Negative Effects of Immigration on the Economy

by Mike Kimel

Negative Effects of Immigration on the Economy

In a recent post, I showed that looking at data since 1950 or so, the percentage of the population that is foreign born is negatively correlated with job creation in later years. I promised an explanation, and I will attempt to deliver on that promise in this post.

I can think of a few reasons for the finding, just about all of which would have been amplified since LBJ’s Presidency due to two things: the 1965 Hart-Cellar Act and the launch of the Great Society. The Hart-Cellar Act may be better known as the Immigration and Nationality Act of 1965. It phased out country quotas in existence since the 1920s. As a result of these quotas, about 70% of all immigrants were coming from England, Germany and Ireland, with most of the remainder coming from elsewhere in Western Europe and from Latin America. The Great Society, of course, included a number of welfare programs, many of which (or their descendants) are still in existence.

With that, reasons why the foreign born population is negatively correlated with subsequent job creation include:

1. Immigrants who are sufficiently similar to the existing population when it comes to language, culture, skillsets and expectations will integrate more smoothly. Slower and more imperfect integration necessarily requires more expenditure of resources, resources which otherwise could go toward economic development.

2. Naturally, skills and values that are more productive and efficient than those of the existing population are conducive toward growth. Conversely, bringing inferior technology and processes does not improve the economy. As the source of immigrants shifted away from sources of sources of high technology like England and Germany and toward the developing and not-developing world, the likelihood that a randomly selected new immigrant will improve productivity diminishes.

3. Eligibility for welfare can change the incentive structure for existing and potential immigrants. An immigrant arriving in the US in 1890 certainly had no expectation of being supported by the state. It may be that most immigrants arriving in the US now also don’t have that expectation. However, it is no secret that welfare exists so some percentage of potential immigrants arrive expecting to be supported to some degree by the state. In some (many?) cases, the expectation increases post-arrival. (Like any great economist, Milton Friedman got a lot of things wrong about how the economy works but he had a point when he said you can have a welfare state or open borders but not both.)

4. Rightly or wrongly, reasons 1 – 3 above may combine to create resentment in the existing population. Think “my grandparents came to this country with nothing and nobody gave them anything…” Resentment can break down trust and institutions necessary for the economy to function smoothly.

5. Over time, transportation has become cheaper and easier. As a result, the likelihood that an immigrant has come to the US to stay has diminished. Many immigrants come to the US for several years and then go back to their country of origin. This in turn leads to four issues that can have negative impacts on the economy:
5a. Immigrants that expect to leave often send back remittances, taking resources out of the US economy. For example, in 2010, remittances from workers in the US amounted to 2.1% of Mexican GDP.

5b. Relative to many non-Western countries, the US taxpayer invests heavily in the creation of a state that is conducive toward acquiring useful skills and education. Often, the acquisition of such skills and education is heavily subsidized. When people acquire those tools and then leave without applying them, the value of the resources could have been better spent elsewhere.

5c. Immigrants who don’t expect to stay can have less reason to integrate culturally and economically; any real estate investor can tell you that all else being equal, a neighborhood made up largely of homeowners is almost always nicer than a neighborhood made up largely of renters.

5d. Immigrants who arrive with a non-negligible expectation of leaving are, on average, more likely to take risks which generate private gains and social losses. If the bet goes well, congratulations. If the bet goes bad, “so long suckers!” The bet may even involve a crime.

6. (This one is more conjecture than the others – I think it is true, but I haven’t given it enough thought, particularly whether it is entirely separate from the previous reasons.) The non-existence of a lump of labor does not mean there isn’t a population to labor multiplier, or that the multiplier cannot change over time. In an era of relatively slow economic growth, economies of scale, and outsourcing abroad, the number of new employment opportunities per new customer (i.e., job creation per resident) can shrink. We’ve certainly seen something resembling that since about 2000.

None of this is to say that immigration is good or bad, or even that it should be opposed or encouraged. In this post I simply tried to explain what I saw in the data. I will have one or more follow-up posts.