Assignments Topic 5:

Read the following articles and then answer the questions below
These assigments will do in two practical classes.
Class #1: The US and Class #2: The UK

The Economics of Immigration:

A Story of Substitutes and Complements
Scott A. Wolla, Senior Economic Education Specialist

“Give me your tired, your poor, your huddled masses yearning to breathe free.”—Emma Lazarus

America is a nation of immigrants. Currently, immigrants make up about 13 percent of the

overall population, which means about 40 million people living in the United States are foreign
born.1 Indeed, nearly all Americans have an immigration story in their family history. Yet,
despite their history and a culture of immigration, Americans have mixed feelings about whether
the country should keep its welcome mat out on the doorstep. A 2014 Gallup poll reports 72
percent of Americans believe immigration is a good thing, but 36 percent would like to see the
level of immigration decrease.2 Economists, who focus on economic costs and benefits, are
generally more supportive of immigration than the general public.

Percentage of U.S. Labor Force That Is Foreign Born

SOURCE: FRED (http://research.stlouisfed.org/fred2/graph/?g=wrF).

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The Economics of Immigration
In many ways, the arguments about the economics of immigration are similar to those about
the economics of international trade. Economists typically reason that voluntary trade is mutu-
ally beneficial—if it were not, the trade partners would not pursue trade. Economists therefore
generally support free and open trade of goods and services across national borders. In a similar
way, economists think of immigration as mutually beneficial “trade” between immigrants and
their employers. And as with trade, both the immigrant workers and their employers generally
benefit. Not surprisingly, economists generally support free and open immigration.
Immigration increases labor resources, which increase the productive capacity of the econ-
omy. Currently, foreign-born workers make up 16.3 percent of the labor force (see the chart).
Stated differently, the increase in labor resources increases the economy’s ability to produce
goods and services. But how does immigration affect the average American? Once the costs
and benefits are weighed, economists estimate the annual economic gains to the native-born
population to be between 0.1 and 0.3 percent of gross domestic product,3 which might not seem
like a sizable gain but is significant when extended over a lifetime. Some of these benefits take
the form of lower labor costs for employers, lower prices for consumers, and increased employ-
ment opportunities for some workers. However, while the economy in general might be better
off, there are negative externalities, or cases in which third parties are negatively affected. In
the case of immigration, the concerns about negative effects are usually expressed by native-born
workers and taxpayers. These concerns are explained below.

Immigrant Workers: Substitutes or Complements?

One of the most important distinctions between workers is their skill level: Some workers
are more skilled than others. This is true of both native-born and immigrant workers. But in
addition to having skills that differentiate immigrant workers from each other, the skills of
immigrant workers also differ from those of the native-born labor force. Immigrant workers
are overrepresented at the extremes of the skills spectrum—there are many at the low-skilled
end of the spectrum and many at the high-skilled end. On the low-skilled end, 27 percent of
foreign-born workers in 2013 had less than a high school diploma compared with 7 percent of
the native-born population.4 At the high-skilled end, about 40 percent of U.S. PhDs and engi-
neers are foreign born.5
Immigrant workers can either be substitutes for native-born workers or complements to
them. When immigrant workers are substitutes for native-born workers, they compete for simi-
lar jobs. Using a simple supply and demand model, an influx of substitutable workers constitutes
an increase in the supply of labor, causing wages to fall for workers with similar skills. Because
many immigrants are low-skilled workers, economic studies have found that an influx of immi-
grants depresses wages for low-skilled native-born workers in the short run.6 And, because
many immigrants are also high-skilled, a similar substitution effect occurs for some high-skilled
workers.
However, when workers are complementary, an increase in immigrant labor can increase
job opportunities and wages for native-born workers. So, the low-skilled immigrant labor reduces
the cost of production and increases the output of those goods; this greater output increases
the demand for other, higher-skilled workers. For example, consider that immigrant workers
account for 22 percent of the construction workforce. They tend to pursue jobs in the construc-
tion industry that require less training and education but are areas where the industry has its

