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Warning: Immigration Can Seriously Damage Your Wealth

Page 4 of 10

The gains and losses of migration (‘the immigration surplus’)

The NRC work also made a lengthy analysis of the impact of immigration on factors of production.

The NRC study is written in an elegant and balanced style, and, not surprisingly, is very often quoted in immigration studies in the USA.

It states that ‘an increase in immigration flows will lead to higher income for productive factors that are complementary with immigrants, but lower incomes for factors that compete with immigrants’.[12]

It then demonstrates convincingly that the theoretical effect of an immigration that is without capital and that has skills different from those of the natives is to create a net increase in native GDp. It is most important to note that the NRC calculation of the ‘immigration surplus’ specifically assumes that the new labour requires no wealth! – no houses, schools, water supplies, etc.

This process is achieved by reducing the wages of natives and increasing returns to capitalists and complementary labour. As a side effect, there is an immigration surplus created by the arrival of immigrants who do not retain all the product they create – some of this product is diverted to capital or complementary labour. The technical argument for the gains and losses of immigration (or the ‘immigration surplus’) is contained in Appendix A.

But calculations by the NRC, Professor Borjas and others show that this immigration surplus, based on the then current immigration labour force in the USA, is very small ($1–10 billion per annum for the US economy in 1996, when the US GDP was $7,000 billion) and that there are substantial distribution effects away from native labour, which competes with immigrants, to capital and complementary labour.

However, the NRC emphasized that ‘It is only because immigrants and native workers differ from each other that immigration yields a net national gain.’[13]

The NRC also examined the case where immigrants have the same skill distribution and capital as natives, and found no gain for natives in this scenario:

If immigrants have exactly the same skill distribution as domestic workers…and if they have brought sufficient capital with them to maintain the US capital/labor ratio, then natives will neither benefit nor lose from immigration. In this case, all inputs and national output will increase by the same amount and the wages of all workers will remain constant.[14]

It is clear from this quotation, with its reference to output, that the NRC only considers capital as being the ‘tools of production’ and does not consider wealth.

On the face of it, the NRC conclusions appear astonishing and perverse. How can the economic well-being of American natives increase as a result of an influx of unskilled and capital-less workers, while it does not increase following an influx of workers with the same skills and capital as native Americans? In fact, the explanation for the apparently perverse outcome is that the NRC ignores the effects on wealth. (And, of course, for a full analysis it is necessary to consider the fiscal and cultural effects of migration, which are not treated here. The most likely economic benefit of migration – the one-off provision of nurtured and educated adults from another economy – falls within the fiscal sphere.) This paper will endeavour to address the contradictions.

The NRC also points out that:

if the children of immigrants are just like the children of the native born, we are back to the case in which all we are doing is scaling up the population and economy with no impact on per capita incomes. A generation of increased immigration then can alter long-term growth paths only if generational assimilation, both economic and demographic, is never complete.[15]

This careful study, therefore, concludes that the immigration of those with the same skills and capital as natives does not benefit natives. It also concludes that, as immigrants come to be like the native born, all that happens is that we see an increase in population and GDP, with no effect on the per capita GDP of natives.

The only economic benefit of present immigration in the USA comes about if immigrants are different from native workers, cause a fall in some native wages and, as a by-product, produce $1–10 billion net GDP gain for natives overall, both to complementary labour and capital, reducing each year as the immigrants assimilate. The NRC analysis does not consider the effects of such immigration on wealth.

It is, of course, possible to envisage immigrants who have higher skills than the natives and who bring in more capital per head with them than the natives possess. In this case, the overall per capita GDP of the new, combined native/immigrant population will rise, compared to the pre-existing native per capita GDp. Such immigrations are typical of the settlement of the Europeans in the New World and Australasia, or of modern Israel.

So, the NRC’s findings can be summarized thus:

· The current influx into the US of immigrants whose skills or capital are different from those of natives creates a very small net addition to the per capita GDP of natives (about 0.10 per cent). This analysis of the net gains of immigration ignores the required provision of wealth to immigrants.

· An influx of immigrants whose skills and capital are the same as those of natives does not increase the per capita GDP of natives.

· The immigration surplus is created because of the difference between the skills of natives and of immigrants. As these shrink, so the benefit to natives’ per capita GDP shrinks and eventually disappears.

The logic of the above is that, once the difference between natives and migrants disappears, there is no further benefit to natives, and therefore there can be no long-term situation where the per capita GDP of natives is increased by immigration, unless the immigrants have more skills and capital than natives.

As the first and second finding appear contradictory and perverse, it is necessary to examine why both propositions are true. The explanatory link is to be found in an analysis of the effects of immigration on wealth and capital (see below).

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