The other economic question: Immigration's impact on the economy

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The other economic question Immigration's impact
on the economy by Arthur Sweetman for
Metropolis CSPS webinar Dec. 2008
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Structure of the talk

• Background
• Dramatic decline in labour market outcomes
• Arrivals and departures
• Intergenerational and conditional earnings
• The economic impact of immigration on the
  domestic economy
• Traditional Canadian conclusions
• Several key concepts ( a few controversial
  results)
• Conclusions

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PART 1 BACKGROUND 1.1 Dramatic Decline in
Labour Market Outcomes

• There has been a decline in labour market
  earnings for recent arrival cohorts
• There is a substantial rate of economic
  integration, but the time required to catch-up
  with the Canadian born is increasing
• Close to, or beyond, retirement for many
• Even if catch-up occurs, life-time earnings
  difference is substantial

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Warman and Worswick (2004)
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• Warman and Worswick (2004)

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Having incomes below the low income cut-off
(LICO) is increasingly common for immigrants
Business Cycle Peaks in 1980, 1990 2000
Source Statistics Canada Picot Hou (2003)
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Post 2000? Did Outcomes Improve?

• Most analysis uses 2000 census
• We had hoped that labour market outcomes would
  improve
• But, they did not
• Arguably, the decline continued then a return
  to 2000 levels

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2000 census year
Note Comparison group Canadian born plus
immigrants more than 10 years Source Statistics
Canada, Picot, Hou and Coulombe, 2007
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1.2 Related background issues

• Arrivals
• Departures
• Generational look at who is in Canada
• Earnings in a more complex framework
• By generation
• With and without adjusting for observable
  characteristics

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Source CIC, Facts Figures
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Departures (Are immigrants staying?) Retention
rates for males age 25-35 at landing
Source Statistics Canada, Aydemir and Robinson,
2006
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1.3 Generational Population Shares ()

Immig 2nd Gen 3rd Gen Non-Vismin 3rd Gen Vismin plus N
US 14.6 6.0 63.7 15.7 304,165
Cda 22.6 14.3 60.1 3.0 814,054

• Sample is aged 25-65, Cdn 2001 census, US 1998-04
  CPS
• 3rd Generation Vismin plus includes those who
  self identify as visible minorities, aboriginals
  and citizens at birth born outside of Canada
• Source Aydemir and Sweetman (2008)

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Age controls in all regressions. Source
Aydemir and Sweetman (2008)
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Age controls in all regressions. Source
Aydemir and Sweetman (2008)
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Overall

• The big policy story is that there has been a
  remarkable decline in the labour market earnings
  of recent immigrant arrival cohorts
• The entry effect has increased dramatically
• The integration rate appears to have increased,
  but the catch-up time is much longer than
  previously
• This has lead to a substantial increase in
  poverty for new immigrants
• The decline appears to be larger when control for
  the observable characteristics of the immigrants
  (esp., age, education)

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PART 2 Immigrations economic impact on the
domestic economy

• Little research on this for Canada
• Some US and other work
• Some international lessons, but, not possible to
  simply apply other countrys results to Canada
• SUMMARY Most analysts suggest that immigrations
  impact on GDP/capita is probably positive, but
  quite small
• (and some say potentially negative)

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2.1 Two traditional views differ on direction,
but agree that any impact is small in magnitude

• Macdonald Commission research overview said
• The broad consensus is that high levels of
  immigration will increase aggregate variables
  such as labour force, investment and real gross
  expenditure, but cause real income per capita
  and real wages to decline Marr and Percy, 1985,
  p 77

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The Economic Council of Canada (Swan et al. 1991)
was more positive on some dimensions and
concludes

• In contrast to previous investigators in Canada
  and Australia, we do find that immigration
  enhances economic efficiency within the host
  community. The effect flows almost exclusively
  from the greater size of the population that
  immigration brings. the gross efficiency gains
  are positive but very small

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What is at issue in economic context?

