The Economic and Fiscal Consequences of Immigration (2017) / Chapter Skim
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6 Wider Production, Consumption, and Economic Growth Impacts
6 Wider Production, Consumption, and Economic Growth Impacts
Pages 279-320
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From page 279... ...
But product, housing, and capital markets are affected by immigration as well, as are some nonmarket activities and -- as a result of human capital formation and innovation induced by high-skilled immigration in particular -- the trajectory of long-run economic growth. This chapter discusses these economic impacts of immigration that take place beyond the labor market while recognizing that many outcomes associated with them are influenced by their interaction with changes in labor supply and demand over time.1 The chapter begins (Section 6.1)
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From page 280... ...
However, when factors beyond those directly attributable to labor force expansion are considered -- for example, the contribution of immigrants to capital formation, entrepreneurship, and innovation, which also shape the way and the pace at which growth unfolds -- expansion of the aggregate economy attributable to new arrivals becomes much larger. Recent immigrants have higher patenting rates than natives due to their concentration in science and engineering and to their disproportionate representation among highly educated workers.
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From page 281... ...
The difference between the measured economic outcomes generated by endogenous growth models, as opposed to models in which growth is exogenous to the economy, may be significant. The recent endogenousgrowth literature suggests that estimates of productivity and wage impacts of immigration can be either larger or smaller than those derived when static conditions are assumed, depending largely on the extent to which new immigrants contribute to human capital formation and innovation.
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From page 282... ...
. Some endogenous growth models are also consistent with empirical evidence suggesting that the proportion of high-skilled workers immigrating to the United States (as well as to other major receiving countries)
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From page 283... ...
natives (the immigration surplus discussed at length in Chapter 4) is typically estimated to be a small piece of this already small overall impact.
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From page 284... ...
As detailed in Section 5.6, patenting activity by foreign-born population not aged, with two-thirds of this reduction attributable to slower growth in the labor productivity of workers and about one-third attributable to slower labor force growth. Given current population projections, their results imply that "annual GDP growth will slow by 1.2 percentage points this decade and 0.6 percentage points next decade due to population aging" (Maestas et al., 2016)
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From page 285... ...
did find the effects of recent immigrant inflows on overall wage inequality in the population (including natives and immigrants) to be somewhat larger than the impact on the relative wages of U.S.
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From page 286... ...
computer and engineering labor markets and found that immigrants earned higher wages on average due to higher average levels of education. The wage advantage was larger for computer workers than for engineering workers, possibly due to greater returns on English proficiency for the latter.
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From page 287... ...
explored this potential "shot in the arm for local economies," focusing mainly on the labor market impact of consumer demand for local services. They found that the bump in consumption can "attenuate downward pressure from immigrants on non-immigrants' wages, and also benefit non-immigrants by increasing the variety of local services available."9 Using Decennial Census data from 1980 to 2000, the authors found evidence that, due to these effects, immigrants did in some cases raise native workers' real wages.
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From page 288... ...
There is evidence that immigrants are more responsive than natives to regional differences in labor demand, a factor that makes labor markets more efficient because workers flow to where wages are rising (Borjas, 2001; Somerville and Sumption, 2009)
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From page 289... ...
For similar reasons, immigration has an ambiguous theoretical effect on the relative prices of different goods and services. The same economic change -- an increase in the supply of workers -- that can lower wages and production costs can also lower prices, particularly in labor-intensive sectors (Baghdadi and Jansen, 11 may also reflect the possibility that high-skilled labor markets are more "national" in It scope while low-skilled labor markets are more local.
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From page 290... ...
. But from the perspective of the remittance-sending country, the outflow of income when immigrant workers send remittances "back home" reduces immigrant savings rates and consumption within the United States and deepens the deficit in the current account.
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From page 291... ...
While this discussion emphasizes that remittances may reduce some of the benefits immigration confers on the destination country economy by reducing what immigrants spend and save domestically, such a focus ignores the important benefits that remittances confer upon the origin country. Moreover, native indi viduals and businesses also increasingly spend and invest abroad.
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From page 292... ...
Benefits in the form of reduced costs of living created by lower prices to consumers should, as noted above, be largely restricted to nontraded services. Child care, eating out, house cleaning and repair, landscaping and gardening, taxi rides, and construction are a few examples of goods or services that must be produced and consumed in the same geographic location and for which prices are most likely to be affected by local availability of different pools of labor.