2
largest labor shortages—such as painters, drywall installers, and construction laborers.7 This
supply of immigrant labor has decreased the cost and presumably increased the number of
homes produced and sold over time. The increase in housing construction has increased the
demand for higher-skilled construction workers such as contractors, electricians, and plumbers
and increased the demand for manufactured goods such as air conditioners and appliances. In
some cases, immigrant labor has complemented native-born laborers by allowing them to move
into the labor force. For example, immigration has provided families with access to low-cost
child care. This has allowed more native-born women to enter the workforce.8
In the modern economy, high-skilled immigrants complement high-skilled native-born
workers by filling positions in the fast-growing science, technology, engineering, and math
(STEM) fields; they make up about 45 percent of medical scientists and 37 percent of computer
programmers.9 These workers fill positions in areas where native-born labor is relatively scarce
and positions that are often complementary to other STEM jobs. For example, Bill Gates has
stated in congressional testimony that Microsoft hires four additional employees to support
each high-skilled worker hired on a temporary work (H-1B) visa.10 In addition, high-skilled
immigrants appear to be more innovative than their native-born counterparts, which can boost
productivity and economic growth over time. Highly educated immigrants receive patents at
twice the rate of highly educated native-born workers. Immigrants also tend to be more entre-
preneurial; research indicates they are about 30 percent more likely to start a business than non-
immigrants.11 In fact, immigrants founded 25 percent of the U.S. high-tech startups between
1995 and 2005.12

The Effects of Immigrant Workers on the U.S. Federal Budget

Low-skilled and high-skilled immigrants also differ in how they influence the U.S. federal
budget. The United States has a progressive income tax, which means that those with higher
incomes pay a greater percentage of their incomes in taxes. Low-skilled workers typically earn
low wages and as such do not pay much in taxes, but they benefit from taxpayer-supported edu-
cation services, medical services, income subsidies, and other means-tested (asset- or income-
dependent) benefit programs. This results in low-skilled (low-income) immigrant workers
creating a net fiscal drain. Such programs function as a taxpayer subsidy to firms that hire low-
skilled workers and their customers. The firms, their customers (through lower prices), and the
immigrants are better off, while taxpayers bear the cost of providing the benefit programs. High-
skilled immigrant workers are likely to earn higher incomes—and therefore pay higher income
taxes—and qualify for fewer means-tested benefits. As a result, high-skilled immigrants are
more likely to generate a fiscal surplus. Their situation is not unlike that of their native-born
counterparts with comparable skills.

What About Illegal Immigration?

In 2010, slightly more than 1 million immigrants were admitted to the United States legally,
and the net inflow of illegal immigrants was at least 500,000.13 Economists who study immigra-
tion often do not differentiate between legal and illegal immigrants. However, noneconomists
draw a sharp distinction between these two groups: Most are supportive of legal immigrants
but very critical of illegal immigrants. The 2014 Gallup poll mentioned earlier also reported
88 percent of Americans worry at least a little about illegal immigration, and 93 percent report
that controlling the U.S. borders to halt the flow of illegal immigrants into the country is at
least moderately important.14 Despite these perceptions, recent research suggests that policies

3
that reduce immigration (legal and illegal) will also reduce job creation and the benefits that
would have accrued to native-born workers. This research argues that a policy of deportation
would have a negative effect on the employment opportunities of native-born workers, whereas
a policy of legalization would increase job opportunities.15

Conclusion
Immigration creates economic winners and losers. Winners include (i) employers who bene-
fit from lower labor costs, (ii) consumers who benefit from lower prices for goods and services,
and (iii) complementary workers who benefit from increased job opportunities and higher wages.
The losers are (i) substitutable workers who compete for the same jobs as immigrant workers (in
both low-skilled and high-skilled professions) and earn depressed wages as a result and (ii) tax-
payers who pay higher taxes to support means-tested benefit programs. There are many non-
economic factors involved in the issue of immigration; but, in terms of simply weighing the
economic costs and benefits of admitting additional workers, immigration is a net benefit. ■

NOTES
1 See Congressional Budget Office. “A Description of the Immigration Population—2013 Update.” May 8, 2013;
http://www.cbo.gov/publication/44134.
2 See Gallup. “Immigration,” pp. 1-2; http://www.gallup.com/poll/1660/immigration.aspx#1.
3 See Orrenius, Pia and Zavodny, Madeline. “From Brawn to Brains: How Immigration Works for America.” Federal Reserve Bank

of Dallas 2010 Annual Report, p. 10; http://www.dallasfed.org/assets/documents/fed/annual/2010/ar10.pdf.

