CHAPTER 2 SOME GENERAL THEORY OF IMMIGRATION'S CONSEQUENCES An Introductory Note On The Literature Trade Theory Versus Immigration Theory Discussion AN INTRODUCTORY NOTE ON THE LITERATURE The economic literature on the effects of immigration upon natives is remarkably sparse, as may be confirmed by inspection of standard texts on international trade. Rosenzweig (1982) avers that the complexity of the subject, and the large number of factors that may enter into the analysis, may explain the paucity of work on the topic. The only systematic treatise is that of Isaac (l947), which canvassed and organized what had been written on the subject four decades ago. Competent as it is, to the present-day reader that book seems lacking in several respects. It devotes considerable attention to a great many topics we now consider unimportant. It does not consider many of the issues we consider important, including most of those examined at length in this book. It contains almost no empirical evidence bearing on any of the topics discussed. And it attempts no integrated assessments offering answers to policy questions about the quantity of immigration. These deficiencies are not a criticism of Isaac's valiant effort, but rather an indication of how long ago in the history of economics the work was done. And since then, despite the manifest social and political interest in the field, the literature has continued to be thin, as the reader will see in the discussion of individual topics that follow. The best single review of the theory still is Reder's 1963 article, in which the standard issues are stated clearly and sensibly. For our purposes here, however, that article has two drawbacks: First, it proceeds on the assumption that immigrants to rich countries from poorer countries have less education and skill than the rich-country work force and therefore compete with the lower-income natives, which is not the representative case in the U.S. on average, though it fits much of the European experience in recent decades. Second, it does not consider such dynamic and transformational forces as the effects of immigrants upon workplace productivity and economic flexibility, forces which are of great importance. Other general treatments of the topic include an article by Spengler (1956) which sensibly set the problem in the context of standard economic theory. Grubel and Scott (1977) deal with international migration in a wide-ranging fashion; by being willing to go outside the standard framework they provide us with many rich insights. Jones and Smith (1970) attacked the subject in a sensible and useful fashion, in the context of a pathbreaking empirical study of New Commonwealth immigration into Great Britain. The recent policy-oriented review of the topic by Cafferty et.al. (1983) is capable and reasonable. The Select Commission on Immigration and Refugee Policy also should be mentioned because it produced much useful material. And with respect to data and governmental reports, Canada and Australia lead the world in quantity and quality. Ethier (1984) systematically examined migration in the light of pure trade theory. His work helps establish the potential contributions of that body of theory, as well as the limits to those contributions. A point to be developed below should be noted immediately with respect to Ethier's analysis: He deals only with people who work at producing goods that are internationally traded -- the canonical cloth and wine. He does not analyse either a) the case of people who work at producing non-traded goods such as bus travel and restaurant food or work in organizations such as IBM where the organization as a whole cannot easily move, yet who may be thought of as an input to production just as are the people in Ethier's analysis; or b) the case of people whose persons embody the goods, such as entertainers and journalists and medical workers, and who are therefore best thought of as outputs rather than inputs. A large proportion of immigrants would seem to fall into these two categories; the analysis given by Ethier does not apply to them, in my view. In Ethier's analysis of people as inputs to the production of traded goods, the reason that people move between two countries is either that the countries have (by assumption) recently opened trade and hence are not yet in equilibrium and therefore the relative endowments of capital and labor differ between the two countries, or else there is an absolute production-cost difference between the countries which causes different wage rates. (The Ricardian model may here be seen as a special case of the Heckscher-Ohlin-Samuelson model.) For the most part, such analysis of people as labor input is the same as the analysis of capital as input. The migration occurs in response to the difference in wage rates, and continues until a wage-rate equilibrium is reached (at wage-rate equality under most sets of assumptions). Migrant agricultural labor in the states of the U.S. bordering Mexico would seem to fit this model, although the same crops might just as well be grown on the Mexican side of the border, and the causes of the location of production in one country or the other are not immediately obvious. There has, however, been considerable time for pairs of countries such as the U. S. and the U. K. to move most of the way toward such an equilibrium between them. One might argue that immigration restrictions prevent an equilibrium from being reached. But prior to 1924 there were few restrictions on immigration into the U. S., and quotas from the U. K. to the U. S. have not been a tight constraint. Yet migration has not equalized wages across the two countries in such fashion as to remove the reasons that cause some persons to migrate from the U.K. to the U.S. Ethier (1985) has also offered an interesting analysis of European-style temporary migration which makes sense of the fact that guestworkers are said to be complementary to native workers when they are desired, but are said to be substitutes when they are no longer wanted. Because he deals with labor as essentially composed of large homogeneous sectors, however, his analysis is not helpful in understanding the sort of international migration envisaged in this book. In contrast to the study of its consequences the study of the determinants of migration -- a topic which is mostly outside the purview of this book -- has received considerable scholarly attention (Ravenstein, 1889; Lee, 1966; Sjaastad, 1962; plus a large volume of recent empirical work. But see Thomas, 1954, Chapters 1-3, for a review of the major writings of Classical and modern economists with respect to such questions as whether free trade and innovation lead to international migration, and the importance of mobility between occupations and between "classes." He concludes that the subject was not much advanced by those writings.) And the topic seems sure to receive even more attention in coming years as economists interested in the family and in labor shift their attention to this issue and away from studies of the determinants of fertility and mortality, topics which share common theoretical and empirical investigative methods with immigration studies. Whether the increasing study of determinants will turn out to be a complement or a substitute for the study of the consequences remains to be seen. The explanations of migration boil down to the proposition that the expected gains from the move outweigh the expected costs of the move. That is, the market value of the individual must be greater in one place than in another, over and beyond transaction costs. It follows, then, that to understand inter-country migration we must know why people are different in value in one country rather than in another. And we require an explanation which does not require that the countries be out of equilibrium due to the recency of trade or migration opening up between them. Most of the research on the determinants of migration does not speak to this question, however, but rather simply assumes some set of characteristics of the individual, and of the origin and destination countries, that make a move profitable. That is, most research concerning the determinants of migration focuses on the reasons that randomly-chosen individuals move, rather than the reasons why there may exist systematic gains to migrants, and hence net migration from one place to another. Most of that body of research is composed of microeconomic studies of individuals moving from one part to another of a country such as the U.S. or Canada. Immigration and modern domestic migration differ greatly in their respective ratios of net to gross migration. For example, the rates of in-migration and out-migration for a sample of cities is as follows: Annual rate per hundred residents ____________________ Metropolitan In- Out- area migration migration ___________ ____ ____ Akron 6.9 7.4 Albany 7.0 6.2 Albuquerque 14.4 14.8 Allentown 5.7 6.1 Atlanta 11.4 11.4 Bakersfield 15.1 15.1 Baltimore 5.3 5.9 Birmingham 8.6 10.4 Boston 5.8 6.3 Bridgeport 8.0 8.0 Buffalo 4.8 5.9 Source: Morrison and Wheeler, 1978, Table 1. The ratio of gross to net migration obviously is very large internally, whereas international immigration is mainly one-way. (These remarks do not pertain to black migration from the rural South, or earlier white migrations from farm to city.) These data fit with the variations in price structures being relatively small among various regions of countries such as the United States, compared to the variation in price structures among countries. The determinants of domestic migration are largely those that reflect imperfect matching of individual's specific abilities with the characteristics of specific jobs; the match can be better west or east, north or south, for most persons in most occupations most of the time, in addition to such extraneous factors as climate. That is, even if the net migration between two areas of the U.S. is zero, gross migration in both directions may still be considerable. And the causes of that gross migration are the search for, and the execution of, improved matching. Individuals A and B may exchange jobs in two states and thereby produce a better match of individuals with jobs, but this sort of migration and its determinants -- which constitutes most of the contemporary internal migration in the U.S., as shown by the fact that gross migration is large relative to net migration -- is not of interest from the point of view of this book, because the citizens of neither place are affected except by a general increase in efficiency produced by the improved matching. This explains why almost all research on internal migration focuses upon the personal characteristics of the migrants, and upon distance, which is symmetrical rather than one-directional. A by-product of the theory presented below is that it helps distinguish between international migration to the United States, and contemporary internal migration within the United States (as distinct from the rural-to-urban migration of the past). Broad factors such as differences in average income, as related to the structures of prices and wages, help us understand international migration. This is in contrast with the myriad of relatively small "random" factors related to individual employers and prospective employees, rather than to the economic environment generally, which explain internal migration. This is why individual characteristics have not been the focus of past research on international migration. * * * The next