NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Spreading the Gains from Immigration

"The United States is the single biggest recipient of immigrants - 35 million, or 12.4 percent of the population, in 2000."

Because immigrants are the main economic beneficiaries from immigration and do not participate in decisions on immigration policies, the level of immigrant flows is the least developed part of globalization. To encourage the residents of rich countries to accept a higher level of immigration, the government could provide innovative economic incentives to residents. Countries with a queue of immigrants like the United States could auction off visas for immigration to the highest bidders. They could charge new immigrants a sizable fee - maybe as much as $50,000 apiece -- or add a surcharge to incomes taxes, and use these "admission fees" to benefit existing citizens and gain their support for higher levels of immigration.

In People Flows in Globalization (NBER Working Paper No. 12315), Richard Freeman writes that such "radically economic policies" may represent a possible way to ameliorate one problem arising from "globalization": the fact that the flow of people across international borders in the form of immigration, movement of international students, business travel, and tourism is smaller than the rising flows of trade and capital. As a result, there are huge differences in pay between the labor markets of well-to-do countries and those in poor nations for people of similar skills. This implies that policies giving workers in developing countries greater access to advanced country labor markets could raise global economic wellbeing considerably. The economic problem, though, is that immigrants -- not the citizens of immigrant-receiving countries -- benefit most from immigration. Imposing charges on immigrants could spread a portion of those benefits to the citizens.

As it is, if a nation restricts trade, then cries of protectionism resound. Suggest linking labor standards to trade and it's protectionism in disguise, Freeman writes. Limit capital flows and the International Monetary Fund is on your back. But limiting people flows is an accepted exercise of national sovereignty. During the past few decades, most countries have reduced barriers to the trade of goods and services and liberalized financial capital markets. However, most have also sought to limit immigration, worried about economic and cultural disruption.

In this paper, Freeman examines the causes and consequences of immigration in making his argument that larger people flows are fundamental to creating a global economy. "Greater mobility of labor across borders could raise the output and economic wellbeing of workers in developing countries more than many other policies associated with globalization," he holds. Moreover, even with current restrictive immigration policies, the aging populations and low birth rates in advanced countries, coupled with the huge disparities in pay around the world and increased education in developing nations, are likely to lead to increased immigration in the decades ahead.

The United Nations, he notes, projected that immigrants numbered about 190 million in 2005, more than twice the 82.5 million in 1970. Two-thirds of them settled in rich countries, where 8.7 percent of the population is foreign-born. In developing nations, 1.5 percent of the population is foreign-born.

The United States is the single biggest recipient of immigrants - 35 million, or 12.4 percent of the population, in 2000. Russia is next. The collapse of the Soviet Union prompted many persons of Russian ancestry to return to Russia from former states of the Soviet Union that had become independent nations. Germany is third with 7.3 million immigrants. Other major recipients of immigrants are Ukraine, Saudi Arabia, France, Australia, Canada, and India and Pakistan.

Top migrant-sending countries are China, with 35 million natives moving to other countries, India (20 million), and the Philippines (7 million). Many U.S. immigrants, particularly from Mexico, have less than a high school education. But in 2000, 45 percent of U.S.-based Ph.D. economists and 55 percent of U.S.-based Ph.D. natural scientists aged 45 or younger were foreign-born. Sixty percent of immigrants to the United Kingdom are professionals.

Further, in 2004, there were about 2 million international students. The United States is the largest single student destination, with 573,000 of them, of which one-fourth come from China and India. The World Tourism Organization estimates that there were 760 million international tourist arrivals in 2004.

Offering some comparative numbers, Freeman notes that immigrants make up some 3 percent of the global workforce and 9 percent of the workforce in advanced countries. The ratio of world exports to total world gross domestic product -- that is, the total output of goods and services -- was 27 percent in 2004. Foreign direct investment, a volatile flow over the years, rose to 20 percent of gross capital formation in 2000 before falling to 7.5 percent in 2004.

Wages in the richest 20 percent of countries are four to five times those in the poorest 20 percent of countries, if measured according to the purchasing power of those wages in the countries. The result, Freeman writes, gives the global economy "the appearance of a gated wealthy community consisting of the advanced countries, surrounded by impoverished ghettos, with immigration restrictions preventing the ghetto residents from moving to where their productivity and wellbeing would be higher."

Economic factors motivate an estimated 4 million illegal immigrants to move from poor to rich countries annually. This has created a multi-billion dollar illegal industry that helps transport them across borders. In 2000, about 8 percent of the Mexican-born population was living in the United States and 30 percent of Mexicans with formal sector jobs worked here. U.S. data show that immigrants earn less than native-born overall, and less than native-born with the same years of schooling. These differences decline over time. But immigrants earn far more in their new country than in their home country. For example, in 2000 a Mexican with five to eight years of schooling earned $11.20 per hour in the United States, compared to about $1.82 an hour in areas of Mexico sending many immigrants to the United States - a six-fold difference. The immigrants benefit from the higher productivity in advanced nations resulting in part from relatively large capital spending. The 0.1 percent of India's population living in the United States earns roughly the equivalent of 10 percent of India's national income.

However, immigration, Freeman notes, does not provide a ready solution to the problems of retirement and pensions that face many developed economies. For example, to stabilize the ratio of the number of retired persons divided by the number of workers, the United States would need 10.8 million new immigrants per year through 2050. Post-1995 immigrants then would make up 27 percent of the U.S. population.

After examining a number of studies, Freeman concludes that the negative impact of immigrants on the wages of native workers is "modest." In nations that are the source of immigrants, the size of the any harm from the loss of highly skilled workers -- the "brain drain" -- is unclear, Freeman notes. That emigration can be huge. For instance, more than half of university-educated adults from the Caribbean live in the United States. On the positive side, those source-nations benefit from the remittances of immigrants, which could amount to as much as $160 billion a year. Freeman writes that, "empirical analysis does not reach any firm conclusion about whether emigration hurts or helps source economies." But, he notes that the arrival of skilled immigrants in the United States could "help produce a technological edge for the country." At the same time, it could reduce the incentive for the native-born to choose to become scientists and engineers.

Looking at what a visa for entry into the United States might be worth for a person from a country with wages only 20 percent of U.S. wages in purchasing power, Freeman calculates that the immigrant could be $100,000 better off over a working lifetime. If the person pays $50,000 for that visa, then a million additional immigrants would produce $50 billion in tax receipts for use of all Americans. "Some form of redistribution of the benefits of immigration may be necessary to win support for greater immigration," Freeman writes.

-- David R. Francis

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
 
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