The Diversity Benefits of Immigration

A propos of recent discussions regarding immigration, I thought it worthwhile reposting the link to a relevant paper that I quite like: Gianmarco Ottaviano and Giovanni Peri, “The Economic Value of Cultural Diversity: Evidence from US Cities.”

What are the economic consequences to U.S. natives of the growing diversity of American cities? Is their productivity or utility affected by cultural diversity as measured by diversity of countries of birth of U.S. residents? We document in this paper a very robust correlation: US-born citizens living in metropolitan areas where the share of foreign-born increased between 1970 and 1990, experienced a significant increase in their wage and in the rental price of their housing. Such finding is economically significant and survives omitted variable bias and endogeneity bias. As people and firms are mobile across cities in the long run we argue that, in equilibrium, these correlations are consistent only with a net positive effect of cultural diversity on productivity of natives.

Being the child of two immigrants to the US, I feel like I have personal experience supporting my firm belief that the greatest benefits of immigration to a country are quite subtle, very pervasive, and difficult to measure. Traditional studies that try to tally up the costs and benefits of immigration usually focus on the taxes paid by immigrants, the direct impact of immigration on labor markets, and the government services that they receive. Typically such measures show a rough balance, some showing a slight gain to the native-born population, and some showing a slight loss. (All show large gains for immigrants themselves, of course, as well as large gains for the overall population including both immigrants and natives.)

But the approach taken by Ottaviano and Peri is a good effort at trying to identify one of the less tangible effects of immigration: its impact on the productivity of non-immigrants. Their result is striking. In cities with more immigrants, the non-immigrant population tends to get paid more, and the market tends to value real estate higher, implying that the city is generally viewed as a more desirable place to live. They use some careful and rather clever econometrics to ensure that the causation runs from more immigrants to higher pay for non-immigrants, rather than the other way around. After all of their controls for other determinants of non-immigrant wages, and after taking account of the fact that richer cities would be expected to attract more immigrants, they still find a statistically robust and positive residual effect of immigration on the income and productivity of non-immigrants.

Exactly why diversity improves the productivity of native-born Americans is a bit of an open question, though I suspect it has to do with the rich variety of viewpoints, experiences, and ideas that a diverse community offers. Regardless, it is not at all surprising to me that this paper shows the effects of immigration to be large, robust, and very beneficial.

Kash

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