section of this chapter examines what the "pure" economic theory of trade has to say about the effects of immigration upon natives. The surprising conclusion is that the standard theory of international trade -- almost the only brand of "pure" theory that apparently bears upon the matter -- is not at all relevant. Migration does not confer the sort of benefits to the consumer that trade in goods and capital movements provide. This section is offered as a new theoretical contribution. Other theory is brought to bear upon more specialized topics in other chapters. For example, in Chapter 7 marginal productivity distribution theory enters into the analysis of the effects of immigrants through the utilization of capital. Some new theoretical approaches to the effect of immigration upon unemployment may be found in Chapter ll. And the effect of remittances is analyzed in an afterword to Chapter 7. Some other theoretical issues are touched on in the discussion section of this chapter. TRADE THEORY VERSUS IMMIGRATION THEORY The aim of this section is not to develop theory upon which we shall build later, but rather to clear the decks of theory that is thought to be useful but is not. The common view is that international trade and international migration are similar phenomena, to be analyzed with the same general theory, the Heckscher-Ohlin-Samuelson theory of factor-price equalization that considers movement of workers and movement of capital to be alternative routes to the same production end. But the analogy is not sound. International trade and international migration are theoretically different phenomena rather than similar. Trade theory is necessarily silent about migration, as is confirmed by texts on that subject. The gains from trade are quite unlike the gains from migration. Consumers do not obtain the same sort of gains from the international movement of people as they do from international exchange of goods, though there are important gains from immigration to the countries of destination through mechanisms other than trade-like effects. And the "explanation" of why people move is different from the explanation of why goods move. A numerical example helps illuminate the issue. Consider first the more difficult case of an "occupationally unbalanced" migration, that is the immigrants not in the same proportions as the workforce in the country of destination. Let just a single barber move between countries ("U.S." and "India") which have only barber and chicken-farming sectors. The analysis proceeds in two stages, the first stage before the destination economy fully adjusts, and the second stage after it reaches its new equilibrium.1 Assume that initially the "U.S." and "India" each have 400 man-hours per week available to the economy and that they produce chickens and haircuts as in Table 2-1. Table 2-1: Prior to migration U.S. India Total Haircuts 200 200 400 Chickens 600 400 1000 One man-hour produces 1 haircut in both countries, but produces 3 chickens in the U.S. and 2 chickens in India. One haircut is worth 3 chickens in the U.S. and 2 chickens in India. Now let one barber migrate, shifting 40 man-hours per week of barbering. In the first adjustment stage, the migrant barber forces U.S. haircut prices down enough to create demand for his services, but as yet no native barbers have left the trade. The opposite happens in India. Production in the two countries is as shown in Table 2-2. Table 2-2: After migration but before adjustment U.S. India Total Haircuts 240 160 400 Chickens 600 400 1000 Total world production is the same as prior to migration, so there clearly is no total gain in consumer welfare. The barber is better off, however, because he/she is paid at a higher price than before -- more than 80 chickens-worth though less than 120 chickens-worth --which explains why the migration takes place. After some time, the shift in prices leads to occupational adjustments. There is no reason to expect the fully-adjusted occupational proportions to be different than before the migration. Hence the structure of production will be as shown in Table 3, and prices should therefore return to what they were prior to the migration. Now there is an increase of 20 chickens in total world production, but all the increase goes to the migrant barber, in connection with the higher price of haircuts that he gives in the U.S., and represents the increase in his/her standard of living. But everyone else's standard of living is as before. So we distingish three groups -- the natives of the origin country who do not move, the natives of the destination country, and the immigrant. The first two groups do not benefit from the move, whereas the immigrant does. Table 3-3: After adjustment to the immigration U.S. India Total Haircuts 220 180 400 Chickens 660 360 1020 To repeat, trade-induced shifts in prices and production benefit consumers in both countries, whereas the shifts due to international migration benefit only the migrant. And after full adjustment, international migration leaves prices as before, whereas trade in goods alters the price structure. Capital has been omitted from the model for simplicity. If migrants come to the destination country in the same proportion as the existing labor force -- not wildly different from reality in the U.S. -- the entire process can be seen as a single stage. Prices then simply remain unchanged, the total economy expands in proportion to the migrants, natives' incomes are unchanged, and immigrants obtain a higher standard of living. This discussion does not answer the question of why production of the tradeable good is higher in the destination country. There are many possible explanations, just as in trade theory. But this question is not part of the matter at issue here. Trade