Week 2: The Economics of Immigration

September 17-21, 2007

Faculty: Jeff Bergstrand

Professor of Finance, Mendoza College of Business
Website: http://www.nd.edu/~jbergstr/

Listen to the podcast (MP3 format, total running time: 00:12:06)

Introduction to the reading:

Faculty Jeff Bergstrand’s summary of Richard B. Freeman’s “People Flows in Globalization”

Richard B. Freeman, “People Flows in Globalization.” Journal of Economic Perspectives 20:2 (Spring 2006): 145-170. Freeman JEP People Flows Spring 2006.pdf


Jeffrey H. Bergstrand [photo]

Jeffrey H. Bergstrand is Professor of Finance in the Mendoza College of Business at the University of Notre Dame, a fellow of Notre Dame’s Kellogg Institute for International Studies, and a research associate of CESifo (an international network of researchers based in Europe).

He has taught economics and finance in the undergraduate, MBA, and Executive MBA programs in the Mendoza College of Business for over 20 years. His research on international trade flows, free trade agreements, foreign direct investment, and multinational firms has been published in over 30 articles and as chapters in books. From 1996 to 2003, he was a co-editor of the Review of International Economics and remains currently on its Editorial Board.

In 2001, he co-authored the lead article in the Journal of International Economics and won in 2003 the Jagdish Bhagwati Award for the Best Paper in the Journal of International Economics for the period 2001-2002.

His current research focuses on economic determinants of multinational firm behavior and foreign direct investment (with Peter Egger) and, under a grant from the U.S. National Science Foundation, on the “Causes and Consequences of the Growth of Regionalism” (with Scott Baier).

His most recent published article, “Do Free Trade Agreements Actually Increase Members’ International Trade?” (with Scott Baier) appeared in the March 2007 issue of the Journal of International Economics. His paper, “Do Economic Integration Agreements Actually Work? Issues in Understanding the Causes and Consequences of the Growth of Regionalism,” is forthcoming in The World Economy.

For more information: http://web2.business.nd.edu/Faculty/faculty_bio_dmpage.cfm?who=jbergstr

Online Discussion

Ask a Question

Submit your question to Professor Bergstrand. Questions will be answered throughout the week.

Previous Questions

In the article by Steven A. Camarota, "The High Cost of Cheap Labor: Illegal Immigration and the Federal Budget" (August 2004), the assertion is made that "If the estimated net fiscal drain of $2,736 a year that each illegal household imposes on the federal treasury is multiplied by the nearly 3 million illegal households, the total cost comes to $10.4 billion a year. Whether one considers this to be a large sum or not is, of course, a matter of perspective. But, this figure is unambiguously negative and certainly not trivial." Dr. Bergstrand, what do you think he means when he says that this figure is negative? What kind of perspective or context would you bring to this statement? Is this a good argument against immigration of undocumented workers?

Christine Babick

The estimate of $10 billion a year construed as negative means that on net there is a dissavings to the US economy of this amount. If the government's budget was initially balanced (which it is not), then this would create a deficit, requiring borrowing capital from abroad, which would either tend to raise interest rates or (as is currently the case) tends to cause a depreciation of the dollar in foreign exchange markets, which makes foreign goods more expensive and is a cost born by all US citizens.

Two further points need mentioning. First, there is a wide range of estimates of the costs to the goverment of undocumented immigrants. While this estimate is a plausible one, and is a factor arguing against immigration, there have also been estimates smaller than this one. Second, this is a direct estimate to the costs of having immigrants enter. However, it cannot reflect all the costs and benefits. For instance, it cannot measure in the case of an undocumented worker that some of the output added to the economy and income paid is not recognized (for perhaps a job that would otherwise not be filled). Yet this individual purchases goods and services in the US economy, that adds to the national income. Moreover, it cannot measure the positive effect on our culture and diversity, nor of the potential net benefits that may arise from immigrants' children being born in the US.

Jeff Bergstrand

Dr. Bergstrand, Take the scenario of a middle-class United States citizen wanting, for some reason, to emigrate. How many developed countries would greet him/her with open arms? Would Canada or the EU or Japan or Brazil, for example, allow him/her to become a citizen? How difficult and lengthy would the process be? How much would the US native have to pay? Are US natives seeking citizenship elsewhere treated differently by most of these countries than natives of less developed countries? How, and why?

Bill Gerards

First of all, I am not an expert by any means on the immigration rules of all the various countries around the world. However, the author makes an interesting point about "balance" of migration flows. One area that I have worked in is examining the gross flows of migrants among many different countries (thousands of pairings) around the world. Interestingly, the total amount of a typical flow is highly related to the two countries sizes. The US is a very large immigrating nation from, say, the EU on average, but there is approximately balance in the number of emigrants from the US to the EU; it is surprising how related the flows are to the product of the two countries' GDPs. That said, there are many other factors as well explaining these flows, such as differences in per capita GDPs, migration policies, and distance between them.

Regarding imbalances, all countries have different policies on migration. On shortfall at the world policy level is the lack of harmony among countries on migration policies. There is much more harmony among the world's nations on goods trade and financial capital flows; much less harmony on migration policies. this is certainly one area where countries need to come together to formulate more mutually consistent policies.