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From page 293... ...
who, using Decennial Census data to track immigrant cohorts of the 1980s and 1990s, examined how low-skilled immigration affects the labor supply of highly educated women in the United States. They found a striking correspondence between the availability of low-cost, flexible housekeeping and child care services provided by the foreign-born and increases in the number of hours worked by women in high-salary jobs.16 Of course, lower-income households also benefit from reduced prices of clothing, housing, food, etc.; however, they (especially recent immigrant cohorts)
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From page 294... ...
For example, the direct contribution of residential investment to annual GDP growth frequently reached 1 to 1.5 percentage points in recoveries prior to the mid-1980s. During the 3 years subsequent to the end of the recession in the second quarter of 2009, the contribution of residential investment to GDP averaged close to zero" (Paciorek, 2013, p.
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. The research indicates that the gains for the 19 Estimates based on the Current Population Survey Annual Social and Economic Supplement (IPUMS)
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growth, analyzing local labor market impacts of immigration on native outcomes without controlling for city characteristics will bias estimates. Vigdor (2013)
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From page 297... ...
based on school district level data sources suggest that the negative relationship between inmigration to neighborhoods and housing values may be partly accounted for by parents' housing choices based on preferences regarding the ethnic composition of public schools. 6.5 THE ROLE OF IMMIGRATION IN LONG-RUN ECONOMIC GROWTH As discussed in detail in Chapter 5, much of the research on the economic impact of immigration, such as that focusing on labor market effects, takes a somewhat short-run perspective.
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From page 298... ...
. In essence, endogenous growth models start where the Solow-type growth model ends.
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From page 299... ...
. The Main Ideas Underlying the Endogenous Growth Concept The essence of endogenous growth theory is that the persistent and largely uninterrupted growth in per capita income in the United States and other developed economies over the past 170 years or so can be explained as the outcome of continuous investments in human capital and knowledge formation, or in direct innovative activity at the firm and industry levels, which serve as engines of advancement in total factor productivity and per capita income.23 While the literature varies in terms of the way that the 23 Though such growth is ordinarily accompanied by investment in and accumulation of physical capital as well, models that rely solely on the physical capital channel either cannot bring about sustained growth over long time periods or generate empirically implausible predictions.
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From page 300... ...
While most of the theoretical literature on endogenous growth has so far been formulated in a closed-economy set-up, there is a fledgling strand, described below, that is exploring the relevance of immigration to knowledge formation in an open-economy setting. Skilled immigrants contribute to knowledge formation through their own acquired knowledge as well as via "diversity effects" in knowledge formation, as modeled in Ehrlich and Kim (2015)
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From page 301... ...
. Individuals and families invest in their own or their offspring's learning capacity and knowledge formation.26 Such knowledge production can lead to self-sustaining, long-term growth in total factor productivity and per capita income on the assumption that "knowledge is the only factor of production that is not subject to diminishing returns" (see Clark, 1923, p.
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From page 302... ...
There is indeed a general recognition in both the literature on innovation and the endogenous growth literature that the processes of knowledge formation, innovation, and economic growth are enhanced not just by individuals' own educational investments but also by the spillover effects conferred by the interaction within and across different skill groups, and thus also by the average skill level and educational attainments in the population. Beyond the closed-economy models, there is a nascent literature on endogenous growth that adopts an explicit or implicit open-economy setting that allows for the role of immigration in enhancing either R&D/new goods production or human capital formation.
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From page 303... ...
is on how immigration, treated as exogenous, affects the receiving country's long-term growth and the net benefit to natives in that country: the "immigration surplus." Calibrated simulation runs of the model indicate that if immigration involves exclusively high-skilled migrants, the growth rate of real income rises due to an increase in skill-intensive R&D activity. In contrast, the net real income benefits to natives were negative if immigration was exclusively low skilled.
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From page 304... ...
added a new dimension to the human-capitalbased endogenous growth model that allows for international labor mobility by treating the flow of immigrants and their skill composition, as well as human capital formation, income distribution, and economic growth, as endogenous variables. To this end, they pursue an open-economy model recognizing two interacting countries -- destination and source -- as well as two types of workers: skilled and unskilled.
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From page 305... ...
Analytical considerations and calibrated numerical simulation in Ehrlich and Kim (2015) imply that such technological advances generate a higher rate of human capital formation and full-income growth, as well as a generally rising level and share of skilled migrants relative to both the migrant and native populations in the receiving countries.
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From page 306... ...
