Thinking about Costs and Benefits of Immigration

August 13, 2017

I find this a useful way to organise my thoughts about the costs and benefits of immigration. It may work for you too. I start out with a neutral benchmark, where immigration has neither costs nor benefits for the original population. Then I think of different ways in which that neutral benchmark could be wrong. This post is just a list (no doubt incomplete) of things that might create costs or benefits from immigration. I make no attempt to say which is bigger. It depends.

I am writing this mostly for non-economists. I should warn you that the economics of migration is not my area. I’m a macroeconomist, and most economists who specialise in immigration are microeconomists. This may give me a different perspective.

In case you think it matters: I migrated to Canada from the UK 40 years ago (and to Quebec from Ontario 30 years ago). This may influence my perspective.

And for what it’s worth: I think that Canadian immigration policy is probably in the same ballpark as the right immigration policy for Canada. Though it is probably different for different countries.

The Neutral Benchmark. The country clones itself and becomes twice as big. Everything scales up in proportion. The supply of everything doubles, and the demand for everything doubles, so all prices (and wages) stay the same. Total output and income doubles, but output and income per capita stay the same. There are neither costs nor benefits for the original population.

I think that’s a good place to start, but obviously a bad place to stop. What follows is a list of things we need to consider that might make it wrong.

Money and Say’s Law. (I’m good at this stuff, and want to get it out of the way first.) If the stock of money in the country stays constant, we have a problem. There won’t be enough money to buy double the quantity of goods, unless that money circulates twice as quickly (which is very unlikely to happen), or unless the dollar price of everything halves, so each dollar is worth twice as much as before (which may take a long time to happen and will cause other costs). If the supply of everything doubles when the population doubles, the central bank must ensure that the supply of money doubles too, otherwise demand won’t double and immigration will cause mass unemployment. “Supply creates its own demand” (Say’s Law) only works if the supply of money doubles along with a doubling of the demand for money. So we need a sensible response to immigration by the central bank.

Land. Doubling the population by immigration is not the same as annexing the identical country next door, because the stock of “land” (natural resources) stays the same. So the amount of land per person halves. Think about an agricultural economy, for example. Output rises if labour doubles, but the rise in output is less than double. So output and income per capita fall.

If the land is privately owned, by the original population, their average income per capita rises. But wages fall, and rents on land rise, and so the distribution of income changes; workers who own no land are worse off.

If the land is held in common, so the immigrants pay no rent to the original population, the original population is worse off.

It’s much the same if the land is used for housing instead of agriculture. A doubling of the population causes house rents and prices to rise, so that real wages (adjusted for the cost of housing) fall.

Or the land could be used for national parks, that are held in common.

Capital. In the “short run”, when the stock of capital is held fixed, capital (machines that make labour more productive) is just like land. So if you double the quantity of labour, holding capital fixed in the short run, output and income per capita fall, and wages fall. But unlike land, in the “long run” you can produce more capital by saving and investing, so eventually the stock of capital will double too, if the population doubles. And you can speed up the process by importing more capital from abroad. So we are back at my Neutral Benchmark, though it may take some time to get there if you can’t import capital along with the immigrants.

Economies of Scale. That’s when if you double all the inputs, output more than doubles. In this case, immigration causes output and income per capita to increase.

Non-Rival Goods. That’s when it costs little or nothing to let an additional person consume a good that is already being produced. Like radio and TV broadcasts, or maybe national defence. So if the population doubles, the cost per person halves. It’s like an extreme case of economies of scale.

National Debt. If the population doubles, the pre-existing national debt halves on a per capita basis. It’s like land held in common, except we are now talking about a common liability rather than a common asset.

Comparative Advantage. One of the reasons that people trade, both with people from the same country and with people from other countries, is that different people are relatively better or worse at different things. (The other reason is economies of scale). But transport costs can make trade difficult, so it can be easier to trade if the people who trade move closer together. (Similarly, the Economies of Scale argument for immigration ultimately depends on transport costs.) And easier trade generally makes people better off.

Redistributive Taxation. If the immigrants are (or will be) more productive and have higher incomes than the original population, and so pay more taxes, this is a benefit to the original population. And the opposite if they are less productive and have lower incomes.

All The Other Things That Economists Normally Hold Constant Because We Aren’t Very Good At Thinking About Them. If a doubling of the population caused a civil war, because the immigrants and original population had incompatible visions of how the country should be governed, that would obviously be a cost to the original population. And that cost might outweigh or nullify any of the other possible benefits listed above. And they might view surrender as even worse. That’s an extreme case, of course. But it does remind us that countries are not just areas of land; countries are clubs of people. And some countries are richer than others, not just because they have more or better land, but because their social/cultural/economic/whatever institutions work better. And it is people who create and maintain those institutions. And those institutions may or may not change (for better or worse, in the eyes of the original inhabitants) as a result of immigration. It depends.

Not in the list, but something we should remember when trying to figure out whether the costs or benefits are bigger:

History is Biased. We can look at past experience to see whether immigration created net costs or net benefits. But we need to remember two sources of bias. The first bias is selection bias: countries normally try to prevent immigration if they think it will have bigger costs than benefits (and when they try and fail they call it “invasion” not “immigration”). So we tend to observe only that immigration that would be beneficial to the original population. The second bias is that history is written, in part, from the perspective of those who were immigrants themselves, or their descendants. If immigration changes a country, it may change what is considered a “cost” and what is considered a “benefit”, and make it different from the past perspective of the original inhabitants. And the whole idea of a country is based on “We are all in this together”, which is hard to reconcile with the idea that some of us shouldn’t be here. Which makes it tricky to think about the costs and benefits of immigration.

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