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June 23, 2011

To boost economy, boost immigration

Megan McArdle, the libertarian pundit at the Atlantic Monthly, did a (partly) tongue in cheek posting today pitching for vastly greater immigration to boost the economy. Here it is, with the research abstracts at the end:

Tim Pawlenty Can Get 5% Growth (but He Needs Immigrants to Help)
Posted: 22 Jun 2011 07:40 AM PDT

On April 20, 1980, Fidel Castro made an important contribution to the social sciences. His unexpected declaration that the port of Mariel would be temporarily open to any Cubans seeking to flee the island served as a natural experiment that has helped labor economists understand the impact of immigration. In his now classic paper, economist David Card [SEE ABSTRACT BELOW] convincingly showed that the massive influx of 120,000 Cubans increased the labor force of Miami by 7% yet had almost no impact on the employment or wages of natives.

This result is probably shocking to many, and certainly runs contrary to the popular but unfortunate myth that immigrants "steal our jobs". But while this study is an important result in the literature, it is not an isolated one. Most research on immigration shows small or zero impacts on unemployment and wages. This, however, does present something of a puzzle: if immigration increases labor supply, then why didn't wages fall and unemployment rise? How was it that the labor market in Miami was able to absorb so many new workers?

Immigration has little impact on wages and employment. But a 10% increase in immigration drives up house prices by 1%.

One important reason is that immigrants aren't just workers, but also consumers. Economists Bodvarsson, Lewer, and Van den Berg studied [SEE ABSTRACT BELOW] the Mariel boatlift and found that migrants increased labor demand enough to offset the increase in labor supply so that there was no negative impact on natives that one might otherwise expect when labor supply increases drastically. This result shouldn't be surprising. Immigrants buy stuff, that means businesses sell more, and they need to expand and hire new workers.

What does this have to do with Tim Pawlenty? He recently came under criticism for suggesting that he could make GDP grow 5% per year. But if immigration, even large influxes of unskilled immigration, has zero or a very small effect on wages and employment of natives, then it's actual pretty easy to make GDP grow 5% a year: just increase immigration until that happens. If we're expecting 2.5% real GDP growth a year, then increase immigration by 2.5%. If we're expecting 1.5%, then increase it by 3.5%. This shouldn't be too hard considering there are 145 million adults worldwide who would like to come here.

The bonus here is that aside from the affect on overall consumer demand, immigration has a particularly large impact on the demand for housing. Research by Albert Saiz has shown that a 10% increase in immigration drives up house prices by 1%. Whatever immigration research you're looking at, this is an order of magnitude larger than the labor market effects. This is important because immigrants tend to migrate to areas where there are already large numbers of immigrants. This means some of the worst housing markets will benefit the most from more immigration. will benefit the most. For instance, California, Nevada, Florida, and Arizona, are ranked 1st, 4th, 5th, and 9th by percent of population foreign-born. Since falling house prices are hurting the wider economy, the economic benefits of immigration would have secondary positive effects on GDP.

Is an increase in immigration what Tim Pawlenty had in mind when he promised 5% GDP growth? I doubt it. But if he was serious about his promise, he'd take a lesson from the Cuban immigrants of the Mariel boatlift and embrace one of the few ways that he could actually achieve that kind of growth.

David Card, The Impact of the Mariel Boatlift on the Miami Labor Market,
Industrial and Labor Relations Review, Vol. 43, No. 2. (Jan., 1990), pp. 245-257.

On the web at: http://www.econ.berkeley.edu/%7Ecard/papers/mariel-impact.pdf


Using data from the Current Population Survey, this paper describes the effect of the Mariel Boatlift of 1980 on the Miami labor market. The Mariel immigrants increased the Miami labor force by 7%, and the percentage increase in labor supply to less-skilled occupations and industries was even greater because most of the immigrants were relatively unskilled. Nevertheless, the Mariel influx appears to have had virtually no effect on the wages or unemployment rates of less-skilled workers, even among Cubans who had immigrated earlier. The author suggests that the ability of Miami's labor market to rapidly absorb the Mariel immigrants was largely owing to its adjustment to other large waves of immigrants in the two decades before the Mariel Boatlift.

Bodvarsson et al Measuring Immigration's Effects on Labor Demand: A Reexamination of the Mariel Boatlift, University of Nebraska-Lincoln and IZA
Discussion Paper No. 2919 July 2007

On the web: ftp://repec.iza.org/RePEc/Discussionpaper/dp2919.pdf


It is now well known that exogenous immigration shocks tend to have benign effects on native employment outcomes, thanks to various secondary adjustment processes made possible by flexible markets. One adjustment process that has received scant attention is that immigrants, as consumers of the goods they help produce, contribute to their own demand. We examine the effects of an immigration shock on labor demand by testing a general equilibrium model in which imperfectly substitutable native and immigrant workers spend their wages on a locally produced good. The shock induces three responses: (i) a substitution of immigrants for natives; (ii) out-migration; and (iii) stimulation of labor demand. According to (iii), native wages can fall, stay the same or rise, depending upon the strength of the shock and various product and factor market elasticities. As our test case, we reexamine the 1980 “Mariel Boatlift,” using Wacziarg’s “Channel Transmission” methodology. Our data set includes approximately 6,600 observations for 1979-85 from the Current Population Survey on workers in 9 different retail labor markets and Survey of Buying Power data on retail spending by consumers in Miami and four comparison cities. Our results provide a more complete explanation for why the Boatlift’s overall effects on native wages in Miami were benign: Lower wages due to greater labor supply were offset by higher wages due to greater labor demand. We conclude that the demand-augmenting effect of an immigration shock is a significant secondary adjustment process that must be considered when assessing the distributional effects of immigration.