Part I Immigration Theory and Evidence

Similar documents
Part I Immigration Theory and Evidence

Professor Christina Romer. LECTURE 13 LABOR AND WAGES March 1, 2018

Professor Christina Romer. LECTURE 13 LABOR AND WAGES March 2, 2017

Chapter 5. Labour Market Equilibrium. McGraw-Hill/Irwin Labor Economics, 4 th edition

Professor Christina Romer. LECTURE 11 LABOR AND WAGES February 28, 2019

Notes on exam in International Economics, 16 January, Answer the following five questions in a short and concise fashion: (5 points each)

Chapter 8 Economic Integration, Labour Markets and Migration

Chapter 4 Specific Factors and Income Distribution

10/11/2017. Chapter 6. The graph shows that average hourly earnings for employees (and selfemployed people) doubled since 1960

The Analytics of the Wage Effect of Immigration. George J. Borjas Harvard University September 2009

Chapter 10 Worker Mobility: Migration, Immigration, and Turnover

Professor Christina Romer. LECTURE 11 LABOR AND WAGES February 28, 2019

International trade in the global economy. 60 hours II Semester. Luca Salvatici

CHAPTER 4. new equilibrium wage is $47.5 and the equilibrium level of employment is 7.5

Trillion-dollar bills : gains from a borderless world. Prof. Goldstein Economic Demography Econ/Demog C175 Week 11, Lecture A UC Berkeley Spring 2018

International Trade Theory College of International Studies University of Tsukuba Hisahiro Naito

Labor Market Consequences of Immigration. Econ/Demog C175 Economic Demography Prof. Goldstein Spring 2018, UC Berkeley

Illegal Immigration. When a Mexican worker leaves Mexico and moves to the US he is emigrating from Mexico and immigrating to the US.

CHAPTER 18: ANTITRUST POLICY AND REGULATION

Study Questions (with Answers) Lecture 10. Migration

Introduction to Labor Economics

Public Affairs 856 Trade, Competition, and Governance in a Global Economy Lecture 22 4/10/2017. Instructor: Prof. Menzie Chinn UW Madison Spring 2017

Public Affairs 856 Trade, Competition, and Governance in a Global Economy Lecture 23 4/18/2018. Instructor: Prof. Menzie Chinn UW Madison Spring 2018

Chapter 4: Specific Factors and

6/4/2009. The Labor Market, Income, and Poverty. Microeconomics: Principles, Applications, and Tools O Sullivan, Sheffrin, Perez 6/e.

Chapter Ten Growth, Immigration, and Multinationals

EXAMINATION 3 VERSION B "Wage Structure, Mobility, and Discrimination" April 19, 2018

Labour Mobility Interregional Migration Theories Theoretical Models Competitive model International migration

Immigration and Poverty in the United States

ECON 1000 Contemporary Economic Issues (Spring 2018) Economic Growth

WE LL WORK THESE TOGETHER IN CLASS PRIOR TO THE HOMEWORK DAY

(V) Migration Flows and Policies. Bocconi University,

WORKING PAPERS IN ECONOMICS & ECONOMETRICS. A Capital Mistake? The Neglected Effect of Immigration on Average Wages

On the Rationale of Group Decision-Making

19 ECONOMIC INEQUALITY. Chapt er. Key Concepts. Economic Inequality in the United States

Citation 經營と經濟, vol.90(4), pp.1-25; Issue Date Right.

Introduction. Equilibrium in a Single Competitive Labor Market. (Pareto) Efficiency. Competitive Equilibrium Across Labor Markets.

How Should Immigration Affect the Economy? A D A M M. Z A R E T S K Y

How Immigration Affects Workers: Two Wrong Models and a Right One

The task-specialization hypothesis and possible productivity effects of immigration

Chapter 9. Labour Mobility. Introduction

Poverty and Inequality

Can We Reduce Unskilled Labor Shortage by Expanding the Unskilled Immigrant Quota? Akira Shimada Faculty of Economics, Nagasaki University

The Labor Market Impact of Immigration. George J. Borjas Harvard University October 2006

Illegal Immigration, Immigration Quotas, and Employer Sanctions. Akira Shimada Faculty of Economics, Nagasaki University

Regional Economic Integration: Theoretical Concepts and their Application to the ASEAN Economic Community

POLICY Volume 5, Issue 8 October RETHINKING THE EFFECTS OF IMMIGRATION ON WAGES: New Data and Analysis from by Giovanni Peri, Ph.D.

