The Economics of Immigration

Written By – Ronak Pol
Published on 9th July 2016


A UN study revealed that 244 million people, or 3.5 percent of the world’s population, live outside the countries of origin in 2015. That figure compares to 173 million in 2000 and 222 million in 2010.

This discussion is more crucial now than ever, today major global powers and their residents are taking political decisions based on their country’s immigration policy, in the previous article we narrowed down the reason for Brexit to three crucial points and Britain’s immigration issue proved to be the most important one,making it important to rational with this xenophobia, today a presidential candidate of one the worlds global super power openly condemns illegal immigration, suggesting solutions like building a huge wall, making it necessary to look at the impact of illegal immigration on an economy.

It is essential to remember that the economic impact of immigration will vary over time and place depending on the demography of not on the country that individuals emigrate but also the characteristics and reasons that motivate immigration, the final impact of immigration can either be beneficial or harmful depending on the particular case and time.

Understanding various forms of immigration.

Immigration can either be within a region known as internal migration, or between international borders known as International immigration. International migrations is widely classifies into 3 distinct states – legal, Illegal and Refugees

Another third type of classification was done by Jay Weinstein and Vijayan Pillai called as forced migration, this covers slavery and external factors like natural disasters or civil war that force individuals to migrate, in recent years we have seen a rise in migration forced by growing terrorism, countries like Canada have been accepting over 250,000 immigrants annually from countries like Syria, individuals who’ve fled their war-torn country in the worst humanitarian crisis since the Second World War.

When it comes to immigration there are a few set of questions around which the discussion about immigration is centered

  • Does immigration reduce wages of natives
  • Is immigration a drain on the welfare state
  • Does immigration help the economy grow
  • Who does immigration hurt

Economics of Immigration and wages

Screen Shot 2016-07-08 at 10.28.19 PM

A simple model of labour market

It would be a complete no brainer that an increased labour supply would lead to reduced wages, and can also be observed through a simple partial equilibrium analysis shown in the diagram above.This simple analysis would dictate that a more liberal immigration policy would cause wages for natives to go down. Then why do some economist argue that a more liberal policy would have increased benefit and in the long run improve wages and standard of living?.

When it comes to evaluating any theory, it is necessary to understand its assumptions, in this case we have assumed among other things that wages are set competitively and labor is homogeneous, meaning that all workers are economically identical from the perspective of employers, and thus are perfectly substitutable for one another; and changes affecting this market do not affect others.

Now assuming homogeneous and perfectly substitutable labour might be true for certain subpopulations but is clearly violated for the others. For example if the immigrant population is unskilled while the native population is skilled we can argue that an increase in labour supply of unskilled labour can act as a compliment to the native population, in turn shifting the labour demand schedule, increasing wages for both the natives and immigrant population.

The assumption of perfect substitutability may also not hold because of the characteristics of native population, who would tend to have better command over native language and would take lesser time to adapt to the work culture, making them intrinsically better suited for a job.

The second difficulty of using such a model to predict immigration’s economic effects is that, because it is a partial-equilibrium model, this model ignores potentially important general-equilibrium effects of immigration. For example, in response to an immigration-induced fall in the relative price of unskilled labor in an economy, additional capital is likely to flow to that economy, restoring the capital-to-labor ratio, and with it, native wage rates and employment. Moreover, an influx of immigrants to an economy increases not only that economy’s supply of labor. It also increases its demand for labor—both through immigrants’ consumption and when some immigrants become employers themselves—putting upward pressure on native wages and employment.

Now one might argue that these are very specific case, to which I agree but the point of these argument to highlight the possible fallacies of simplified theoretical models that are often used by people.

Now that we have reasoned the theory that wages may not necessarily fall due to an increase in immigration, there is a need to look at the picture more dynamically and empirically

Immigration-a drain on welfare state?

Welfare state is a concept of government in which the state plays a key role in protection and promotion of the economic and social well-being of its citizen.

Nobel Prize-winning economist and liberty advocate Milton Friedman highlights an interesting paradox where having immigration of unskilled individuals is beneficial so long as it is illegal, he argues that as soon as it becomes legal the equation changes.

He reasons “illegal immigrants do not qualify for welfare, they don’t qualify for social security, they don’t qualify for the other myriad of benefits that we pour out from our left pocket to our right pocket. So long as they don’t qualify they migrate to jobs. They take jobs that most residents of a country are unwilling to take. They provide employers with the kind of workers that they cannot get. They’re hard workers, they’re good workers, and everyone is clearly better off”.

This is a very interesting take on illegal immigration and welfare state, because it clearly highlights the benefits of services that an unskilled immigrant provides while also showing resistance to having legal immigration in a welfare state. It is important to note that Friedman’s argument was about unskilled immigrants and careful evaluation needs to be made before extending it to skilled immigration.

Though widely accepted research today documents that in America immigrants contribute more to the welfare state than what they take away, conservatives who site reports such as the one by the Center For Immigration Studies, This report exaggerates the number of immigrants on welfare by using households as the unit of analysis; as long as the head of household is an immigrant, they consider it an immigrant household, and the researcher counts a household “as using welfare if any one of its members used welfare during 2012.” This means that a household with an American spouse who therefore qualified for welfare could be counted as “using welfare.” The same would go for a child born in the United States to immigrant parents. If he or she received subsidized lunch at school, the whole household would be categorized as “using welfare.” This highly skews the final results making it not useful for drawing analytical conclusions.