4 See note 1.
5 See Mankiw, N. Gregory. Principles of Economics. Sixth Edition. Mason, OH: South-Western Cengage Learning, 2011, p. 387.

6 Economists agree that while immigrant labor influences wages in the short run, in the long run, once adjustments to the
capital stock are accounted for, the returns to capital and labor revert to their initial levels. Much low-skilled work would likely
be done offshore if immigrant labor were not available. When immigrant labor is available, transportation costs make offshore
options unattractive. Recent research suggests that immigrant labor is a more suitable substitute for offshore labor than native
labor. See Ottaviano, Gianmarco I.; Peri, Giovanni and Wright, Greg C. “Immigration, Offshoring and American Jobs.” CEP
Discussion Paper No 1147, Centre for Economic Performance, May 2012; http://cep.lse.ac.uk/pubs/download/dp1147.pdf.
7 See National Association of Home Builders. “Immigrant Workers in the Construction Labor Force.” April 1, 2013;
http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=200529&channelID=311.
8 See Furtado, Delia and Hock, Heinrich. “Immigrant Labor, Child Care Services, and the Work Fertility Trade-Off in the United

States.” IZA Discussion Paper No. 3506, Institute for the Study of Labor (IZA), May 2008; http://ftp.iza.org/dp3506.pdf.
9 See Orrenius, Pia and Zavodny, Madeline. “From Brawn to Brains: How Immigration Works for America.” Federal Reserve Bank

of Dallas 2010 Annual Report, p. 8; http://www.dallasfed.org/assets/documents/fed/annual/2010/ar10.pdf.

10 H1-B visas are nonimmigrant visas granted to U.S. employers to temporarily employ foreign workers in specialty occupa-
tions. See Kerr, Sari Pekkala; Kerr, William R. and Lincoln, William F. “Skilled Immigration and the Employment Structures of
U.S. Firms.” NBER Working Paper No. 19658. National Bureau of Economic Research, November 2013;
http://www.nber.org/papers/w19658.
11 See
Fairlee, Robert W. “Estimating the Contribution of Immigrant Business Owners to the U.S. Economy.” Small Business
Administration, Office of Advocacy Report No. 334, November 2008; http://archive.sba.gov/advo/research/rs334tot.pdf.
12 See
Wadhwa, Vivek; Saxenian, AnnaLee; Rissing, Ben A. and Gereffi, Gary. “America’s New Immigrant Entrepreneurs: Part I.”
Duke Science, Technology & Innovation Paper No. 23, January 2007.
13 See Borjas, George J. Labor Economics. New York: McGraw Hill, 2013. The number of illegal immigrants varies from year to

year and is very sensitive to changes in economic conditions between the United States and the source countries.
14 See Gallup. “Immigration,” p. 1; http://www.gallup.com/poll/1660/immigration.aspx#1.
15
See Chassamboulli, Andri and Peri, Giovanni. “The Labor Market Effects of Reducing Undocumented Immigrants.” NBER
Working Paper No. 19932. National Bureau of Economic Research, February 2014; http://www.nber.org/papers/w19932.

4
GLOSSARY
Complement (resources): Productive inputs that are used jointly with other inputs in the
production process.
Means-tested: Programs in which eligibility depends on the level of one’s current income or assets.
Negative externality: A negative side effect that results when the production or consumption of a
good or service affects the welfare of people who are not the parties directly involved in a
market exchange.
Substitute (resource): Productive inputs that can be used in place of each other.
 CentrePiece Winter 2007/08

What are the effects of increased immigration

on the wages and employment of people who
are already here, whether they are native-
born or earlier immigrants? Research by
Marco Manacorda, Alan Manning and
Jonathan Wadsworth investigates.

