The economic impact of migration: a survey.

• Author: Drinkwater, Stephen
• Position: Report

Abstract

This survey reviews both theoretical and empirical papers that examine the economic effects of labour mobility. We address three broad sets of issues: firstly, the effect that immigration has on the host country's labour market. Although the possible adverse effects that immigration can have on the wage and employment levels of natives are typically examined, immigration may also have a role to play in raising skill levels. This leads to the second broad issue: the effect of migration of a particular skill composition on the long-term (endogenous) growth of the host country. Finally, immigration can have a major economic impact on the source country. These effects can either be positive or negative depending on the interplay between the effects of growth, remittances and the brain drain.

INTRODUCTION

Immigration is one of the most important issues in the contemporary global economy. (1) It is estimated by the United Nations that over 175 million people now reside outside the country of their birth. This clearly has major economic and political implications for both the sending and receiving countries. Coppel et al. (2001) identify four major of international population movements. Firstly, there is the effect that immigration has on the host country's labour market. Although the possible adverse effects that immigration can have on the wage and employment levels of natives are typically examined, immigration may also have a role to play in reducing skill shortages in certain key sectors of the economy. Secondly, immigration is likely to influence the budgetary position of the receiving country because the amount recent arrivals receive through health, education and welfare systems is unlikely to exactly balance the increased tax revenues from new workers. Thirdly, it is argued that immigration may be a solution to the ageing population problem that faces many OECD countries. Finally, immigration can have a major economic impact on the source country. These effects can either be negative, in terms of a brain drain (though a brain drain can be beneficial if it creates incentives for human capital investment in the source country), or positive since migrants' remittances are thought to be an important economic development tool for many labour exporting countries. The overall balance of these effects is therefore likely to have a major influence on the immigration policies that are implemented, both in the source and host countries.

In this survey we review the theoretical and empirical literature on the economic effects of international migration, focusing in particular on the influence that immigration can have on growth rates in the host and source countries. Without some restriction, this is a vast literature so some constraints must be placed on the scope of our survey. First, we exclude any consideration of papers that study the determinants of migration in an attempt to understand the pressures for migration or migration equilibria. (2) The level of migration (controlled or otherwise) is a given throughout this survey. Second, where possible our empirical evidence relates to the European migration experience. (3)

We structure the rest of the survey around four sections. Section 2 examines level effects based on the strictly static framework adopted by Borjas (1995) and reviews papers where migration affects transitional but not long-term growth. Section 3 then looks at a much smaller literature on the effects of migration on long-term growth. The section concludes with results from a current project involving the authors. Section 4 discusses the policy implications that emerge from the papers that have been surveyed and Section 5 concludes.

The Immigration Surplus

The immigration surplus is the term coined by Borjas (1995) to refer to the increase in income of the indigenous population of the host country following immigration. The simplest model to assess the magnitude of the immigration surplus is as follows. Consider two blocs, East and West, and assume that wages are perfectly flexible and labour markets clear in both blocs. Further assume that the regions produce the same composite output and the labour force is equal. Capital of both the physical and human variety are given and higher in the West. Both average and marginal output per worker are therefore higher in the West.

[FIGURE 1 OMITTED]

Figure 1 shows what happens when migration from East to West occurs. The Eastern workforce (fully employed by assumption) falls from OA by an amount HA, increasing the Western workforce by the same amount AB(=HA). The area under the marginal product of labour (MPL) curves give total output and the MPL(West) is higher than its Eastern counterpart--MPL(East)--because physical and human capital are higher in the West. Ignoring human capital differences for the moment, then 1 unit of Eastern labour is equivalent to 1 unit of Western labour. Output then rises by an amount KDBA in the West and falls by an amount FJAH(=ECBA) in the East. The increase in output is therefore given by the area KDCE. The real wage falls in the West and rises in the East. If there are costs associated with migration and migrants maximize income net of costs, migration will cease before wages are equalized. Figure 1 shows the case of factor price equalization, where migration costs are zero and migration leads to equal wage rates. Migrants gain by an amount EDCJ; non-migrants in the East see total output fall by an amount FJG. The original Western population gains by an amount KDE--the immigration surplus. This constitutes a total gain of [w.sub.W] KDw for Western capitalists and a loss of [w.sub.W] KEw for Western workers. Similarly the non-migrants in the East lose by an amount FGJ(=EJC); [wFGw.sub.E] is a gain for Eastern workers and [wFJw.sub.E] is a loss for Eastern capitalists. Thus the losers are the original Western workers and Eastern capitalists; the winners are the migrants and Western capitalists.

