The total effect of immigration is positive

Last time, I said that nobody really cares about the direct or partial effect of immigration on natives. This isn’t strictly true. If immigration policy were changed to only allow immigrants of a particular skill-type to come into the country, this would probably upset the people of that skill-type. Each individual immigrant hurts the employment opportunities of natives with the same skills as the immigrant. Immigrants, in total though, can have a positive impact on natives because immigrants have different types of skills. People, immigrant or not, that have different skills tend to compliment each other in the production process. They make each other more efficient.

Perhaps this is the source of the assumption of substitution I asked about before: we tend to imagine groups of people as being homogeneous masses, not individuals with a variety of skills. If immigrants were all the same, with the same skills, and natives all the same, with the same skills, and if those skills perfectly overlapped, then immigrants would compete directly with natives and hurt their employment opportunities. In reality, though, a random immigrant has different skills than a random native. Because they have different sets of skills, this random pair do not compete with each other in the labor market. In fact, on average, a random pairing of natives and immigrants would be more productive than the sum of its parts.

Even in the extreme case where all immigrants had exactly the same skills, this would only hurt the group of natives that had those skills. Everyone else would benefit from having co-workers with complimentary skill sets. Its a common belief that all recent immigrates have been very low educated. This, it is imagined, would hurt very low educated natives. The distribution of education among recent immigrants, however, has been U-shaped. There have been many very low educated immigrants and many very highly educated immigrants.

Even among natives with no high school degree, the pain of immigration has not been felt. There are two reasons for this. First, because it turns out that workers with no high school degree are strong competitors with those with a high school degree in the labor market, very low educated immigrants compete with a much bigger pool of natives, spreading out the pain of direct competition. Second, the pool of low educated natives benefit from the large group of highly educated immigrants as highly educated workers make the low educated much more productive. In other words, the negative effects of low educated immigrants on low educated natives are small and spread out, but the gains from high educated immigrants are acute. On net, the gains swamp the losses and even low educated natives benefit from immigration.

Capital accumulation also plays a key role. Like the Econ 101 growth theory would tell us, immigration, by increasing the labor supply, increases the return to capital. This will give investors an incentive to invest more and the capital stock will grow. Because capital makes labor more efficient, it would increase wages until they returned to their long-run value ((This means when capital fully adjusts, the average wage effect of immigration is zero. Different groups might be affected differently, but its a wash on net. It turns out all groups of natives benefit even if slightly from immigration. The only group that is hurt by new immigration is old immigrants.)). This undoes some of the negative direct effects of immigration, too.

All of these empirical claims were verified in a paper by Ottaviano and Peri just a couple of years ago ((A good discussion of that paper can be found here. The author reproduces many of Ottaviano and Peri’s findings using a slightly different data set.)). A random immigrant makes a random native more productive because the native is unlikely to have the same skills as the immigrant and because natives and immigrants, even if they have the same education and experience, are not perfect substitutes. Next time we’ll see that this is because immigrants specialize in different tasks than natives and because they induce innovations that complement their skills.

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