Does Immigration help the economy grow?

The short answer to this question would be yes, as one might have already drawn from all the discussion above illegal immigrants do help an economy grow. The unskilled lot undertakes odd jobs which natives might be reluctant towards and the skilled ones bring their innovative spirit to the equation.

According to University of California economist Gordon Hanson Immigrants are far more likely than natives to study science and engineering and more likely to produce innovations in the form of patents. Expanding the supply of immigration visas for high-skilled workers increases patenting activity in science and engineering, particularly in US high-tech firms.

A report from the Partnership for a New American Economy found more than 40 percent of Fortune 500 companies were founded by immigrants or their children, according to the report, the foreign-born population of the United States has averaged 10.5 percent since 1850. That means immigrant entrepreneurs are overrepresented on the list of founders of Fortune 500 companies.

The report also notes, “Many of America’s greatest brands – Apple, Google, AT&T, Colgate, eBay, General Electric, IBM, and McDonald’s to name just a few – owe their origin to a founder who was an immigrant or the child of an immigrant.”

The research shows the attribute of risk-taking that results in immigrants taking a chance on a new land in many cases can be passed along to their children. Another argument for maintaining a legal immigration open to ambitious immigrants and their families.

Who does Immigration hurt?

Now that we have talked about all the positives about immigration it is important to reason with the widespread negativity associated with immigration and to find out who are the natives that are affected by immigration.

One needs to understand that the group of economist who argue for the benefits of immigration are generally looking at the bigger picture, it is obvious that not everyone is going to turn out to be a winner in this case. A particularly contentious issue as far as economists are concerned is the effect of immigration on low-income, native-born workers. The literature is divided on whether an increase in low-skilled immigrant labor hurts low-skilled native workers in the long-run or not.

But it’s almost certain that in individual cases there will be workers who get put out of work by immigrant competition. And these individual stories of hardship are a much more salient effect of immigration than a slew of patents that make hundreds of products ever-so-slightly more efficient. In other words, the benefits of increased immigration will be spread out among the entire population, while the costs will be borne by a relatively small group of individuals who will feel the effects acutely.

Now that we have explored all the basic questions, we now look at two countries that have taken completely different approaches while faced with the question of immigration.

Brexit and Immigration 

A very interesting observation about how lack of information about the true composition of immigration into the UK was feeding xenophobia was done by Simon Tilford deputy director of the Center For European Reform, in his report he points out that net immigration into the UK over the last 15 years has not been exceptional. For example, between 2000 and 2014 net inflows to Italy and Spain were higher than those to the UK (or Germany or France, for that matter). The share of Britain’s population comprising non-Britons is not out of line with other EU countries. And a higher proportion of immigrants living in the UK come from non-EU countries than in any other EU member-state.

Another widely accepted fact was how poorly did Britons handle their immigration problem, though a Brexit was a clear message for the british government to better handle the immigration problem but it is not clear whether and how that message will actually result in significant reductions to immigration into the U.K.

Boris Johnson, the former London mayor who was the head of the “leave” campaign and is seen by many as Cameron’s likely successor as prime minister, wrote in The Telegraph that he did not think the “Brexit” vote was about immigration from within the EU at all. Johnson, in addition to other British politicians (and even President Obama), envisions a relationship with the EU that is akin to Norway’s. Norway is not an EU member, but it’s part of the European Economic Area, which gives it access to the single market, in exchange for which it, among other things, allows the freedom of movement within its borders for EU citizens—that same freedom of movement that many British voters want to limit. Indeed, while Johnson in his column said that British people will be able live and work in the EU, he pointedly did not mention whether the citizens of EU countries will be accorded that reciprocal right.

A report titled Brexit and the Impact of Immigration on the UK done by The Centre for Economic Performance (CEP), a politically independent Research Centre at the London School of Economics, summarised all that there is to know about immigration and Brexit and I would highly encourage interested readers to take a look.
This report concludes that the empirical evidence shows EU immigration has not had significantly negative effects on average employment, wages, inequality or public services at the local level for the UK-born.

Canada and Immigration

The level of transparency with regards to an open and welcoming immigration policy commands admiration when it comes to Canada,country has made family reunification one of its core immigration priorities.

One important thing to note is that Canadians have been able to look beyond the usual xenophobia associated with immigration and have embraced the cultural diversity that immigrants bring with them, most importantly though is the fact that Canadians have embraced refugees without the fear of them being terrorist and have shown the world a better way.


In light of all the discussion so for we can conclude that in the long run immigration is a good a thing for both the immigrant and the country that individuals immigrate, but this does not mean that there will be no marginally small negative short-term effects on individuals. We observe that countries faced with similar set of immigration related questions have come up with distinctly different answers with some choosing to embrace it while others choosing to opt for a more enclosed society.

I strongly believe that when supported by appropriate policies, migration can contribute to inclusive and sustainable economic growth and development in both home and host communities.


3 thoughts on “The Economics of Immigration

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s