The Economics of Immigration

The Economics of Immigration

Örn B. Bodvarsson Hendrik Van den Berg The Economics of Immigration Theory and Policy 2nd ed. 2013

Örn B. Bodvarsson Department Economics St. Cloud State University St. Cloud, MN, USA Hendrik Van den Berg Department Economics University of Nebraska Lincoln, NE, USA ISBN 978-1-4614-2115-3 ISBN 978-1-4614-2116-0 (ebook) DOI 10.1007/978-1-4614-2116-0 Springer New York Heidelberg Dordrecht London Library of Congress Control Number: 2013931101 # Springer Science+Business Media New York 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

1 Introduction to Immigration Economics... 1 1.1 The Late Twentieth-Century Immigration Explosion... 2 1.1.1 The Complexity of Immigration... 3 1.1.2 Not Everyone Likes Immigrants................ 4 1.1.3 Economists Perspective... 4 1.2 The Determinants of Immigration..................... 5 1.2.1 Many Factors Discourage Immigration........... 6 1.2.2 Considering the Full Set of Push, Pull, Stay, and Stay Away Factors....................... 8 1.2.3 Shifts in Economic Forces Influence Immigration... 9 1.2.4 Immigration Is a Complex Phenomenon... 9 1.3 A Brief History of Immigration....................... 10 1.3.1 Early Migrations...... 10 1.3.2 Recent Immigration... 12 1.4 There Are Many Types of Immigrants.................. 14 1.4.1 Not All Immigrants Are Permanent Settlers... 14 1.4.2 Forced Immigration..... 15 1.4.3 Some Immigrants Are Difficult to Classify........ 16 1.5 The Purpose and Organization of this Book.............. 16 References..... 18 Part I Immigration Theory and Evidence 2 The Determinants of International Migration: Theory... 27 Chapter Overview..................................... 27 2.1 Early Migration Theory... 29 2.1.1 Pre-1960 Theory... 29 2.1.2 Ravenstein and Zipf.... 30 2.1.3 The Standard Modern Theory of Migration........ 31 2.1.4 Further Influences on Migration..... 37 v

vi 2.2 The Modern Model of Immigration.......... 40 2.2.1 The First Borjas Model... 40 2.2.2 Borjas 1991 Model... 46 2.2.3 Recent Extensions of the Borjas Model........... 47 2.3 The Family or Household as the Decision-Making Unit... 52 2.3.1 Conflicting Interests and the Family Migration Decision......... 52 2.3.2 Mincer s Model.......... 53 2.3.3 Family Migration as a Portfolio Decision......... 53 2.4 Summary and Conclusions...... 54 References..... 55 3 Why People Immigrate: The Evidence... 59 Chapter Overview..................................... 59 3.1 Regression Models of Immigration.................... 60 3.1.1 Empirical Models of Regional Migration.......... 60 3.1.2 The Gravity Model of International Migration...... 62 3.1.3 Some Econometric Problems Related to the Gravity Model... 65 3.2 The Choice of Variables in Statistical Models of Immigration.... 65 3.2.1 Three Examples... 66 3.2.2 Representing Income Differences..... 66 3.2.3 Representing Migration Costs.................. 67 3.2.4 Representing Source Country Development..... 67 3.2.5 Representing Immigration Restrictions.... 68 3.2.6 The Empirical Evidence on the Determinants of Migration..... 69 3.2.7 Evidence on Worldwide Migration.............. 70 3.2.8 Evidence on Migration to Groups of OECD Countries......................... 70 3.2.9 Evidence on US Immigration.................. 71 3.2.10 Immigration to Other Countries... 72 3.2.11 Summarizing the Results... 73 3.3 Summary and Concluding Remarks.... 74 3.3.1 The Power of Statistical Models................ 75 3.3.2 The Way Forward... 76 References..... 76 4 Who Immigrates? Theory and Evidence... 79 Chapter Overview..................................... 79 4.1 Immigrant Selection: The Chiswick vs. Borjas Debate... 81 4.1.1 Some Unfortunate Terminology................ 82 4.1.2 The Chiswick View..... 82 4.1.3 The Borjas Model... 84 4.1.4 A More Detailed Look at the Borjas Model........ 85 4.1.5 Selection by Observed Characteristics.......... 88