Borjas (1995) provides rough estimates of the immigration surplus for the US, but in fact it could be any OECD country. Assume first that all workers, East and West, are perfect substitutes. Suppose a host workforce N expands to L = N + M, where M is the number of immigrants. Then the immigration surplus is given by

S = [DELTA]w.M/2Y = (L[DELTA]w/w[DELTA]L) x (w/L) x ([DELTA]L.M/2Y) = - 1/2 e [(wL/Y)(M/L).sup.2] = - 1/2 [esm.sup.2]

where we have put [DELTA]L = M (since all migrants find employment), s is labour's share of national income, e is the elasticity of the wage rate with respect to the labour force and m = M/L is the proportion of migrants in the workforce (AB/0B in Figure 1).

Given that labour income accounts for around 70% of GDP for most OECD countries, and just under 10% of the US (or German) workforce are immigrants and the elasticity of the factor price of labour (capital fixed) is thought to be around 0.3 (Hamermesh, 1993), Borjas puts s=0.7 and e=-0.3 to arrive at the pessimistic conclusion that a 10% increase in the workforce through immigration increases US (or German) GDP by only 0.105%. This net gain is accompanied by a 3% fall in the wage rate and hence a not-insignificant redistribution from labour to capital.

Now consider immigration with wage rigidity. The general case of some wage flexibility, which encompasses the case of full flexibility above, is illustrated in Figure 2--taken from Levine (1999). The labour supply curves (which, following Layard et al. (1992), we refer to as the 'bargained real wage' or BRW curves) and the labour demand (MPL) curves are shown for the two blocs. Upward-sloping BRW curves are consistent with a number of theories of wage determination including the monopoly union model, bargaining and efficiency wage theories. As a result of migration from East to West, with some real wage flexibility, the BRW (W) shifts to the right and employment rises by WW'. Similarly the BRW (E) shifts to the left and employment falls by EE'.

[FIGURE 2 OMITTED]

The welfare implications of East-West migration--which we analyse in more detail in the next section--can be assessed by comparing the increase in Western output (HJWW') with the decrease in the East (FGEE'). We have illustrated the case where WW', EE' and the real wage flexibility in the two regions are about equal. Then the net output gains are positive; in general, however, the output effects are crucially dependent on the degree of real wage flexibility in the two labour markets. To work out the immigration surplus, we put [DELTA]L = [eta]M where [[eta].sub.i] [member of][0,1]--encompassing the cases of complete wage flexibility [eta] = 1 and complete inflexibility [eta] = 0 . The immigration surplus now becomes

S = - 1/2 [esm.sup.2][[eta].sup.2] (1)

which provides an even more pessimistic outlook for the economic benefits of migration for host residents.

The analysis up to now has assumed only one type of labour. Suppose now the workforce in both blocs consists of skilled and unskilled labour and output Y=f(K, L, H) in the host country, where L and H denote skilled and unskilled labour respectively. Let elasticities of factor prices [w.sub.L] and [w.sub.H] be denoted by [e.sub.LL] = [partial derivative]log[w.sub.L]/[partial derivative]logL, [e.sub.HH] = [partial derivative]log[w.sub.H] /[partial derivative]logH and [e.sub.LH] = [partial derivative]log[w.sub.L]/[partial derivative]logH. Let the migration rate be m = M/(L + H) and the post-migration proportion of skilled labour be h = H/(L + H). Let [beta] denote the fraction of skilled workers among immigrants and the changes in the skilled and unskilled workforces following migration be [DELTA]L = [[eta].sub.L](1 - [beta])M and ?H = [?.sub.H][beta]M where [[eta].sub.i] [member of][0,1] are measures of labour market flexibility for the two types of labour. Finally let [s.sub.L] = [w.sub.L]L/Y and [s.sub.H] = [w.sub.H]H/Y be factor shares. Then following Borjas (1995), the...