The Minimum Wage. Introduction. Impacts on Employment

Written Testimony of

MENA Women in the Economy Rabat, December 8-9, 2005

Migration, Intermediate Inputs and Real Wages

Econ 196 Lecture. The Economics of Immigration. David Card

ECONOMIC GROWTH* Chapt er. Key Concepts

Productivity, Output, and Unemployment in the Short Run. Productivity, Output, and Unemployment in the Short Run

Chapter 17. The Labor Market and The Distribution of Income. Microeconomics: Principles, Applications, and Tools NINTH EDITION

involving 58,000 foreig n students in the U.S. and 11,000 American students $1.0 billion. Third, the role of foreigners in the American economics

CH 19. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

The UK and the European Union Insights from ICAEW Employment

Lesson 10 What Is Economic Justice?

The Impact of Foreign Workers on the Labour Market of Cyprus

NBER WORKING PAPER SERIES THE LABOR MARKET IMPACT OF HIGH-SKILL IMMIGRATION. George J. Borjas. Working Paper

Earnings Differences. Chapter 17. Skill Differentials. The Demand for High-Skilled and Low- Skilled Labor. Union-Nonunion Wage Differentials

14.54 International Trade Lecture 23: Factor Mobility (I) Labor Migration

Review of implementation of OSCE commitments in the EED focusing on Integration, Trade and Transport

Tax Competition and Migration: The Race-to-the-Bottom Hypothesis Revisited

Labor Market Challenges in Europe With Respect to the Migrant Crisis

Support Materials. GCE Economics H061/H461: Exemplar Materials. AS/A Level Economics

Are Second-Best Tariffs Good Enough?

Options for Romanian and Bulgarian migrants in 2014

The Long Term Economic Impacts of Reducing Migration in the UK

14 Pathways Summer 2014

Thinkwell s Homeschool Economics Course Lesson Plan: 36 weeks

The Labor Market Impact of Immigration: Recent Research. George J. Borjas Harvard University April 2010

The Economics of Imperfect Labor Markets. Chapter 9. Migration Policies

Labour market integration and its effect on child labour

MADE IN THE U.S.A. The U.S. Manufacturing Sector is Poised for Growth

A Comparison of the Theories of Joseph Alois Schumpeter and John. Maynard Keynes. Aubrey Poon

Chapter 5. Resources and Trade: The Heckscher-Ohlin

The Outlook for EU Migration

A2 Economics. Standard of Living and Economic Progress. tutor2u Supporting Teachers: Inspiring Students. Economics Revision Focus: 2004

Chapter 2: The U.S. Economy: A Global View

Source: Piketty Saez. Share (in %), excluding capital gains. Figure 1: The top decile income share in the U.S., % 45% 40% 35% 30% 25%

Uncertainty and international return migration: some evidence from linked register data

Chapter 5. Resources and Trade: The Heckscher-Ohlin Model

NBER WORKING PAPER SERIES THE ANALYTICS OF THE WAGE EFFECT OF IMMIGRATION. George J. Borjas. Working Paper

Poverty and Inequality

The Economics of European Integration

IMMIGRATION AND THE UK S PRODUCTIVITY CHALLENGE

The Not-So-Destructive Scourge of Illegal Immigration

Public Choice : (c) Single Peaked Preferences and the Median Voter Theorem

Brain Drain and Emigration: How Do They Affect Source Countries?

Development Economics at HECER. Channing Arndt. Dual Economy Models and Rural-Urban Migration

Potential Economic Impacts in Oregon of Implementing Proposed Department of Homeland Security No Match Immigration Rules

First Midterm. Time allowed: 50 minutes. Please answer ALL questions. The total score is 100. Please budget your time wisely.