vii 4.2 Extensions of the Borjas Model..... 88 4.2.1 Variable Migration Costs and Migrant Selection.... 88 4.2.2 Credit Constraints and Immigrant Selection... 90 4.2.3 Family Migration and Selection Bias............. 91 4.3 The Empirical Evidence on Immigrant Selectivity... 93 4.3.1 Borjas Empirical Results...... 93 4.3.2 Further Tests of Borjas Model... 94 4.3.3 Tests Based on Counterfactual Density Functions... 95 4.4 The Asymmetric Information Model... 96 4.4.1 Kwok and Leland s Model.................... 97 4.4.2 Restoring Symmetric Information....... 98 4.5 The Theory of Immigrant Assimilation................. 99 4.5.1 The Chiswick Study of Assimilation..... 99 4.5.2 Potential Bias in Chiswick s Results... 100 4.5.3 Borjas Empirical Results...... 102 4.6 Addressing Borjas Critique..... 103 4.7 Conclusions..................................... 104 References..... 105 5 The Effects of Immigration on the Destination Economy: The Theory... 109 Chapter Overview..................................... 109 5.1 The Macro Effects of Immigration..................... 110 5.1.1 Homogeneous Labor with Fixed Capital... 110 5.1.2 Homogeneous Labor with Variable Capital.... 114 5.1.3 Heterogeneous Labor........ 116 5.1.4 Heterogeneous Labor with Constant Capital...... 117 5.1.5 Heterogeneous Labor and Perfectly Elastic Capital Supply....................... 117 5.1.6 How Big Is the US Immigrant Surplus?... 117 5.2 Detailing the Distributional Effects of Immigration...... 118 5.2.1 The Johnson Model (1980).................... 118 5.2.2 The Altonji and Card Model (1991)..... 119 5.2.3 The Ottaviano and Peri Model... 120 5.3 Long-Run Adjustment Processes........ 122 5.3.1 Internal Migration Responses......... 122 5.3.2 Multiple Goods............................ 123 5.3.3 Choice of Technology....................... 124 5.3.4 The Demand Effect of Immigration.............. 124 5.4 The Demand Effect of Immigration... 125 5.4.1 Say s Law of Immigration... 125 5.4.2 Regional Migration and Local Demand..... 126 5.4.3 A Few Models of Immigrant Demand Effects...... 127 5.4.4 Bodvarsson and Van den Berg s Lexington Model... 128

viii 5.4.5 The More General Case..... 129 5.4.6 Further Models of Immigrant Demand Effects... 130 5.5 Concluding Remarks.... 131 References..... 133 6 How Immigration Impacts the Destination Economy: The Evidence... 135 6.1 Introduction..................................... 135 6.2 The Spatial Correlation Method....................... 136 6.2.1 Cross Section Applications.................... 137 6.2.2 Dealing with Simultaneity and Spurious Correlation..... 138 6.2.3 Recent Applications of the Spatial Correlation Method... 141 6.2.4 Applications of the Unexpected Exogenous Supply Shock Method....................... 144 6.2.5 The Mariel Boatlift......................... 145 6.2.6 Russian Immigrants in Israel..... 146 6.2.7 Assessing the Spatial Correlation Method... 148 6.3 The Production Function Method...................... 148 6.3.1 Grossman s Pioneering Production Study..... 149 6.3.2 Gang and Rivera-Batiz... 150 6.3.3 Assessing the Production Function Method... 151 6.4 The Skill Cell Approach... 152 6.4.1 Borjas Use of National Data Versus Regional Data...... 152 6.4.2 Ottaviano and Peri s Extension of Borjas Skill Cell Model... 154 6.4.3 Other Types of Labor Market Cells.............. 156 6.5 Concluding Remarks.... 157 References..... 158 7 Estimating Immigration s Impact: Accounting for All Adjustments... 161 7.1 Introduction..................................... 161 7.2 Does Immigration Trigger Internal Migration?..... 162 7.2.1 Evidence That Immigrants Induce Native Out-Migration... 162 7.2.2 Evidence That Immigration Has Little Effect on Native Out-Migration... 165 7.3 Migration Biases Estimates of Immigration s Wage Effect... 166 7.4 Does Immigration Change Industry Structure?... 168 7.5 Measuring the Demand Effects of Immigration............ 169 7.5.1 Hercowitz and Yashiv s Estimates.... 169 7.5.2 Bodvarsson and Van den Berg s Lexington, Nebraska, Study............................ 171

