on labor market outcomes. Recent studies, as discussed in previous issues of the Chicago Policy Review, have found that immigration has no adverse impact on domestic workers’ job prospects or incomes.

Meanwhile, in a recent paper, researchers Harry P. Bowen and Jennifer Pedussal Wu contend that past research inadequately addresses the question of how immigration affects a host economy. In their paper “Immigrant Specificity and the Relationship Between Trade and Immigration: Theory and Evidence,” the authors criticize the partial equilibrium model used in previous studies which makes two restrictive assumptions. First, there is usually an implicit assumption that immigrant workers are specific to the non-trade (or services) sector only. Second, immigrants and native-born workers are assumed to be homogeneous, thus failing to take into account the differentiating characteristics of immigrants and how these may affect their mobility across sectors.

Bowen and Pedussal Wu present an alternate general equilibrium model of the economy, allowing for mobility of factor inputs across economic sectors. Their model builds on the Rybczynski Theorem, which states that an increase in the supply of one factor of production will increase economic growth in sectors that intensively use that input. Immigration is thus viewed as an increase in labor supply, which leads to higher growth in labor-intensive sectors.

The paper presents a theory of immigration impact based on a small open economy with three sectors: services, export industries, and import-competing production. Because the paper only studies immigration in industrialized OECD economies, this allows the authors to make the assumption that exports are capital-intensive and require more skilled labor, while import competing production and services are labor-intensive and more open to absorbing low-skilled immigrants.

The analysis of labor market is more sophisticated. The authors account for the varying level of mobility of immigrant workers arising from difficulties faced due to language barriers, differing skill levels, or legal status. Thus, unlike previous studies, this model does not treat native-born and immigrant workers as homogenous. Secondly, the model incorporates Guest-Workers, temporary, usually low-skilled, foreign workers who do not have permanent immigrant status.

The results, based on a regression analysis of sector-wise growth and immigration in 22 OECD countries, provide mixed recommendations for immigration policy. The authors find that immigration leads to higher growth in both the services and export sectors. Also, while Guest-Worker programs significantly lower the contribution of immigrant workers to service sector growth, these programs have no impact on export growth.

The authors explain the results as being a function of the varying levels of mobility between different sectors. While immigrant workers are usually restricted to non-trade sectors because of various constraints, native-born workers who were earlier employed in the non-trade sector find it easier to find jobs in the tradable goods sector. The authors believe that these native-born workers are better suited to jobs in the capital-intensive exports sector because of their higher skill levels. This results in labor-led growth in both services and export sectors.

However, the authors believe that if immigrant workers were also mobile, they would have joined import-competing sectors. This would in turn have attracted an outflow of capital from the exports to the import-competing industries. Thus, the ease of switching jobs by immigrants would result in lower trade. The gains from immigration are conditional upon the level of mobility of immigrants, and in consequence, the level of integration of immigrant workers in the given country.

Even though the model appears compelling, the authors do not provide empirical evidence to substantiate their claims. However, given the positive externalities associated with having a well-integrated society, further investigation into the area may be fruitful.

As debate on immigration reforms continues, questions on how immigration shapes the domestic and global economy have become increasingly pertinent. Research studies like these are important in ensuring that arguments in the policy debate are grounded in empirical analysis.

Article Source: Harry P. Bowen and Jennifer Pedussel Wu, “Immigrant Specificity and the Relationship Between Trade and Immigration: Theory and Evidence,” Southern Economic Journal 80, No. 2 (Oct 2013): 366-84.

Feature Photo: cc/(Kenny Shackleford)