ESPON Open Seminar Prague 3-4 June 2009

Does Immigration Reduce Wages?

eupinions Brief January 2018 Cold Love

Does Immigration Harm Native-Born Workers? A Citizen's Guide

The Impact of Immigration on Wages of Unskilled Workers

Migration and the European Job Market Rapporto Europa 2016

Transcription:

Part I Immigration Theory and Evidence The economic theory of immigration seeks to explain why people leave one country and go and live and work in another country. Also, the economic theory of immigration seeks to highlight the economic consequences that immigration has on the welfare of others in the source and destination countries. Since people are workers, consumers, and innovators, the economic consequences of immigration on both the source country and the destination country are varied and broad. Furthermore, the analysis of the many positive and negative effects on both the demand and supply sides of the source and destination economies helps to explain why immigration is a controversial issue in so many countries. Modeling Immigration As discussed in the introductory chapter that precedes this first main section of the book, economic incentives to immigrate are related to a great variety of push, pull, stay, and stay away factors. Given the complexity of immigration, many different models of immigration have been developed. In preparation for this detailed examination of the many economic models of immigration, we introduce here the labor market model of immigration that many economists have used to explain and analyze immigration. This model is the one that appears most often in textbooks. In its simplest representation, this model assumes immigrants are only workers, and their only effect is to change the supply of labor in the source and destination countries. Clearly, this model introduced here does not do justice to the complexity of immigration. However, you are well advised to devote a few minutes to learning this model because most economic models of immigration effectively build on this popular labor market model. 21

22 I Immigration Theory and Evidence I.1 The Basic Labor Market Model of Immigration The typical demand curve for labor is known in the labor economics literature as the value of the marginal product of labor (VMP L ) curve. The VMP L curve is the product of the marginal physical product of labor, MP L, and the marginal price of the output, P, or VMP L ¼ MP L P ði:1þ VMP L thus represents the value of the additional output produced when one more unit of labor is used in the production process. Because the marginal product of labor declines as more labor is hired, the VMP L curve is downward-sloping. The shape of the supply curve for labor is not as obvious, however. An upwardsloping supply curve implies that the quantity supplied increases when the price rises. Certainly, the opportunity costs of leisure and nonpaying home activities rise as wages rise, and, all other things equal, a higher wage will tend to make workers substitute work for leisure. But higher wages also increase the income received by labor, and this positive income effect may very well lead people to acquire more leisure even if the opportunity costs go up. Thus, if the income effect of higher wages outweighs the substitution effect of increased opportunity costs of not working, the supply of labor curve will be backward-bending, as the curve labeled C in Fig. I.1, not upward-sloping as the more familiar-looking supply curves labeled A and B. There is indeed evidence that the income elasticity of supply is negative. Only a century ago, in today s high income countries industrial workers routinely worked 12 h per day, 6 days per week. Today, the 40-h workweek is the norm, except where even shorter workweeks have been mandated. Recently, France legislated a 35-hr workweek. In the simple labor market model, we draw the labor supply curves as perfectly vertical. We do this to simplify the graphs. Be reassured, however, that even if we draw the labor supply curve as upward- or backward-sloping, the conclusions reached are not qualitatively different from those that we will reach assuming a perfectly vertical supply of labor curve. Fig. I.1 The labor supply curve

I.1 The Basic Labor Market Model of Immigration 23 Fig. I.2 The labor market In a competitive labor market, the wage is equal to the value of the VMP L curve where it intersects the supply of labor curve. The area under the VMP L curve, the demand curve for labor, represents the total value of output produced in the economy using all the factors of production, namely labor and all the other factors employed along with the labor. The area under the marginal curve represents the sum of all the marginal values, or the total value. With labor supply equal to S L, total output is equal to the areas A plus B in Fig. I.2. The total value of output is split among labor and the other factors. At the wage w, total labor income is equal to the rectangle B. The remaining output, area A, accrues to the other factors of production such as capital and land that labor uses to produce the output. Since we are interested in the broad consequences of immigration across both the source and destination countries, we will often examine a two-diagram graphic model such as in Fig. I.3, which shows the labor markets of two countries. Suppose that the supply and demand curves for labor are different in two countries, say Poland and Germany, and wages are 10 euros per hour in Germany and 10 zloty in Poland. If the exchange rate between euros and Polish zloty is, say, equal to one euro ¼ 5 zloty, we can translate the zloty wage into euros. Or, suppose Poland joins the euro area, and Polish citizens exchange 5 zloty for one euro. Then, in euro terms, wages are five times as high in Germany than they are in Poland, 10.00 as compared to 2.00. The wage difference will tend to cause Polish workers (especially plumbers, apparently) to move to Germany. This immigration will cause the supply curve for labor to shift to the left in Poland and to the right in Germany. Figure I.4 depicts a possible outcome. Immigration is shown to have shifted the supply curve inward in Poland and outward by an equal amount in Germany, which made wages rise to 3.00 in Poland and fall to 8.00 in Germany. In the absence of any psychological or economic costs or explicit restrictions of any kind, we might have expected immigration to continue until the wages become equal in the two countries. Figure I.4, however, depicts the more realistic situation where migration tends to reduce, but not eliminate, the difference in wages between two countries. There are, no doubt, assorted stay and stay away factors, such as language differences, moving costs, and family ties, to prevent perfect wage equalization.

