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The Economic Value of Immigration

A hot topic in the world of politics is immigration. I purposely avoid politics on this blog, but in this case in a way I am going to make an exception. Today, I’m going to discuss why economically speaking we should encourage immigration. As you read this remember I am coming at this purely economically speaking, so I ask that we keep the heated resulting discussion to a minimum.

Absolute and Comparative Advantage

Economists today are largely in agreement to some basic tenets of immigration. At its most basic, immigration is another form of comparative advantage. This theory was created in the 1800s by economist David Ricardo focusing on global trade. However, the arguments are just as relevant when discussing immigration today.

Any discussion of comparative advantage starts with the concept of absolute advantage. This is the concept that certain countries/groups/organizations/or even people are better at certain tasks than others. I’m sure at our most basic you can agree to that concept, we all know people that are better at some task than us. This can be expanded slightly beyond ability to execute to include the cost to execute. Needless to say, a worker in China can produce something of a repetitive nature for less than an individual in America simply because the cost of living there is cheaper so they get paid less.

Comparative advantage states that this absolute advantage is not everything to consider. You see when an individual or organization focuses on building one thing, they do so by not building something else. So in our above example imagine a US worker can kick out 100 units of a widget in an hour and the Chinese person can produce 50 (irrespective of labor cost). On the flip side the US worker can spit out 50 gadgets and the Chinese person can only kick out 20. Each country has 2 workers. Now for this example lets assume gadgets and widgets hold equal value to society. The US holds an absolute advantage in each, but if you put 50% of the US workers on each and 50% of the Chinese you end up with 150 widgets and 70 gadgets or a total of 220 units of value. However, if the US person focuses solely on the widget they produce 200 and the Chinese person focuses on gadgets they produce 40 units. That means they’ve produced 240 units, so society worldwide is in better shape as is each country if they share in global trade.

Immigration, Production, and Innovation

In the world of immigration, the same scenario plays out on a smaller scale. The immigrant may focus on a task they learned in their home country, or came here for a specific task. The US worker takes another job instead of that one, thus producing both goods at a higher product for society. Then as a country we share in the profits. Simply put, the more the country produces the more wealth the country has. That money is then spent on other goods and services becoming a cycle of more production.

Immigration also brings new talent and skills. When a country has a bunch of people leaving it is called a brain drain. In the same way a bunch of incoming immigrants bring new ideas and talents. According to Forbes, 45 of America’s billionaires are immigrants. Think about that, these people created countless jobs in our country, as well as all sorts of new ideas that we would have otherwise missed out on without their immigration.

But, what of the US worker who may have lost out on the job? On aggregate the workers of the US are better off by this. By the US productivity increasing, costs decline. New innovations are created as are jobs.

Critiques of Immigration

Now, there are two critiques with this theory. The first is the life raft theory. That is that a country has a specific amount of public resources. It is possible that so many people could flood into a wealthy country that they use up all the public resources, essentially flooding the raft. Some countries limit this risk by limiting the usage of public services by immigrants or controlling their flowthrough. Others attempt to do the same thing by only letting in immigrants who can prove they can pay their own way. This is a legitimate concern at the extremes, but the point is there are plenty of ways to mitigate the concern. The impact would be felt most if it was sudden massive immigration, but that would be on a scale of an unlikely tens of millions of people in a few weeks. Over time the country and economy adapts. More people in a country means more consumption and more production. They offset.

The second critique goes back to that individual worker. If the US worker lives in a small town and has little education, they may have difficulty finding alternative employment. Furthermore, even if they can work in the same field the supply of people with that skill set drives down their pay.

This is potentially real concern, but based on studies it has not had a significant negative impact on the average worker. According to the Washington Post data from the OECD shows no correlation between the size of a countries immigration population and their unemployment rate.  Based on a study by IZA, a labor think tank, combing multiple studies using different approaches shows at worst wages are impacted by -.8% per 1% change of immigrants in the labor force.

Many studies actually show a positive employment and wage impact, but lets roll with the worst case. So if 2% of America immigrates in a year, you’re talking about a negative 1.6% impact to wages. With a US population of 319M, that’s over 6 million immigrants a year at a cost of less then 2% of income. Again that’s a worst case, the average of studies appears to focus around 0 impact on wages and employment. None of these outcomes should have us particularly concerned given the positives outlined above.

For the pay decrease, economics also argues that ultimately the prices in the economy will reduce to the point as to offset the pay decrease across the whole of the population. This doesn’t say anything about the individual himself, since economics is not the study of an individual but the study of groups or organizations there of. What about the individual though? That is what people are upset about today.

The Reality of Job Disruption

Ultimately, it is here where the reality comes in. Disruption of jobs and careers is an inevitability. Immigration may speed the obsolescence of one skill set, or reduce it’s value. But so too does technological advancement and even changing tastes. In todays day and age that disruption is a fact of life. The better approach for the country as a whole is to embrace that change and develop programs to help those affected by it to adjust.

9 Comments

  1. Royal Blue
    Royal Blue February 3, 2017

    Well written post FTF! It is indeed a hot topic all over the world. Immigration, free trade and globalization are all being questioned these days. I agree with your conclusion.

  2. Have you read the book, The Rational Optimist? The authors main point is that through exchange of goods, exchange of ideas, the parties involved in the exchange both see their standard of living increase, which sums up the book, but also your points above. It is a very interesting book, though dense.

    My personal thoughts is immigration is a positive thing, as long as the people coming are going to work to better themselves and the country they are joining. I see where the rhetoric is coming from where the government says “we need extreme vetting”. I think a less harsh tone might be better, but what do I know.

    Great post, I look forward to your future insightful posts.

    • fulltimefinance@fulltimefinance.com
      [email protected] February 3, 2017

      Thanks Eric. I haven’t read that particular book but I may have to check it out. I studied Paul Krugman’s work in college. His Nobel Prize was for his work in Global Trade. His writing today is more political then economics.

  3. SMM
    SMM February 3, 2017

    Wow, this is such a coincidence! I was just listenting to NPR radio last night and they were talking about immigration and wanted callers from small towns to call where there may be more friction and describe their experience. One caller said she has many immigrant friends and has learned a lot from them and has essentially made her a better person.

    “Immigration also brings new talent and skills” – in regards to this comment, I’d like to add that immigrants come from places where there is less opportunity, so in my experience I have seen immigrants have a greater willingness to acquire new talents and skills in hopes of attaining a strong position

  4. Smart Provisions
    Smart Provisions February 3, 2017

    Interesting thoughts, FTF.

    I agree we should embrace the changes and adjust to help those who were affected. We should also look into new opportunities that new technology brings in as they would need to expand. Perhaps some of the people who were affected can be assimilated into new positions created there.

    • fulltimefinance@fulltimefinance.com
      [email protected] February 6, 2017

      Great attitude and way to approach the situation. By no means should we let people fall through the cracks, but we also can’t stand in the way of progress.

  5. Mustard Seed Money
    Mustard Seed Money February 4, 2017

    My father in law immigrated here and has become a successful doctor. I am definitely and 100% behind you when it comes to the value of immigration. If I had it my way every college student with a STEM degree would get a green card stapled to their diploma.

    Let’s keep the best and brightest in the world here in the US.

    • fulltimefinance@fulltimefinance.com
      [email protected] February 6, 2017

      So many people have stories like your father in law, we are a nation of immigrants after all.

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