ix 7.5.3 Estimating the Demand Effect of the Mariel Boatlift... 172 7.5.4 Additional Estimates of the Demand Effects of Immigration....................... 174 7.6 The Costs of Government Services for Immigrants... 176 7.6.1 Recent Studies for the USA... 177 7.6.2 Are US Immigrants More Costly Today than in the Past?... 178 7.6.3 Estimates of Fiscal Costs for Other Countries... 178 7.7 Immigration s External Effects.................. 180 7.7.1 Economies of Scale......................... 180 7.7.2 Are There Negative Externalities Associated with Immigration?... 182 7.8 Concluding Remarks.... 183 References..... 184 8 Immigration and the Source Country... 187 8.1 Remittances and Demand Effects in the Source Country..... 188 8.1.1 Supply and Demand Effects... 188 8.1.2 Immigrants and Remittances................... 190 8.1.3 A Two-Country View of Remittances............ 191 8.2 What We Know About Immigrant Remittances... 192 8.2.1 The Growth of Immigrant Remittances......... 192 8.2.2 Remittances as a Percentage of Source Country GDP.............................. 193 8.2.3 The Reliability of Remittance Data.............. 194 8.2.4 The Recent Data on the Growth of Immigrant Remittances...... 195 8.2.5 Policies to Encourage Remittances.... 196 8.2.6 How Remittances Are Used in the Source Countries......................... 197 8.2.7 Remittances: Tentative Conclusions... 199 8.3 The Brain Drain.................................. 199 8.3.1 Human Capital of Immigrants........... 200 8.3.2 The Brain Drain as a Development Issue.......... 200 8.3.3 How Big Is the Brain Drain?.... 201 8.3.4 Why Human Capital Flees Capital-Scarce Countries......................... 205 8.3.5 Brain Drain and Brain Waste... 206 8.4 A Reassessment of the Brain Drain.................... 207 8.4.1 Remittances Again.... 207 8.4.2 The Brain Drain as an Incentive to Seek Education... 208

x 8.4.3 A Simple Case........................... 208 8.4.4 A More Realistic Case........ 211 8.5 Conclusions..................................... 212 References..... 214 9 Economic Growth and Immigration... 217 9.1 The Early Models of Economic Growth................ 218 9.1.1 Adam Smith s Broad View of Growth... 219 9.1.2 The Classicals and Diminishing Returns........ 220 9.1.3 The Role of Immigration in the Classical Model... 221 9.1.4 Was the Classical Model a Failure?............ 222 9.1.5 Forgetting the Classicals and Marx: The Neoclassical School...... 224 9.1.6 Keynes and the Harrod Domar Model...... 224 9.2 The Solow Growth Model... 226 9.2.1 A Graphic Representation of the Solow Model... 226 9.2.2 Immigration Similarly Has No Long-Run Effects......................... 228 9.2.3 How an Economy Achieves Permanent Growth... 229 9.3 Immigration and Technological Progress: A First Examination.... 231 9.3.1 Immigration and Technological Progress........ 231 9.3.2 Joseph Schumpeter s Theory of Creative Destruction... 232 9.3.3 The Opportunity Costs of Innovation....... 233 9.3.4 The Gains from Innovation.................. 234 9.4 Immigration in the Schumpeterian Model: A More General Discussion......................... 234 9.4.1 Immigrants as an Innovative Resource.......... 234 9.4.2 Immigrants, Population Size, and the Returns to Innovation... 235 9.4.3 Immigrants and Technology Transfers.......... 236 9.5 Growth Effects of Immigration in the Source Country...... 238 9.5.1 The Overall Growth Effect of Out-Migration... 238 9.5.2 How Remittances Are Used in Source Countries... 239 9.5.3 The Brain Drain Again... 240 9.6 Summary and Tentative Observations.................. 241 References..... 246 10 Immigration and Economic Growth: More Fundamental Issues... 249 10.1 Technology... 250 10.1.1 A Broader Definition of Human Technology..... 251 10.1.2 The Diversity of Technological Change......... 252 10.1.3 The S-Curve of Technology Diffusion... 254 10.1.4 Technological Change Is Not Always Technological Progress... 255