24 I Immigration Theory and Evidence Fig. I.3 The labor markets before immigration Fig. I.4 The labor market after immigration I.2 Who Gains and who Loses with Immigration? Figure I.4 provides useful insight into why labor migration is a controversial issue in many countries: Even though the overall worldwide gains appear to outweigh the losses, the model shows that some groups suffer welfare losses when people immigrate. Note that as a result of labor migration from Poland to Germany (represented by the shift in supply curves), migrating workers increase their welfare as they gain higher wages.

I.2 Who Gains and who Loses with Immigration? 25 Table I.1 Gains and losses from immigration 1. Poland: Owners of other (non labor) factors: loss of e + g Remaining workers: gain of e Net change in real income: loss of g 2. Germany: Workers originally in Germany: loss of E Owners of other (non labor) factors: gain of E + G Net change in real income: gain of G 3. Immigrants: Loss of wages in Poland loss of h Gain of wages in Germany gain of H Net change in real income: gain of H h World (1 + 2 + 3): Net change in Polish real income: loss of g Net change in German real income: gain of G Net change in immigrants real income: gain of H h Net gain: gain of (H + G) (h + g) > 0 More specifically, after q q 0 workers depart, the supply of labor in Poland falls from S to S 0 and total output falls by the area g þ h. The wages of the workers remaining in Poland rise from two to three euros, and their labor income increases from f to e þ f. The other factors earn only d, which is smaller than their former income by the value of the areas e þ g. It thus appears that labor gains real income while other factors lose income. The other factors in Poland suffer a net loss in income: The area e that other factors lose is gained by labor, but the area g is completely lost to Poland because the fall in total output, g þ h, is greater than the wages that no longer need to be paid to the workers who left (area h). Immigration causes a similar, albeit reversed, redistribution of welfare in Germany. According to Fig. I.4, native labor in Germany sees its income fall from E þ F to just F, but other factors enjoy a rise in income from D to D þ E þ G. The income of Germany s native workers and other factors rises by the net amount of G as other factors gain more than the native workers lose. Output increases in Germany as we move down the labor demand curve in Fig. I.4; this increase is represented by the area G þ H. Figure I.4 also shows that the gain in output in Germany is greater than the loss of output in Poland. This must be the case since q q 0 ¼ Q 0 Q and the average height of the areas G þ H and g þ h, respectively, are 9 euros and 2.5 euros. This rise in the value of total world output is the result of labor moving from a country where its marginal contribution to the real value of output is low to a country where its marginal contribution to the real value of output is higher. Table I.1 summarizes the distributional results from immigration in Fig. I.4.

26 I Immigration Theory and Evidence I.3 Building on the Basic Labor Market Model According to the simple labor market model developed here, the total income in the source country falls, and total income in the destination country increases. The immigrants clearly increase their welfare, which is why they were motivated to immigrate in the first place. Notice also that in the example given here, the gains of the immigrants are much larger than the net gain in the destination country. As detailed later in the book, evidence suggests that, indeed, immigrants capture the greatest part of the immediate gains from immigration. Other results of the model are that immigration causes world output to rise, wages to rise in the immigrant source country, and wages to fall in the destination country. Finally, the model effectively confirms what many people in immigrant destination countries suspect, namely that immigrants cause wages to decline. This simple model is often used in immigration analysis. But, despite its popularity in the economics literature, the model is an extreme simplification of what actually happens in source and destination countries when people immigrate. All models are simplifications, of course, but there are some obvious extensions that can make the model more realistic. First of all, when labor moves from one country to another, there is an international transfer of not only a factor of production, but also a consumer. That implies that expenditures, and thus the demand for labor, also shift from the source to the destination countries when people immigrate. Furthermore, immigrants may introduce economies of scale effects. And, in the long run, there are dynamic growth effects associated with the movement of people because immigrants are also innovators, inventors, and entrepreneurs. These, and many more issues, are dealt with in detail in Chaps. 2 9 of this section on the economic theory of immigration.