Immigration, Skill, Efficiency, and Quotas: A Conflict of Economic Intuitions
By Bryan Caplan
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.