xi 10.1.5 Technological Change Is a Combinatorial Process................................ 256 10.1.6 Technology Is a Nonrival Good.... 257 10.1.7 Paradigm Shifts.......................... 258 10.2 Immigration and the Agglomeration of Economic Activity.. 259 10.2.1 The Causes of Agglomeration... 260 10.2.2 The Agglomeration of Innovative Activity... 261 10.2.3 The Changing Patterns of Economic Activity... 262 10.3 Immigration and the Social and Natural Environments.... 264 10.3.1 Nature as a Source of Diminishing Returns...... 265 10.3.2 The Natural Environment....... 266 10.3.3 An Ecological Solow Model................. 267 10.3.4 Adding a Third Sector: Human Society......... 271 10.3.5 Bourdieu s Forms of Capital... 273 10.3.6 Modeling the Social Sector...... 274 10.4 Institutions and Social Capital... 276 10.4.1 The Study of Institutions.................... 276 10.4.2 Conflicts Between Formal and Informal Institutions... 277 10.5 Chapter Conclusions and Some Further Thoughts on the Solow Model.... 278 References..... 280 Part II Immigration Issues and Cases 11 Temporary Immigration, Involuntary Immigration, and Other Variations on the Standard Model... 287 Chapter Overview..................................... 287 11.1 Return Immigration..... 288 11.1.1 Return Immigration as a Response to Changing Circumstances... 289 11.1.2 Correcting Mistakes in Judgement............. 290 11.1.3 Source Country Policies to Encourage Immigrants to Return...................... 290 11.2 Temporary Immigration........................... 291 11.2.1 The Multinational Corporation and Temporary Immigration... 291 11.2.2 Temporary Immigration as a Destination Country Policy...... 292 11.2.3 The Diversity of Temporary Immigration... 293 11.3 Analyzing Temporary Migration.... 294 11.3.1 A Simple Model: Culture Clash Versus Higher Income... 294 11.3.2 Other Determinants of Temporary Immigration.... 296

xii 11.3.3 The Role of International Trade..... 297 11.3.4 Further Issues Related to Temporary Immigration.... 298 11.3.5 Temporary Immigration as a Form of Labor Market Discrimination...... 300 11.3.6 Growth Implications of Temporary Immigration.... 302 11.3.7 Temporary Immigration and the Ageing Problem................................ 303 11.4 Asylum Seekers and Refugees......... 305 11.4.1 Refugees... 305 11.4.2 The UNHCR............................ 306 11.4.3 Asylum Seekers.... 307 11.5 Involuntary Immigration... 307 11.5.1 A Model of International Slavery.... 309 11.5.2 Other Oppressive Forms of Immigration........ 311 11.6 Summary and Conclusions..... 312 References..... 314 12 Unauthorized Immigration... 317 12.1 Introduction... 317 12.2 Estimating Unauthorized Immigration... 319 12.2.1 The Residual Method... 319 12.2.2 Other Methods for Estimating Unauthorized Immigration..... 321 12.3 What Do the Estimates Tell Us?... 323 12.4 Some Characteristics of Unauthorized Immigrants... 325 12.5 The Economic Analysis of Unauthorized Immigration..... 326 12.5.1 The Supply and Demand for Unauthorized Workers................... 327 12.5.2 Unauthorized Immigration as a Form of Labor Market Discrimination...... 329 12.5.3 Oppression of Unauthorized Workers.......... 332 12.5.4 Discussion of the Labor Segmentation Hypothesis... 334 12.5.5 Temporary Work Visas: Just a Variation on Illegality?...... 335 12.5.6 Unauthorized Immigration Can Be Deadly....... 336 12.6 The Fiscal Costs and Benefits of Unauthorized Immigration... 337 12.7 Unauthorized Immigration: Policy Options.... 339 12.7.1 Border Controls... 340 12.7.2 Employer Sanctions....................... 340 12.8 Conclusions.... 341 References..... 342

xiii 13 Hispanic Immigration to the USA... 345 13.1 A Brief Description of Recent Hispanic Immigration to the USA...... 347 13.2 Assimilation...... 350 13.2.1 Hispanics Slow Assimilation................ 350 13.2.2 Further Reasons Why Hispanic Assimilation Is Slow................................ 356 13.2.3 Is It All Just a Data Problem?................ 357 13.3 Geographic Diffusion........... 358 13.3.1 Networks and Herding..................... 358 13.3.2 Toward the South and the Midwest............ 358 13.3.3 The Dispersal of Manufacturing Jobs and Immigrant Dispersal... 359 13.4 Explaining Hispanic Immigration... 361 13.4.1 The Welfare Effects on the Source Hispanic Countries........................ 362 13.4.2 The Demand Effects of Hispanic Immigration.... 363 13.5 Future Hispanic Immigration... 363 13.5.1 Will Hispanic Immigration Continue?.......... 364 13.5.2 Temporary Immigration Programs............. 365 13.6 Conclusions.... 366 References..... 367 Part III Immigration Policy: Introduction 14 Immigration Policy in the USA... 375 Chapter Overview..................................... 375 14.1 Early Immigration Policy.......................... 378 14.1.1 The Borders Were Not Entirely Open... 379 14.1.2 Assessing the Early Policies... 379 14.2 The Latter Half of the Nineteenth Century... 380 14.2.1 Religion and Immigration..... 380 14.2.2 Growing Opposition to Immigration Spurs New Legislation......... 381 14.2.3 The Chinese Exclusion Act.................. 381 14.2.4 Controlling the Border.... 382 14.2.5 Immigration Remained Mostly Open........... 384 14.2.6 Assessing the Early Policies... 385 14.3 The Shift in Policy in the Early Twentieth Century........ 386 14.3.1 The First General Restrictions of Immigration.... 386 14.3.2 The Post-World War I Shift in Policy..... 387 14.3.3 Immigration During the Great Depression... 388 14.3.4 Immigration Policy During the War............ 389

