The Benefits of Immigration: Some Implications of Recent Findings

1. The Benefits of Immigration: Some Implications of Recent Findings Ethan Lewis Dartmouth College

2. The Standard Model • Gains to immigrants themselves are huge • Large cross-country income differences persist • The world would benefit from a much freer immigration system (e.g., Hamilton and Whalley 1984, Kennan 2013) • Gains to receiving country are comparatively small, and contingent on much larger distributional impacts (e.g., Borjas, 1999) • Typical estimate of net benefit: Well <1% of GDP.

3. The Standard Model • Immigration produces benefits by tilting the wage structure: • A country gains the most from immigration when it admits immigrants with “scarce” skills: those skills which are rarest in the existing population • This lowers the wage of those scarce skill, but raises the wage of everyone else (the commoner skill) and on average natives benefit • There are winners and losers • A skill-balanced inflow produces no long-run benefits • Perhaps a (very) short run benefit for native “capital owners”

8. The standard model: what’s missing? Factors which make benefits larger: • Imperfect substitutability between immigrants and natives in the same observable “skill group” • ↑s natives’ gains from immigration: adverse distributional consequences are borne more by immigrants themselves • Related: gains from product variety • Productivity spillovers Factors which (generally) make benefits smaller: • Long-run adjustments in production technology • Non-wage impacts: public goods, compositional amenities

9. Gains from Variety • Immigrants increase variety of goods & svcs • More small firms (Olney, 2013), ethnic diversity in restaurants (Mazzolari and Neumark, 2012) though perhaps more big-box retailers • Hedonic value (Ottaviano and Peri, 2006) • Another mechanism: scale effects increase the extent of the product market • Large effects from scale effects of immigration, e.g., 5% of GDP in U.S. (di Giovanni et al., 2013)

10. Productivity Spillovers • High skill “H1-B” (type of US visa) immigrants may raise productivity by e.g., generating new ideas • H1-B immigrants have high patent rates, induce more patents from native-born: Hunt & Gauthier-Loiselle(2010), Kerr & Lincoln (2010) • Link to productivity? HGL say may have ↑d GDP ≈2% in the 1990s (applying est’s from Furman et al. 2002) • Direct association between “H1-B induced” increase in science workers and productivity across U.S. metro areas (Peri et al., 2013) • 1990-2000: TFP 3.8%; higher college, but not non-college wages

11. Spillovers, but… • But Paserman(2013) finds no evidence of productivity spillovers in Israel following the influx of former Soviet Union immigrants • He looks across industries and firms • Some evidence that high-tech sectors benefitted • Misses aggregate effects? • Israel too far from the technological frontier?

12. Spillovers, but… • A concern: “spillover” model may be symmetrically used to argue that unskilled immigration harms productivity: (e.g., Moretti, 2004) But: • Results sensitive, especially to who is “unskilled” • Acemoglu and Angrist (2000), Sand(2007), Iranzo&Peri (2009) • Don’t forget: unskilled immigration is the source of benefits in standard model (in the US) • Indeed: in the U.S., immigration is associated with faster wage growth, despite reducing college share: e.g., Peri(2012)…

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14. Other factors not in standard model • Entrepreneurship: immigrants have high rates • May also have productivity benefits • Long run adjustments in production techn. • Public goods

15. Conclusions • Standard model: immigration has benefits, but come with larger distributional consequences • Benefits largest from immigrants with skill that are scarce in the native population (low-skill in US) • Standard model leaves out many things, some of which may dwarf benefits in stand. model • Although more research supporting this claim would be helpful

16. Bonus Slides

17. Imperfect Substitutability - details

18. Imperfect Substitutability • Imms & natives are imperfect substitutes = wage gap between them responds to their relative #s* • In U.S. appears tied to English language skills: • Immigrants w/strong English much closer substitutes for natives (Lewis, 2011) • Immigrants and natives specialize in different jobs • Natives specialize in jobs which require communication (Peri & Sparber, 2009) • …and benefit from lower cost of low-skill svcs (Cortes, 2008) • This increases natives’ net gains from immigration, as adverse distributional consequences are borne more by the immigrants themselves * e.g., Ottaviano and Peri, 2012. Back

19. Back to language skills Back to what’s missing

20. Aggregate Trends in Israel, Before and after FSU Immigration

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25. More Native Wage Growth Results

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29. Immigrant Entrepreneurship

30. Immigrant Entrepreneurship • Entrepreneurial ability – or willingness to take risks – may be another “scarce” skill that immigrants bring, with productivity benefits • Imms more likely to start businesses (eg, Hunt 2011) • Hunt studied college educated imms, but imms have high entrepreneurship rates at all education levels • Raises productivity? Immigrant-owned businesses have 12% more revenue/worker than native-owned businesses (Garcia-Perez, 2008) • Also, business turnover accounts for a large fraction of productivity growth (e.g., Haltiwanger 2009)

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32. Details: Characteristics of Immigrant-Owned Businesses

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35. Other Factors Not in Standard Model

36. The Long Run • In the long-run, adjustments in production tech may diminish adverse distributional impacts of immigration (Lewis, 2013) • In response to unskilled imm, shift to (Beaudry & Green 2003, 2005) or develop (Acemoglu 1998, 2002) more unskilled production technology • Other mechanisms: capital adjustments under capital-skill complementarity; adjustments in product mix • Also implies that benefits will diminish over time back