The labour market effects

of immigration
uring the past ten years there

D
Figure 1:
has been a significant increase Immigrant shares in male population of working age
in the number of individuals
coming to live and work in
25%  Graduates
the UK. By 2007, 12.5% of the working
 All men
Percentage of immigrants in the male

age population had been

 School leavers
born overseas, up from 8.5% at the end of 20%
working age population

the last recession in 1993 and 7% in the

mid-1970s.
15%
The addition to the UK labour force
over this period caused by the rise in the
number of working age immigrants from 10%
2.3 to 4.2 million is about the same as
that stemming from the increase in the
native-born working age population 5%
caused by the baby boom generation
reaching adulthood. The relative rise
0%
in immigrant numbers in recent years
has been greater among those with 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
higher levels of educational attainment Year
(See Figure 1).
These trends have stimulated a heated
debate about the effects of immigration, a United States, where researchers have that found in the United States. The most
debate that has taken on renewed vigour reached different conclusions. In a number convincing study – by Christian Dustmann
following the wave of immigration from of papers, David Card at Berkeley finds and colleagues – finds that immigration
the countries that have recently joined the little discernible impact of immigration on has no large discernible effect on the level
European Union and following evidence of the wages of native-born workers, while of native wages.
a loosening of the UK labour market. George Borjas at Harvard argues that At first glance, this finding is puzzling
Yet, despite immigration being at the immigration has a pronounced effect on since simple economic reasoning and
forefront of the political debate, research- the native wage structure. perhaps popular belief suggest that a
based evidence on its effects on the Evidence for the UK is scant and we large increase in labour supply – such as
labour market is far from conclusive. The should not automatically assume that the the one brought about by immigration –
largest body of evidence comes from the impact of immigration will be similar to should lower the wages and/or

21
CentrePiece Winter 2007/08

employment of workers in the recipient from natives or migrants, leaving the dimensions as well as the correlation
country. But this conclusion is based on differential unaffected, between these trends and the wages and
the often unspoken assumption that Conversely, if we find that the native- employment of natives and previous
natives and migrants are highly migrant wage differential is sensitive to migrants.
substitutable in production – that an the share of migrants in the population, Measuring migrants’ skills is not an
employer can easily replace a native-born and in particular if this differential easy task with UK data since the definition
worker with an equally skilled migrant increases as migration rises, this will be of qualifications varies between natives
worker. This need not to be the case and evidence of imperfect substitutability, and migrants, with large numbers of
it is therefore a matter for empirical potentially explaining why natives appear migrants being classified in official surveys
verification. to suffer few losses from migration. as holding unspecified ‘other
A simple test of the degree of To do this, our study focuses on men’s qualifications’. To cut through this
substitutability between these different labour market outcomes using micro-data problem, we measure completed
production inputs is the responsiveness of spanning the period from the late 1970s education in terms of the age at which
the wage differential between native and to the mid-2000s. Because it is well the individual left full-time education.
migrant workers with any given level of known that workers with different labour According to this metric, over the three
skill to labour force changes brought market experience and skills are imperfect decades of analysis, migrants have been
about by migration. The intuition behind substitutes in production, we decompose on average more skilled than natives and
this test is that if natives and migrants are the labour force into different groups increasingly so.
perfectly substitutable in production, we defined by age and education in addition This is shown in Table 1. The relative
would expect their wages to respond to migration status. We estimate the supply of skilled to less skilled labour has
similarly to changes in labour supply, be it trends in immigration along these grown more among immigrants. At the

The main labour market impact of

increased immigration to the UK is felt
by immigrants who are already here

Table 1:
Male immigrants and native-born workers in Britain
(five year averages)
1975 1985 1995 2005
Percentage share of university graduates among:
Native-born 6.0% 12.2% 15.4% 21.6%
Immigrants 9.9% 22.7% 32.9% 40.4%

Percentage wage gap between university graduates and school leavers among:
Native-born 12.3% 12.2% 16.4% 24.4%
Immigrants 25.7% 24.3% 29.6% 29.9%

