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

1. The other economic question: Immigration's impact on the economy by Arthur Sweetman for Metropolis – CSPS webinar Dec. 2008 Immigration, Labour Market Outcomes & Economic Impacts

2. 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 Immigration, Labour Market Outcomes & Economic Impacts

3. 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 Immigration, Labour Market Outcomes & Economic Impacts

4. Immigration, Labour Market Outcomes & Economic Impacts Warman and Worswick (2004)

5. Immigration, Labour Market Outcomes & Economic Impacts Warman and Worswick (2004)

6. 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) Immigration, Labour Market Outcomes & Economic Impacts

7. 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 Immigration, Labour Market Outcomes & Economic Impacts

8. 2000 = census year Note: Comparison group: Canadian born plus immigrants more than 10 years Source: Statistics Canada, Picot, Hou and Coulombe, 2007 Immigration, Labour Market Outcomes & Economic Impacts

9. 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 Immigration, Labour Market Outcomes & Economic Impacts

10. Immigration, Labour Market Outcomes & Economic Impacts Source: CIC, Facts & Figures

11. Departures (Are immigrants staying?) Retention rates for males age 25-35 at landing Source: Statistics Canada, Aydemir and Robinson, 2006 Immigration, Labour Market Outcomes & Economic Impacts

12. 1.3 Generational Population Shares (%) • 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) Immigration, Labour Market Outcomes & Economic Impacts

13. Age controls in all regressions. Source: Aydemir and Sweetman (2008) Immigration, Labour Market Outcomes & Economic Impacts

14. Age controls in all regressions. Source: Aydemir and Sweetman (2008) Immigration, Labour Market Outcomes & Economic Impacts

15. 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) Immigration, Labour Market Outcomes & Economic Impacts

16. PART 2: Immigration’s 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 country’s results to Canada • SUMMARY: Most analysts suggest that immigration’s impact on GDP/capita is probably positive, but quite small (and some say potentially negative) Immigration, Labour Market Outcomes & Economic Impacts

17. 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] Immigration, Labour Market Outcomes & Economic Impacts

18. 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” Immigration, Labour Market Outcomes & Economic Impacts

19. 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 Immigration, Labour Market Outcomes & Economic Impacts

20. 2.2 Some key ideas • Economic vs. social costs/benefits • Aggregate (e.g., GDP) vs. individual (e.g., GDP/capita) costs/benefits • Economies of scale in production • Complementarities vs. substitutes in production • beneficial spillovers vs. displacement • Demographics (baby boom aging) • Fiscal/tax implications • Product market implications • International trade implications • Also other issues (e.g.,) • Supply of physical capital • Geographic distribution Immigration, Labour Market Outcomes & Economic Impacts

21. 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 Immigration, Labour Market Outcomes & Economic Impacts

22. 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 immigration’s 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 Immigration, Labour Market Outcomes & Economic Impacts

23. 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 Immigration, Labour Market Outcomes & Economic Impacts

24. 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 Immigration, Labour Market Outcomes & Economic Impacts

25. 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) Immigration, Labour Market Outcomes & Economic Impacts

26. 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 Immigration, Labour Market Outcomes & Economic Impacts

27. 2.2.5 DEMOGRAPHICS - Immigration’s 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/structure • 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 Immigration, Labour Market Outcomes & Economic Impacts

29. 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) Immigration, Labour Market Outcomes & Economic Impacts

30. 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 Immigration, Labour Market Outcomes & Economic Impacts

31. 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 Immigration, Labour Market Outcomes & Economic Impacts

32. 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 Immigration, Labour Market Outcomes & Economic Impacts

33. 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 Immigration, Labour Market Outcomes & Economic Impacts

34. 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-Queen’s 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 2007–08, 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. Immigration, Labour Market Outcomes & Economic Impacts