xiv 14.4 Post World War II Immigration Policy.... 390 14.4.1 Policy Immediately After the War... 390 14.4.2 A New Immigration Law in 1965... 391 14.4.3 The Economic Effects of the 1965 Act...... 392 14.4.4 The Growth of Unauthorized Immigration..... 393 14.5 Recent USA Immigration Policy...... 393 14.5.1 IRCA... 394 14.5.2 After IRCA............................. 395 14.5.3 Summarizing Recent US Policy... 397 14.6 Post 9/11 Immigration Policy.... 397 14.6.1 Reform of the Immigration Bureaucracy and Enforcement..... 398 14.6.2 Employment-Based Permanent Residency..... 399 14.6.3 Temporary Work Visas..................... 400 14.6.4 Diversity Immigrant Visas..... 402 14.6.5 Immigration Reform Stalls in 2006 and 2007..... 402 14.7 Summary and Conclusions..... 403 References..... 405 15 Immigration Policy in Canada... 407 Chapter Overview..................................... 407 15.1 Overview of Immigration Policy in Canada...... 408 15.1.1 Immigration and Population Growth in Canada... 408 15.1.2 The Early Years.... 409 15.1.3 Late Nineteenth Century Immigration.......... 410 15.1.4 Summary of Nineteenth Century Canadian Immigration Policy........................ 412 15.2 Canadian Immigration Policy in the Twentieth Century..... 413 15.2.1 The First Half of the Twentieth Century... 413 15.2.2 After World War II... 414 15.2.3 Comparing Immigration Legislation...... 415 15.3 Canada s Immigration Policy Today...... 416 15.3.1 The 2002 Reform.......... 417 15.3.2 The Canadian Point System................. 417 15.3.3 Should Policy Discriminate in Favor of Highly Educated Immigrants?...... 418 15.3.4 The Seven Questions in the Early Twenty-First Century.............. 421 15.3.5 Immigrant Performance and Recent Shifts in Policy............................... 421 15.4 Some Final Observations........................... 423 References..... 424

xv 16 Immigration Policy in Europe... 425 Chapter Overview..................................... 425 16.1 European Migration During the Colonial Era............ 428 16.1.1 Colonial Regimes and Immigration............ 428 16.1.2 The Nineteenth Century...... 430 16.1.3 The Emigration Life Cycle..... 432 16.1.4 European Emigration After World War I.... 433 16.2 The Post-World War II Period..... 433 16.2.1 Guest Workers... 434 16.2.2 The Post-Soviet Era....................... 435 16.2.3 Recent EU Immigration Policy............... 436 16.3 The Interesting Case of Ireland...................... 437 16.4 Recent Immigration Policy in Spain... 440 16.5 Can Immigration Solve Europe s Demographic Burden?.... 441 16.6 Conclusions.... 442 References..... 443 17 Conclusions and Final Observations... 445 Chapter Overview..................................... 445 17.1 Immigration: A Fundamental Economic Phenomenon... 447 17.2 We Must Think Outside Our Little Boxes..... 448 17.3 An Appeal to Holism... 450 17.3.1 Defining Holism..... 450 17.3.2 The Economics of Immigration Must Embrace Holism.......................... 451 17.3.3 The Holistic Approach to the Study of Immigration: An Example................. 452 17.4 Developing International Institutions for an International Phenomenon..... 455 17.4.1 The Global Commission on International Migration................... 455 17.4.2 What Is the Optimal Flow of Immigrants?........ 456 17.4.3 Small Steps Towards Global Governance..... 457 17.5 Final Comment.................................. 458 References..... 459 Index... 461