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 CentrePiece Winter 2007/08

same time, the returns to education have force brought about by immigration over Further reading
risen faster for natives. A way to the three decades of our analysis are due
rationalise this is that the returns to to the inflow of skilled migrants. Because Brian Bell (1997), ‘The Performance of
education among each of these groups of this, our study is unable to shed much Immigrants in the United Kingdom: Evidence
respond to their own relative supply, light on what appears to have been a from the GHS’, Economic Journal 107: 333-44.
implying imperfect substitutability. recent increase in unskilled migration. This
Our estimates indicate that a 10% rise inflow might have rather different effects George Borjas (2003), ‘The Labor Demand
in the share of immigrants in the UK on the wage and employment structure of Curve is Downward Sloping: Re-examining
population is associated with an increase natives than the one estimated in our the Impact of Immigration on the Labor
in the native-migrant wage differential of research. Market’, Quarterly Journal of Economics
around 1.9%. We take this as evidence Indeed our analysis shows that 118: 1335-74.
that migrants and natives are imperfect unskilled natives are relatively more
substitutes in production. substitutable with respect to migrants George Borjas, Richard Freeman and
This finding is highly robust and than skilled natives, although differences Lawrence Katz (1996), ‘Searching for the
squares well with our other finding that between the two groups are not Effect of Immigration on the Labor Market’,
the extent of occupational segregation statistically significant. More data and American Economic Review 86(2): 246-51.
between migrants and natives in the UK longer time series are needed to estimate
labour market is sizeable. We show that this effect precisely. David Card (1990), ‘The Impact of the
between 20% and 34% of immigrants Mariel Boatlift on the Miami Labor
would have to change jobs to match the Market’, Industrial and Labor Relations
occupational distribution of employment Review 43: 245-57.
among natives.
Interestingly, we find that migration Newly arrived migrants David Card (2001), ‘Immigrant Inflows, Native
particularly affects wage differentials bear disproportionately Outflows, and the Local Labor Market
between natives and recent migrants as the cost of increased Impacts of Higher Immigration’, Journal
well as those who migrated in adulthood. migration in terms of of Labor Economics 19(1): 22-63.
It appears that newly arrived migrants bear lower wages
David Card (2005), ‘Is the New Immigration
Really So Bad?’, Economic Journal 115:
F00-323.

disproportionately the cost of new

migration inflows. This cost manifests itself
in terms of lower wages rather than David Card and Thomas Lemieux (2001), ‘Can
employment losses. This article summarises ‘The Impact of Falling Supply Explain the Rising Return to
We use these estimates to determine Immigration on the Structure of Male Wages: College for Younger Men? A Cohort-based
the effect of increased immigration on the Theory and Evidence from Britain’ by Marco Analysis’, Quarterly Journal of Economics
level of native wages. Our calculations Manacorda, Alan Manning and Jonathan 116(2): 705-46.
show that this effect is negligible. This Wadsworth, CEP Discussion Paper No. 754
result depends on the imperfect (http://cep.lse.ac.uk/pubs/download/ Christian Dustmann, Francesca Fabbri and
substitutability between migrants and dp0754.pdf). Ian Preston (2005), ‘The Impact of
natives coupled with the fact that Immigration on the UK Labour Market’,
migrants still account for a relatively low Marco Manacorda is reader in economics at Economic Journal 115: F324-41.
share of the workforce. Queen Mary, University of London and a
Our conclusion does not imply that research associate in CEP’s labour markets Gianmarco Ottaviano and Giovanni Peri
immigration to the UK has no costs, but programme. Alan Manning is professor of (2006), ‘Rethinking the Effects of Immigration
rather that the effects on groups other economics at LSE and director of CEP’s on Wages’, National Bureau of Economic
than immigrants themselves has been, on labour markets programme. Jonathan Research Working Paper No. 12497.
average, small. Wadsworth is at Royal Holloway, University
As a caveat to our conclusion, recall of London and a senior research fellow in
that most of the changes in the labour CEP’s labour markets programme.

23
Name:………………………………....

“The Economics of Immigration: A Story of Substitutes and Complements”

Case 1: The USA

Exercise 1: After reading the first article on the US immigration, answer the following questions.

1. How does the skill level of immigrant workers differ from that of native-born workers?

2. How does an increase in immigrant workers with substitutable skills influence wages of native-born
workers?

3. How does an increase in immigrant workers with complementary skills influence wages of native-born
workers?

4. How do immigrant workers influence the U.S. federal budget? What are the main reasons?

5. Overall, is immigration a positive or negative for the economy?

1
Name:………………………………....

. Case 2: The UK
Exercise 2: After reading the second article related to the UK immigration, answer the following questions.

1. How does the skill level of immigrant workers differ from that of native-born workers in the UK and what is the
difference with respect to the USA ?

2. What is the effect of immigration on wages of native-born workers in the UK?

3. How do immigrant workers influence the U.K. public budget? What are the differences between the UK and the US?

4. Taking into account the US and the UK cases, do you consider that immigration is positive or negative for the economy?

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