37. Public goods • Likely animates much of the opposition to immigration, rather than labor market impacts • Natives reveal a strong distaste for living in neighborhoods (Saez & Wachter, 2011), sending children to school w/imms (Cascio & Lewis, 2012) • Also, some benefits (social security solvency) • Needs more research • Natives may have an exaggeratedly negative view of immigrants’ impact on public goods back

38. Sources Cited Many of the ideas in this article derive from Lewis E. 2013. “Immigration and Production Technology.” Annual Review of Economics 5. The standard model is well described in: Borjas, GJ. 1999. “The Economic Analysis of Immigration.” In Handbook of Labor Economics Volume 3A, ed. O. Ashenfelter and D. Card, pp. 1697-1760. Amsterdam: Elsevier. Other sources include: Acemoglu D. 1998. “Why do new technologies complement skills? Directed technical change and wage inequality.” Q. J. Econ. 113:1055–89 Acemoglu D. 2002. “Technical change, inequality and the labor market.” J. Econ. Lit. 40:7–72 Acemoglu D, Angrist J. 2000. “How large are human capital externalities? Evidence from compulsory schooling laws.” In NBER Macroeconomics Annual, ed. BS Bernanke, K Rogoff, pp. 9–74. Cambridge, MA: MIT Press BeaudryP, Green DA. 2003. “Wages and employment in the United States and Germany: What explains the differences?” Am. Econ. Rev. 93:573–602 Beaudry P, Green DA. 2005. “Changes in U.S. wages, 1976–2000: ongoing skill bias or major technological change?” J. Labor Econ. 23:609–48 Cascio, EU and Lewis, EG. 2012. “Cracks In the Melting Pot: Immigration, School Choice, and Segregation.” Am. Econ J. Econ. Pol. 4: 91-117

39. Sources Cited (2) Cortes P. 2008. “The effect of low-skilled immigration on US prices: evidence from CPI data.” J. Polit. Econ. 116:381–422 di Giovanni J, Levchenko A, Ortega F. 2013. “A Global View of Cross-border Migration.” Unpublished Manuscript, International Monetary Fund DustmannC, Frattini T, and Preston I. 2013. The Effect of Immigration along the Distribution of Wages.” Rev. Econ. Stud., forthcoming. Eaton J, Kortum S. 1996. “Trade in ideas: patenting and productivity in the OECD.” J. Int. Econ. 40:251–78 Furman JL, Porter ME, Stern S. 2002. “The determinants of national innovative capacity.” Res. Policy31:899–933 Garcia-Perez M. 2008. “Does it matter who I work for and who I work with? The impact of owners and coworkers on hiring and wages.” Unpublished manuscript, Univ. Maryland, College Park Haltiwanger, J. 2009. “Entrepreneurship and Job Growth.” In Entrepreneurship, Growth and Public Policy, ed. ZJ Acs, DB Audretsch, RJ Strom, pp. 119-145. Cambridge: Cambridge Univ. Press Hamilton B, Whalley J. 1984. “Efficiency and Distributional Implications of Global Restrictions on Labour Mobility: Calculations and Policy Implications.” J. Dev. Econ. 14: 61-75. Hunt J. 2011. “Which immigrants are most innovative and entrepreneurial? Distinctions by entry visa.” J. Labor Econ. 29:417–57 Hunt J, Gauthier-Loiselle M. 2010. “How much does immigration boost innovation?” Am. Econ. J.Macroecon. 2:31–56 IranzoS, Peri G. 2009. “Schooling externalities, technology, and productivity: theory and evidence from U.S. states.” Rev. Econ. Stat. 91:420–31 Kennan, J. 2013. “Open Borders.” Rev. Econ. Dyn., forthcoming.

40. Sources Cited (3) Lewis E. 2011. “Immigrant-native substitutability: the role of language ability.” NBER Work. Pap. 17609 Mazzolari F, Neumark D. 2012. “Immigration and Product Diversity.” J. Pop. Econ. 25: 1107-1137. MorettiE. 2004. “Estimating the social return to higher education: evidence from longitudinal and repeated cross-sectional data.” J. Econom. 121:175–212 Olney W. 2013. “Immigration and Firm Expansion.” J. Reg. Science 53: 142-157 OttavianoG, Peri G. 2006. “The Economic Value of Cultural Diversity: Evidence from U.S. Cities.” J. Econ. Geography 6: 9-44. OttavianoG, Peri G. 2012. “Rethinking the Effects of Immigration on Wages.” J. Eur. Econ. Assoc. 10: 152-197 Paserman DM. 2013. “Do high-skill immigrants raise productivity? Evidence from Israeli manufacturing firms, 1990–1999.” Unpublished manuscript, Boston Univ. Peri G. 2012. “The effect of immigration on productivity: evidence from U.S. states.” Rev. Econ. Stat. 94:348–58 Peri G, Shih K, Sparber CS. 2013. “STEM Workers, H1B Visas, and Productivity in US Cities.” Unpublished manuscript, University of California Davis Peri G, Sparber CS. 2009. “Task specialization, immigration, and wages.” Am. Econ. J. Appl. Econ.1:135–69 Saez A, Wachter S. 2011. “Immigration and the Neighborhood.” Am Econ. J. Econ. Pol. 3:169-188 Sand B. 2007. “Has there been a structural change in the labor market? Evidence from U.S. cities.” Unpublished manuscript, Univ. British Columbia, Vancouver

41. Sources Cited (4) US Department of Commerce, Bureau of the Census. 1997. Characteristics of Business Owners. CBO92-1. Washington, DC: United States Government Printing Office.