Immigration in Developed Economies

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Last year, economists across the political spectrum in the United States signed a petition to the US government in support of an immigration policy that would welcome more rather than fewer immigrants.  However, the current US administration seemed to feel that the opinions of these “so-called experts” (a similar denigration of economists as in the pre-BREXIT vote) could be safely dismissed.  After all, an anti-immigration stance had helped propel Trump into the Presidency and certainly had a major influence on the success of the Vote Leave campaign in the UK.

The current US administration when not myopically focusing on the construction of a wall along the southern border has proposed a more merit-based immigration system along the lines of those in Australia and Canada.  On the surface, this looks like an attractive proposition but ignores the fact that without lower-skilled immigrants, the efficiency of the American economy would be seriously challenged.  As Richard Florida (The Creative Class) admitted on National Public Radio one morning, cities with large numbers of the creative class also need folks to pick up the garbage, wait tables in restaurants and, indirectly, low-skill workers to pick the vegetables, process the meat and deliver these products to the restaurants patronized by the Creative Class.

Our work in Chicago exploring the impacts of immigration has revealed the significant contribution that immigrants make. Of course, there are still those who see immigrants as displacing local workers, driving down wages and generally reducing opportunities for native workers. However, this perspective ignores important supply-side shocks to local economies that over the next 20 years will see (1) an increase in dependency ratios (the number of people not in the labor force per employed person) and (2) a concomitant decrease in the size of the labor force accompanied by an increase in the percentage of the population to >20% in most developed economies (including China). Immigration is seen as one of three solutions proffered to address these problems, the other two being an increase in productivity accompanied by significant technological change and an extension to the retirement age.  With the exception of a few specialized professions (e.g., airline pilots), there is no formal retirement age in the US so the latter option needs to be considered in a different light, as will be addressed below.

We found that absent immigration, Gross Domestic Product (GDP) in Chicago would decline 9% by 2040.  Current levels of immigration would mute this decline although, in the short-run, GDP/per capita would decline (lower-skilled immigrants would contribute less per worker) but GDP would still increase.  Further, the dependency level would decline from 32% (no immigration) to 19% by 2030, the same level as that observed in 2005.  There are some longer-run issues that need to be addressed – language barriers and investment in human capital in second and succeeding generations to avoid the accumulation of a large un- or under-employed cadre of Hispanic populations in the decades ahead.  One has only to point to the riots in the banlieues of Paris where the children of immigrants from North Africa complained about their de facto competitive exclusion from opportunities to work as a result of serious deficiencies in the quality of the education to which they were exposed.

Munnell and Sass (Working Longer: The Solution to the Retirement Income Challenge) offer another complement to the benefits of immigration– investment in older workers.  In pitching this idea to leaders in the private sector, the reaction has been universally negative.  There is an innate belief in a hump-shaped productivity curve with increases until employees reach their mid 50s before it starts to decline.  Firms tend to invest in younger workers and yes, their productivity gains may be significant (albeit from a lower base) but within a few years, there is a high probability that these workers will have changed jobs. Clearly, there are significant benefits to the individual younger workers and for society as a whole – but the rents from this investment may not be captured fully by firms who make the payments for these investments.  On the other hand, an employee in her early 50s may be very attracted to remain with a firm (family and community social ties not to mention a more risk adverse attitude towards changing jobs or location) and thus even if the investment in enhancing their human capital yielded fewer returns, these returns would likely be captured over a longer tenure with the firm.

Even in Japan, the foreign share of the population has increased from 0.7% in 1990 to 1.8% in 2016 and is forecast to increase modestly in the coming years.  Many see China’s relaxation of the one-child policy as a pro-active to response the anticipated shrinking of the labour force in the coming decades.  However, the response in terms of enhanced birth rates has not materialized.  As with most policy issues, our research suggested that a single strategy would unlikely to be successful.  Continued immigration and targeted investment in human capital across the age spectrum would seem to be important complements.  Further, we have found that numbers employed and labour force participation rates in the population >65 have been increasing in Chicago and in the decade 2002-2012, those employed in this group were the only ones to receive real (adjusted for inflation) increases in wage and salary income.  Metropolitan regions may thus find that applying the term “inactive” to the age-group >65 may become inappropriate in the context of the labour force (not the golf course).  However, labour force participation rates for this group may never rise high enough to compensate for the generally shrinking labour force and thus immigration will continue to play an important role in sustaining developed country economies.

This blog was written by Professor Geoffrey J.D. HewingsEmeritus Director, Regional Economics and Applications Laboratory, The University of Illinois at Urbana-Champaign. Professor Hewings is an Associate of City-REDI. 

The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham.

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