Hearing about the US President’s rhetorical fervor of building a ‘Trump Wall’ along the US-Mexico border, one wonders – why is there a need to go so far and build a wall to prevent the entry of immigrants into a country? Are immigrants really such a major threat to the natives’ identity, the country’s position, and the economy? Rather than exploring what immigration does to heterogeneous political, social, and cultural dimensions, this article focuses on the economic impact of immigration. We live in the age of globalization wherein immigration, a mighty global force impacts wages, jobs, government’s budget, etc. Often blamed for ‘eating up jobs of the natives’, immigrants are also condemned for impinging on equality, employment, and income distribution in the host country. As we go along, we’ll discover that all these assertions are nothing but erroneous assumptions.
Most people migrate in search of better job opportunities. Therefore, it is tempting to assume that immigrants displace the earnings and jobs of natives. When people move to another country for employment, they get added up to the labor force of the country to which they immigrate. As the number of individuals willing to take up jobs increases, wages in the host country fall. Considering this, one starkly concludes that there is a negative economic impact of immigration on the total population. However, this isn’t completely true because the immigrants’ labor supply also creates its own demand. This can be understood through a simple application of the law of demand and supply. With an income in hand, the immigrant labor force demands goods and services, thus, increasing the output required to support a larger population and further generating demand for labor. Hence, immigrants bring both increased supply and increased demand for labor and they don’t crowd-out natives from the workforce.
But there is a caveat. This simple logic might not apply to every economy. If the immigrants spend modestly in the host country or a major portion of the income earned is remitted (mainly in the case of unskilled labor), there might not be an offsetting impact and economic benefits might be lost to the country of origin. Therefore, the impact in the case of the unskilled labor market is limited and asymmetric.
Student immigrants contribute substantially to the economy. They act as a source of foreign income for various countries. For example, immigrant students contribute around $50 billion to the US economy. Besides, immigration also involves a human capital flight. It allows an influx of better and well-educated people into the workforce. Though the country of origin is subjected to a ‘brain drain’, immigration results in ‘brain gain’ for the host country. This leads to more innovations and job specialization through better matching of skills and employment. The development of human capital leads to an increase in the potential output and capacity in the economy. Therefore, high skilled immigrants make the host country better off. On the flip side, highly skilled and qualified labor might replace natives, causing temporary job losses in the host’s economy. This is the primary reason that makes immigration politically explosive.
A crucial economic impact of immigration is on the government’s budget in terms of social benefits and services the immigrants consume and taxes they pay. Most of them are either of the working-age or students and while earning in the host country they pay more in taxes than the social security benefits they receive. This increases the government’s net revenue which can be used to finance the development of infrastructure and accelerate economic growth. Therefore, the net fiscal impact of immigration is positive.
To meet labor shortfalls in their country or to get people with requisite skills for particular jobs, several countries themselves seek to attract migrants from other nations. They incentivize immigrants by offering them welfare benefits and social housing. These immigrants contribute to the host country’s economy by working on jobs that natives are unable or underqualified to perform. This way immigrants end up doing jobs that nobody else wants.
On the other hand, in the case of immigrants have a lower labor force participation rate, it increases the dependency ratio, causing economic costs for the host country. Undue pressure on the economy’s resources makes immigrants undesirable. For countries that already face a resource crunch, such population surges act as a negative externality. It becomes extremely difficult for the economy to absorb a large number of immigrants. Resource deficits cause congestions, increase in pollution levels, thus, impacting the quality of life of individuals. For instance, a country facing a housing shortage might find it difficult to accommodate immigrants. Immigration would increase house prices, making everyone worse off. This happens mainly in countries where the supply of resources is more or less inelastic. Hence, the welfare of natives might deteriorate even when the net impact is encouraging.
Generally, one is categorized as generous if he favors immigration. It is precise because immigration is a potent tool to fight global poverty. Minimal labor barriers across the globe permit people to move to high-productivity areas, where their skills would be adequately utilized. When immigrants migrate from low-income countries to higher ones, it leads to an increase in their wages, creating a ripple effect by pulling them and their dependents out of poverty. Besides contributing to the economy of the host nation, immigration also helps improve the quality of life in the country of origin. Remittances by immigrants increase the living standards in the native country. For example, remittances by Indian labor in Gulf nations significantly reduce poverty among their dependents. Alternatively, non-residents also invest heavily in their native country through Foreign Direct Investments.
As the size of the population that needs to be catered to reduces, the countries of origin can benefit from an increase in the per capita availability of resources. Other positive externality includes an increase in wages in the native country’s economy when the labor force declines due to increased emigration. As a direct result, it is not inapt to expect a labor shortage in the country from where people have migrated. However, this inference is only partially correct. Empirical results have shown that the emigration of unskilled labor does not cause a shortage of labor in the country of origin. But it is striking to note that the emigration of skilled and highly qualified workers might cause a labor shortage in the respective sectors.
80% of all Silicon Valley start-ups are owned by Indians and the mammoth presence of Indian-owned businesses in the US shows that immigrant entrepreneurs, rather than becoming job seekers, turn into job creators, contributing enormously to the host country’s economy. In the long run, producing goods and services for a huge population enables firms to get the benefits of economies of scale. Therefore, while chasing an extra unit of currency when the economy is growing, immigrants leave native employment unharmed. But during downturns, the woes of immigrants exacerbate. During such periods, natives are prioritized for jobs and immigrants are likely to face difficulty in finding employment if they have low skills or qualifications.
Though the economic impact of immigration depends on how fast immigrants can assimilate to the local population, their presence in the economy is definitely rewarding. Once the labor market assimilation happens over time, their contribution to the economy rises. Their impact on per capita GDP remains uncertain but a cumulative forward-looking impact on GDP due to an increase in economic efficiency is obvious.
Is Migration Good for the Economy, OECD (May 2014)
Economic Impacts of Immigration, HBS (January 2011)
Impact of Immigration on UK Economy, Economics Help (August 2019)
Immigration and economic growth, OECD (2018)
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Currently pursuing Economics (Hons.) from SRCC, Simran is an avid reader and is always on a lookout for some ‘real’ knowledge. She is a proud member of BTS Army and has an innate obsession for Sundays. She often finds herself stuck in the rat race and struggles to have a consensus between her heart and mind.