Jeff Bergstrand

Dr. Bergstrand, I would like to make several points but, first, would like to point out an apparent discrepancy. On the first page, you observe that “today, there are 35 million immigrants in the United States; this is 12 percent of the population, more than double the 4.7 percent in 1970. The recent rise in the level of debate over immigration reflects this proportional increase in the U.S. immigrant population.” However, on page 2, at the bottom of the 2nd paragraph, you say “In 1910, 8.8 million immigrants in a U.S. population of 92 million were proportionally much larger than the 9.1 million immigrants in 2000 in a U.S. population of 280 million; immigration laws were much less stringent in 1910 than in 2000.” There is an obvious contradiction here and I believe that the figures cited on page 1 are correct.

Pete Murphy

The figures are from Freeman's article (pages 146 and 148), and the apparent conflict can be explained. The 35 million immigrants in 2000 refers to the total STOCK of immigrants in the USA, the accumulation of the flows of immigrants over previous periods. The 9.1 million immigrants mentioned later refers to the FLOW of immigrants into the USA from 1991–2000, which of course should be a much smaller number than the stock. This is the source of the apparent discrepancy.

Murphy: Now, on to my points:

1. Regarding the question of immigration’s effect on native workers Freeman begins by citing studies which show a negative effect on their incomes. He then suggests that perhaps there could be a positive effect due to a nebulous concept of “complementarity,” but still arrives at a conclusion that the impact on native workers will be negative. And since his final conclusion is a negative effect (Freeman notes that “immigrants benefit the most from immigration and native workers have the most to lose”), he then goes on to suggest a scheme of charging immigrants admission and raising taxes on the wealthy to fund a program to compensate displaced native workers. I find it astounding that an economist would actually suggest that such an arrangement could somehow be a good thing (or actually work), not to mention the absurdity of believing that the wealthy would go along with such an income redistribution plan. This isn’t good economics.

RESPONSE: The negative effect of immigration on the real incomes of native workers is the most commonly assumed outcome. Empirical work by some economists finds evidence of this, but often these effects are very, very small empirically. There are some economists that have found POSITIVE real income effects on native workers from immigration. The source of this is something like the effect of "technology growth." One might think that the introduction of a computer can displace workers and lower real incomes. While true for some workers, when we look at aggregate data over time we find that computers make workers more productive, and that real incomes per person have risen over long periods of time BECAUSE of computers. It is similar for some immigrants'effects on native workers incomes. Many native workers may be more productive because of immigrants. But usually this occurs with immigrants that are highly educated.

As to the auction mechanism, it makes good economic sense that someone that has to gain considerably from immigration into the USA should pay for the opportunity to earn a considerably higher income. This is a form of tax. And that displaced native workers receive the benefits of the auction also makes sense because they are the ones most at risk in terms of incomes from immigration. While no one likes paying taxes, many wealthy individuals realize that their incomes are considerably higher due to trade and migration of workers that make them more productive, and would likely be willing to pay more taxes, since the tax rate will always be only a portion of their higher incomes and their net incomes would still improve.

Murphy: 2. There is another factor in the immigration equation which economists have yet to recognize—the relationship between per capita consumption and population density. Beyond a certain population density, the need to crowd together and conserve space begins to erode per capita consumption, even as productivity rises, resulting in rising unemployment and poverty. Thus, with the arrival of each new immigrant, not only is the supply of labor increased but, in per capita terms, the demand for products (and labor) declines, magnifying the negative impact on the native worker. The U.S. is already well beyond this point.

RESPONSE: It is true that if increased immigration (and labor supply) reduces the real wage rate of workers, then while aggregate GDP rises, per capita GDP will fall. Consequently, per capita consumption will then decline. However, this outcome relies upon that the real wage rate will go down, which as mentioned above has not been firmly established. (It may be quite surprising to learn that most economic studies find little economically significant negative real wage rate effects due to immigration.) One must keep in mind that these workers produce goods, but also consume goods. However, it is also the case that many immigrant workers send remittances back to their country of origin, dampening the spending effect. The point made is well take here. However, in the effect on unemployment in the USA is not supported empirically. Over long periods of time, the unemployment rate is UNRELATED with the level of openness of the economy, the unemployment rate today is no higher than it was 40 years ago.

Murphy: 3. The negative effects of immigration go beyond the economic. Immigration must be viewed in the context of the realities of the 21st century. The U.S. demand for energy far outstrips our domestic supply. We have a trade deficit in every category of natural resources—even food. Fish populations in the oceans are collapsing as a result of over-fishing. As the biggest contributor to global warming, we are literally cooking the planet. We are essentially scouring the planet of resources like a plague of locusts. By maintaining such a high rate of immigration, we are acting as a relief valve—an enabler—for population growth in other countries, at the same time that we make ever-more impossible the solving of our own problems. This can’t go on. In light of the above negative consequences, economic and otherwise, sustaining a rate of immigration that is much higher than the rate of emigration just doesn’t seem to make much sense.

RESPONSE: The author's comments upon the sustainability of our world economy are important economic issues that world leaders in business and government need to address. They are, of course, well outside the scope of the immigration debated. The main point about immigration is that technological change has contributed to increased mobility of resources around the world, which by itself leads to greater specialization in production, and MORE efficient usage of given resources. This will free up resources to address other economic issues, many of which raised in this last point are issues we need to address. Trade and immigration tend to improve economic efficiency on average, but it does tend to redistribute incomes, and especially hurt lower educated workers. However, tax mechanisms should be used to even out the gains and losses from greater specialization via trade and migration.

Jeff Bergstrand