• Traditionally, economic impacts have been
  viewed as the value to those already in the
  country (Canadian born and previous immigrants)
  of new immigration
• Alternatively, (though not taken up here) could
  look at impact of immigration on new immigrants,
  or on subset of the population

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2.2 Some key ideas

1. Economic vs. social costs/benefits
2. Aggregate (e.g., GDP) vs. individual (e.g.,
   GDP/capita) costs/benefits
3. Economies of scale in production
4. Complementarities vs. substitutes in production
5. beneficial spillovers vs. displacement
6. Demographics (baby boom aging)
7. Fiscal/tax implications
8. Product market implications
9. International trade implications
10. Also other issues (e.g.,)
11. Supply of physical capital
12. Geographic distribution

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2.2.1 Economic vs. Social/Cultural Impacts

• Note that an impact is a change from what would
  otherwise have been the case
• E.g., How much more are people earning because of
  new immigration?
• Distinct question from how much are people
  earning?
• Very difficult question to answer
• The focus today is on economic issues
• BUT, could alternatively look at, for example,
  social and/or cultural impacts

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2.2.2 Absolute versus per person (or per capita)

• Confusion between the impact of immigration on
  the aggregate size of the economy, in contrast to
  the impact per capita
• Consider GDP (not ideal measure, but )
• Immigration clearly has an impact on the total
  size of the Canadian economy
• GDP increases as more people are economically
  active
• However, most people care about GDP/capita
• That is, the standard of living of Canadians
• Future immigrations impact on the standard of
  living of those already in the country is not
  well understood
• Probably small effect
• Economic impact is more than labour market
  earnings (eg price of goods)
• Distribution of different impacts across the
  population
• Individuals experience very different economic
  impacts

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2.2.3 Economies of scale in production (key
traditional economic benefit of immigration)

• IDEA Holding the structure of the economy
  constant, what happens when its size is
  increased?
• Immigration is, of course, never a pure scale
  effect
• Most observers think constant returns to scale
  (CRS) is most reasonable today
• No benefit or harm from modest changes in size
• Increased global trade decreases need for local
  markets
• Personally perhaps still small benefits from
  scale for Canada
• Implies no (or little) economic benefit from
  pure scale increases

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2.2.4 Benefits from Compositional Changes

• Most observers think that any economic benefits
  derive from beneficially altering the composition
  of economic factors of production
• Want complementarities (as opposed to
  substitutes) in production (e.g.,)
• DIFFERENT Age distribution
• Different skill distribution (filling holes
  when/where shortages)
• Education, trade expertise, entrepreneurship
• But, stopped (now restarted) occupational
  targeting
• Physical/financial capital
• Want (net) positive externalities

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If structure of new immigrant flows too similar
to existing stocks (esp. where no shortages),
then general equilibrium effects imply some
displacement of existing resources may occur

• Some concern about new factors of production
  reducing the value of existing factors, or
  changing their relative value
• A large inflow of skilled workers might require a
  large amount of complementary physical capital to
  be productive if physical capital not fast
  enough in adjusting, could alter short run
  capital/labour ratio and increase economic return
  to owners of physical capital relative to human
  capital (Beaudry and Green)

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Displacement in the labour market

• Methodologically difficult question to address
• In-country geographic mobility may undo local
  effects so that immigration has national wage
  impacts
• Controversial Canada-US-Mexico study finds a 1
  increase in the immigrant population depresses
  wages 0.3 to 0.4 (Aydemir Borjas)
• But, uneven across skill groups
• E.g., New high skilled workers likely mostly
  substitute for existing high skilled workers (may
  complement low skilled workers) wage effects
  follow
• New domestic entrants into the labour market are,
  on average, also highly skilled

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2.2.5 DEMOGRAPHICS - Immigrations effect on the
demographic structure is very modest

• Immigration can, clearly, be quite effective at
  increasing the size of the population/ labour
  force
• Less effective at changing the composition/structu
  re
• Even doubling current immigration rate would have
  relatively small impacts on the age distribution
  over long periods
• However, (though neither has major impact)
• As the Canadian population ages impact might grow
• But, new immigrant average age is also increasing
• Could alter policy to focus toward younger
  immigrants

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2.2.6 Fiscal/Tax issues

• Very little is known (Good area for future
  research)
• New immigrants inherit share of outstanding flow
  of costs (e.g., existing government debt), and
  also share of benefits (e.g., natural resource
  endowment)
• Not clear how this balances on the margin
• Taxes and transfers
• Lower immigrant earnings imply lower taxes and
  greater social transfers (Devoretz Pivnenko)
• May be unexpected redistributional effects
• US taxpayers in states with high fractions of
  immigrants do not benefit, whereas those in
  states with few immigrants do (costs local
  benefits national)

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2.2.6 Product Market Effects

• Even less is known than on fiscal side
• Some arguments that were it not for immigration
• Entire industries would not exist (or would be
  dramatically smaller)
• Product market prices would be a lot higher for
  some goods
• But, unclear how this interacts with
  international trade