theory refers to goods -- oranges, chickens, autos, computer programs -- which can be sold separately from the services of the persons who own the means of production of these goods. In contrast, the benefit which the migrant confers upon the person or organization that pays the migrant for her/his services cannot be delivered at a distance. That is, trade theory deals by definition with internationally traded goods, while international (economic) migration is a response to the fact that that person's output cannot be directly sold at a distance. It should not be surprising, then, for trade theory to be silent about the immigration that takes place. Standard trade theory does explain why migration need not take place under certain conditions. But it does not explain why the migration that does take place should occur. To put the point differently, people either migrate internationally or they do not. One class of people who (in trade theory) do not immigrate are those engaged in the production of internationally traded goods, whose wages are thereby equalized in all relevant countries (at least the wages are equalized in principle, though by another principle the equality of wages is not testable empirically); they therefore have no motive to move. Another group of people choose not to migrate because their earnings are greater in the country of origin than in the country of destination. But some people do migrate internationally, even some whose skill in their professions is average. Factor-price- equalization theory provides no motive for these people to migrate. And most important, there is no gain to non-moving natives similar to the Ricardian wine-and-cloth increase in total production whose benefit is realized by native consumers in both countries. The statement above seems very unconvincing at first, and requires a long paper (Simon, 1987?, available upon request) to carry the argument. Because the issue is not central to this book, the matter may safely be left at this point. DISCUSSION 1. One may question whether there will not inevitably be some changes in relative prices due to the immigration of a disproportionate number of barbers, say, because of the very argument adduced here -- that some occupations need not immigrate because there are no gains to their immigration. Inevitably some such distributional effect will occur, and it is especially obvious in the case of self-employed immigrants who work alone, e.g. doctors and domestics. The market for medical services in the United States in recent years has undoubtedly been affected by the influx of foreign physicians. And this is not welcome to U.S. physicians; there will be an obvious loss to the previous sellers of that service who were previously sufficiently efficient to reap some producer surplus, as well as the more difficult-to-calculate loss to the previously marginal producers who are forced out of the business. (And the benefits gained by the immigrants are not an offset to the latter's loss, given that the context of our discussion is the welfare of natives.) 2. Another "conventional" channel through which immigrants can affect the welfare of nationals is the dilution of capital. This effect is discussed in Chapter 7. In private industry, the Borts-Stein-Berry-Soligo analysis points to gains to "owners of capital" being slightly larger than losses to "workers," for a slight net social gain, but these effects are small compared to gains to trade, and also compared to other effects of immigration. As the stock of capital per worker returns to what it would have been in the absence of immigrants, the situation will be exactly what it would have been without the immigrants. That is, the immigrants would then cause the economy to be larger, in proportion to the amount of immigration, but all other magnitudes would be the same. Theory for publicly-used capital also is given there, a larger effect than the above but still much smaller than other effects of immigration. 3. Another "classical" channel through which immigrants have temporary distributional effects is consumer prices. For simplicity imagine a self-employed immigrant who works alone, e.g. a doctor or domestic. By increasing the supply of labor in a given industry, the immigrant pushes down the price of that service. This bestows some additional consumer surplus upon all consumers down to the marginal person who would not have bought at the old price. (At the same time there will be a loss to the previous sellers of that service who were previously efficient enough to reap some producer surplus, as well as the more- difficult-to-calculate loss to the previously marginal producers who are forced out of the business. And the benefits gained by the immigrants are not an offset to the latter loss, given the context of our discussion as being the welfare of natives.) This situation might profitably be analysed more carefully, but I will not pursue it here because the size of the effect is likely to be small relative to other effects analysed in this book. If immigrants are distributed evenly throughout the occupations, and if their consumption patterns are similar to those of natives, the wages and prices of goods will be exactly what they would be without immigrants, aside from the effects due to the temporary dilution of the stock of capital. And as the per-worker stock of capital and the occupational mix return to what they would have been in the absence of immigrants, the situation will be exactly what it would have been without the immigrants. 86-80 Theory2 12/8/87 FOOTNOTES 1The numbers and some of the language in this example are adapted from a letter by Ivy Papps, who kindly granted me permission to do so, though his argument was different than mine. 86-80 Theory2 12/8/87