The Immigration Surplus in Endogenous Growth Models The endogenous growth paradigm, which focuses on the long-term dynamic implications of immigration, also offers new insights concerning the measurement of the net economic costs and benefits to natives associated with immigration -- what the literature has often termed the "immi 29 The sixth country, Germany, was excluded due to absence of relevant time series data for a reunified Germany prior to 1990. 30 This pattern was derived from fixed effects models regressing changes in migrant population stocks on GDP (in cubic transformation)
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. The difference between the measures of the conventional immigration surplus generated in static models or in dynamic models with exogenously determined growth and those based on the endogenous growth paradigms is that the latter account for the way immigration interacts with the economy's human capital formation and self-sustaining growth.
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From page 308... ...
Number % Number % Total 34,162 100.0 170,418 100.0 High School and Above 24,477 71.7 154,826 90.9 Bachelor's and Above 9,943 29.1 53,348 31.3 Master's and Above 3,826 11.2 18,904 11.1 Doctorate 686 2.0 2,492 1.5 SOURCE: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement, 2012, Table 2.5.
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WIDER PRODUCTION, CONSUMPTION, AND ECONOMIC GROWTH IMPACTS 309 1990-1999 1980-1989 1970-1979 Before 1970 Number % Number % Number % Number % 9,546 100.0 7,027 100.0 3,867 100.0 3,112 100.0 6,747 70.7 4,921 70.0 826.0 73.1 2,376 76.3 2,665 27.9 1,943 27.7 1,078 27.9 766 24.6 1,008 10.6 665 9.5 390 10.1 314 10.1 158 1.7 129 1.8 68 1.8 61 2.0 World Region of Birth Latin America Asia Europe All Mexico Other Number % Number % Number % Number % Number % 9,823 100.0 4,075 100.0 17,971 100.0 9,881 100.0 2,292 100.0 8,595 87.5 3,675 90.2 10,118 56.3 4,215 42.7 2,089 91.1 4,939 50.3 1,688 41.4 2,314 12.9 593 6.0 1,002 43.7 2,027 20.6 715 17.5 684 3.8 144 1.5 401 17.5 387 3.9 152 3.7 77 0.4 13 0.1 71 3.1
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; based on Decennial Census data, 1940-1990, and March Current Population Survey for 1996-2000.
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also simulated the immigration surplus under two alternative scenarios: (a) when the skill composition of immigrants is freely determined in an initial equilibrium steady state at the destination country, and (b)
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For example, the immigration surplus in the case where all migration is disallowed in the destination country amounts to a persistent gain of 0.593 percent in the annual growth rate of FIPC after a 15-generations period. Bear in mind that all the immigration surplus estimates reviewed in this section are theoretical and subject to limiting assumptions.
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From page 313... ...
Alesina and Giuliano (2007) examined time use patterns as well and found that, relative to population averages, strong family ties35 are associated with a higher number of hours spent in home production and lower labor force participation of women, as well as less reliance on the government for social insurance.
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Studies of employment arrangements estimate that over half of the unauthorized immigrants in the United States pay income and payroll taxes through employers withholding from their paychecks or by the immigrants filing tax returns (Congressional Budget Office, 2007)
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The overall impact of the informal economy on jobs, production, taxpaying status, and fiscal consequences is not a thoroughly studied topic. 39 Surveying unauthorized workers and hard-to-sample groups (where there is no sampling frame)
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From page 316... ...
In fact, by construction, many of the labor market analyses reviewed in Chapter 5 net out the kinds of economic effects that have been discussed in this chapter, many of which are positive, in order to identify direct, short-run wage and employment impacts. The contributions of immigrants to the labor force reduce the prices of some goods and services, which benefits consumers in a range of sectors including child care, food preparation, house cleaning and repair, and construction.
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6.8 TECHNICAL ANNEX ON MODELS OF ENDOGENOUS GROWTH IN A CLOSED ECONOMY The basic mechanism through which endogenous growth occurs can be illustrated using human-capital-based models. The perception of human capital or human knowledge as the economy's engine of growth stems from a wide agreement in economics that knowledge is the major force affecting productivity growth and the only reproducible economic asset that is not subject to diminishing returns (paraphrasing Clark, 1923)
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From page 318... ...
The assumed production function illustrates the role of intergenerational spillover effects in achieving the growth of innovative human capital. Absent any link between the generations, human capital would be essentially stagnant.
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WIDER PRODUCTION, CONSUMPTION, AND ECONOMIC GROWTH IMPACTS 319 level are a function not just of the technology of knowledge production and transfer but also of the altruistic preferences of parents and the relative costs motivating them to choose between quantity and quality of children and their own consumption, as well as the financing constraints limiting their ability to invest.
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