Migration is known to be beneficial towards increasing total world income. Theoretically, Klein and Ventura (2007) show that world output increases when labour is allowed to flow from low total factor productivity (TFP) to high TFP countries. They suggest that migration of unskilled workers increases world output more than that of highly skilled workers. But what are its effects on the host country?
In 1990, David Card examined the Cuban migration and its impact on Miami’s economy. There was no effect on wages or unemployment rates of less-skilled workers, both amongst the natives and Cubans who had migrated earlier. A more recent analysis of the same event that looks at the wages of high-school dropouts finds a significant short-term effect, which dies in a few years. This might surprise our politicians. Few issues are as differently understood by economists and politicians as the impacts of immigration.
When capital inflow is fixed and migrant labour is a perfect substitute to the native labour, wages and employment of native labour must fall in a market-clearing framework. This is the economic justification of anyone who dislikes immigration. But the assumptions here are simply not true.
Firstly, no two cohorts of labour (migrants and natives) are ever perfectly substitutable. In fact, when the labour groups are complementary, the gains from immigration to the native economy are high. A sub-population of natives which is the closest substitute to migrants may suffer in the short-run, but the negative effects wither away. Secondly, capital inflow hardly remains fixed. If capital stock increases as a response to immigration, gains accrue to native workers as well. Migrant workers add to the economy, pushing up the demand for capital and labour.
Evidence may be less unanimous for host country effects, but not without a favourable long-term trend. One of the largest estimates on the effect of immigration on short-run wages is by George Borjas. He examines immigration to the US from 1960 to1990. It showed that a 10 per cent increase in migrants leads to a 3-4 per cent decline in native workers’ wages and a 2-3 per cent fall in weeks employed. But even this paper admits that it does not account for long-run capital adjustment.
An indicator of welfare of the host population could be inequality. Increase in inequality in the US has not only generated academic interest but it also finds a political foothold. Whether immigration has contributed to the increase in inequality is an unsettled question. Studies find no effect of immigration on inequality when only the native population is considered but an increase when immigrants are included in the estimation. This is because immigrants are disproportionately represented in the low-skilled category.
The last time the US (before Trump) tried to institutionally get rid of migrants was in 1964. It discontinued its Bracero programme, which allowed almost a quarter million Mexican workers to be employed seasonally on US farms. There was no significant increase in native wages or employment, despite the exodus of Mexican migrants.
Why then, is our popular understanding so narrow? The answer may lie in our reliance on a political, rather than economic, understanding of society. And this is a “capital” mistake.
Mahajan and Goyal teach economics at Ambedkar University and OP Jindal Global University, respectively.