Immigration, Skill, Efficiency, and Quotas: A Conflict of Economic Intuitions
Moderate immigration reformers usually argue in favor of more skilled immigrants. As a matter of economic efficiency, are they correct?
Suppose skilled immigrants earn $30,000 at home and $100,000 here; unskilled immigrants earn $1000 at home and $25,000 here. Then the efficiency case in favor of skilled immigration seems airtight. If we admit one skilled immigrant, the wealth of the world rises by $70,000. If we admit one unskilled immigrant, the wealth of the world rises by a mere $24,000.
Since this conclusion matches almost everyone’s intuition, few question it. But doesn’t it contradict the basic economics of trade? According to standard trade models, trade increases efficiency by eliminating relative prices disparities. The bigger the price ratio in country A to country B, the greater the gains to trade. Indeed, in a simple model, the deadweight loss of trade barriers (or taxes) increases quadratically with the relative price disparity: Double the disparity, quadruple the inefficiency.
Which intuition is right? Both. If a country is going to admit a fixed number of human beings, then the most efficient choice is to admit the worker with the largest absolute income gain. That person will normally, though not inevitably, be skilled.
However, if a country is going to admit a fixed dollar value of human capital, the most efficient choice is to admit the workers who face the largest price disparity. Returning to the previous example, imagine that a country decides to admit $1,000,000 worth of human capital, valued at the country of destination. If it admits skilled workers, $1M of human capital equals 10 immigrants ($1M/$100k=10), with an efficiency gain of $700,000 (10*[$100k-$30k]). If it admits unskilled workers, however, $1M of human capital equals 40 immigrants ($1M/$25k=40), with an efficiency gain of $960,000 (40*($25k-$1k]).
This conclusion is even clearer, by the way, if the country values human capital using the country of origin. Then $1,000,000 worth of human capital is 33.33 skilled workers or 1000 (!) unskilled workers, with social benefits of 2.33M and 24M (!) respectively.
I’m well-aware that the fiscal effects of skilled immigration are usually more positive for the receiving nation thanks to progressive taxation and redistribution. But that’s largely a distributional issue. If you stick to textbook cost-benefit analysis, there really is an important sense in which unskilled immigration is the best immigration of all.
May 2 2012 at 3:45am
But individuals rather than dollar values may be the better units, owing to physical and social constraints.
May 2 2012 at 7:58am
Immigration is not a matter of economics alone.
People that form a political community are sovereign and they judge on extra-economic factors such as culture, religion, defense, crime etc etc.
The “Lose the We” is wrong and inviable. Your previous example of ten isolated men on an island are incomplete. You talked about taxation but the concept “tax” only arises in a polity. You needed to inform us whether those ten men had formed a polity with rules or not.
May 2 2012 at 9:09am
Great points–very thought provoking!
May 2 2012 at 9:28am
This is all true but the debate that you’re referring to is about adding to the immigration quota, not creating a new standard that measures gains from trade based on the value of human capital imports.
When proposing reforms within the context of America’s current quota-based system, if you’re arguing about whether to add 10,000 spots for higher or lower skilled people, the higher skilled should get all of the spots based on the numbers that you’ve proposed above.
A major weakness of the focus on high skilled immigration is that it is a static analysis that ignores mid-long-run sorting benefits. Today’s low skilled migrants have children that become the next generation’s higher skilled workers, entrepreneurs, etc. And that’s ignoring the contributions of immigrants as entrepreneurs and innovators (which is substantial) and how lower-skilled less English fluent migrants push Americans up the skill/wage ladder so they experience gains from migration too.
May 2 2012 at 9:39am
I like the distinction here (bringing in humans vs. incomes), but the confusion/confution between stocks and flows (wealth/human capital vs income) displays a stunning failure of basic economic thinking — one that has been widespread among economists for centuries, and that is still dismayingly ubiquitous.
May 2 2012 at 10:47am
Yeah, Bryan should have known better.
May 2 2012 at 11:18am
@Steve and @Saturos,
A fun and theoretically correct ding…but at some point, analytical expediency can allow for capitalizing annuity streams assuming similar growth rates, lifes, and discount factors. In some cases, the results inferred from looking at the flows may not differ much from those inferred form looking at flows. In this case, I suspect a precise capitalization of these annual flows (incomes) would work against Bryan’s value added claim. The low skilled worker’s useful life is likely shorter (without additional ivestments), its income growth rate smaller; as to discount rate, possibly a tie.
May 2 2012 at 11:32am
“If a country is going to admit a fixed number of human beings…”
What’s the rationale for setting a fixed number?
May 2 2012 at 1:21pm
There is no good rationale for it, but that is the context of the debate over increasing quotas for skilled vs. unskilled.
May 2 2012 at 3:54pm
I am a low skilled worker trying to immigrate to Canada to be with my wife. Because of concern that I will displace a Canadian worker, I cannot work for 12-18 months while my application for permanent residence is processed, her family and my wife will be bare most of the burden for that time. An employer who would rather hire me than a Canadian will also be worse off, as well as consumers who would rather buy from me.
Understanding the theory of how immigration restriction is the most regressive policy on planet earth was frustrating. It annoys me even moreso as a victim of it. I can’t even imagine how hard it might be if I were trying to immigrate from a much poorer country.
May 2 2012 at 4:34pm
Of course, unskilled immigrants never have any children, so there’s no need to worry about the long-term effects.
May 3 2012 at 11:57am
If immigration were easier immigrants would be more likely to come to work and leave their families behind.
Of course, either way all that would happen is that the location of the children would change. Their effects, positive or negative, would happen regardless of which country they are in. Maybe the best thing to do would be to make sure they end up somewhere with more opportunities for work and other positive behaviors…..
May 4 2012 at 2:33pm
What this post lacks is a consideration of costs. People don’t just bring productivity with them they bring costs as well. This is harder to monetize but it seems likely that higher skill immigrants have fewer costs, plus there are threshold effects and having more low skilled immigrants could mean reaching those thresholds.
Comments are closed.