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2.2.7 International Trade

• Again, very little is known
• Head and Ries (1998) find that a 10 increase in
  immigration is associated with a 1 increase in
  source country exports, and a 3 increase in
  imports
• Various discussions about international
  competitiveness go in opposite directions
• Not clear how flows of workers and good
  counterbalance each other

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3. Conclusion

• Immigration is part of the fabric of Canadian
  society
• Clear social/cultural benefits
• But, labour market outcomes for new immigrants
  have declined substantially over a few decades
• Useful to distinguish between, for example,
  earnings, and earnings conditional on
  characteristics

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• Despite popular beliefs in the economic and
  demographic benefits (or, some argue, costs) of
  immigration, the evidence does not currently
  appear to support there being either large
  economic benefits or costs
• However, there is scant evidence on impacts and
  it is controversial
• Small total economic benefits is probably the
  best summary at the moment
• There is likely a broad distribution of effects
  with different sets of individuals experiencing
  different impacts
• Given, for example, issues of complementarities
  and substitution, the details of immigration
  policy and the management of the immigration
  system likely have important ramifications for
  the economic impact on sub-populations and the
  nation as a whole

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Suggestions for further reading (mostly overviews)

• Aydemir, Abdurrahman and George J. Borjas. 2006.
  A comparative analysis of the labor market
  impact of international migration Canada,
  Mexico, and the United States. NBER Working
  Paper Series No. 12327.
• Aydemir, Abdurrahman and Chris Robinson. 2006.
  Return and Onward Migration among Working Age
  Men. Analytical Studies Research Paper Series,
  No. 273. Catalogue no.11F0019. Ottawa Statistics
  Canada.
• Aydemir, Abdurrahman and Arthur Sweetman. 2008.
  First and Second Generation Immigrant
  Educational Attainment and Labor Market Outcomes
  A Comparison of the United States and Canada.
  Research in Labor Economics, 27 215-70.
• Beaujot, Roderic. 2003. Effect of Immigration on
  Demographic Structure. Canadian Immigration
  Policy for the 21st Century, eds. Charles Beach,
  Alan Green and Jeffrey Reitz. Kingston, Ontario
  McGill-Queens U. Press, 49-91.
• Borjas, George J. 1999. The Economic Impact of
  Immigration. Handbook of Labor Economics, Vol.
  3A, eds. O. Ashenfelter and D. Card. Amsterdam
  North-Holland, 1697-1760.
• Dustmann, Christian, Francesca Fabbri, Ian
  Preston, Jonathan Wadsworth. 2006. The local
  labour market effects of immigration in the UK.
  Home Office Online Report, 06/03.
• Lowenstein, Roger. 2006, July 9. The Immigration
  Equation. The New York Times Magazine 36-43
  69-71.
• Marr, William L., and Michael B. Percy. 1985.
  Immigration policy and Canadian economic
  growth. in John Walley, ed., Domestic Policies
  and the International Economic Environment,
  Studies of the Royal Commission on the Economic
  Union and Development Prospects for Canada, vol.
  12 (Toronto University of Toronto Press).
• Introduction to Economic and Urban Issues in
  Canadian Immigration Policy by Hugh Grant
  Arthur Sweetman, Canadian Journal of Urban
  Research, 13(1)1-24.
• The Deteriorating Economic Welfare of Immigrants
  and Possible Causes Update 2005" by Garnet Picot
  Arthur Sweetman, Statistics Canada Analytical
  Studies Branch research paper series, No. 262.
• Chronic Low Income and Low-income Dynamics Among
  Recent Immigrants by Garnett Picot, Feng Hou and
  Simon Coulombe, Statistics Canada Analytical
  Studies Branch research paper series, No. 294.
• Smith, James P. and Barry Edmonston. 1997. The
  New Americans Economic, Demographic, and Fiscal
  Effects of Immigration, Washington, D.C.
  National Academy Press.
• Swan, Neil, et al. 1991. Economic and social
  impacts of immigration a research report.
  Ottawa Economic Council of Canada (Supply and
  Services Canada).
• Sweetman, Arthur. 2005. Canada Immigration as a
  Labour Market Strategy (broad overview)
  http//www.migpolgroup.com/infopages/2548.html
• (UK) HOUSE OF LORDS, Select Committee on Economic
  Affairs, 1st Report of Session 200708, 2008. The
  Economic Impact of Immigration.
• Warman, Casey and Christopher Worswick. 2004.
  Immigrant Earnings Performance in Canadian
  Cities 1981 through 2001 Canadian Journal of
  Urban Research 13(1) 62-84.