The other economic question: Immigration's impact on the economy by Arthur Sweetman

Immigration, Labour Market Outcomes & Economic Impacts

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The other economic question: Immigration's impact on the economy

by Arthur Sweetman

for Metropolis – CSPS webinarDec. 2008


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Structure of the talk

1. Background1. Dramatic decline in labour market outcomes 2. Arrivals and departures3. Intergenerational and “conditional” earnings

2. The economic impact of immigration on the domestic economy

1. Traditional Canadian conclusions2. Several key concepts (& a few controversial

results)

3. Conclusions


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PART 1: BACKGROUND 1.1 Dramatic Decline in Labour Market Outcomes There has been a decline in labour market

earnings for recent arrival cohorts There is a substantial rate of economic

integration, but the time required to “catch-up” with the Canadian born is increasing Close to, or beyond, retirement for many

Even if catch-up occurs, life-time earnings difference is substantial


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-.8

-.6

-.4

-.2

0d

iffe

ren

ce in

log

ea

rnin

gs

0 1-5 6-10 11-15 16-20 21-25 26-30 31-35years since migration

c6670 c7175 c7680 c8185c8690 c9195 c9600

Cohort

Source: Canadian Censuses 1981 through 2001

Difference in log earnings of females age 25-59

Warman and Worswick (2004)


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-.8

-.6

-.4

-.2

0d

iffe

ren

ce in

log

ea

rnin

gs

0 1-5 6-10 11-15 16-20 21-25 26-30 31-35years since migration

c6670 c7175 c7680 c8185c8690 c9195 c9600

Cohort

Source: Canadian Censuses 1981 through 2001

Difference in log earnings of males age 25-59

Warman and Worswick (2004)


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Having incomes below the low income cut-off (LICO) is increasingly common for immigrants

Pre-tax, Post-transfer Low-Income (LICO) Rates

101214

16182022

2426

1980 1985 1990 1995 2000

Year

Per

cen

t

Not Cdn-Born

Cdn Born

Business Cycle Peaksin 1980, 1990 & 2000

Source: Statistics CanadaPicot & Hou (2003)


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Post 2000? Did Outcomes Improve? Most analysis uses 2000 census

We had hoped that labour market outcomes would improve

But, they did not

Arguably, the decline continued & then a return to 2000 levels


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Low-income rates, 1992-2004: Recent immigrants and

comparison group aged 20+ (Note Scale)

0

10

20

30

40

50

60

Low

- incom

e ra

te

Comparison

Immigrants in Cda <= 10

Immigrants in Canada 1 full year

Note: Comparison group: Canadian born plus immigrants more than 10 years Source: Statistics Canada, Picot, Hou and Coulombe, 2007

2000 = census year


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1.2 Related background issues

Arrivals Departures Generational look at who is in Canada

Earnings in a more complex framework By generation With and without adjusting for observable

characteristics


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ArrivalsCount: Permanent Residents by Immigration Class

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year

Num

ber

of

People

Family class

Economic immigrants

Refugees

Other immigrants

Source: CIC, Facts & Figures


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Departures (Are immigrants staying?)

Retention rates for males age 25-35 at landing

Source: Statistics Canada, Aydemir and Robinson, 2006


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1.3 Generational Population Shares (%)

Sample is aged 25-65, Cdn 2001 census, US 1998-04 CPS “3rd Generation Vismin plus” includes those who self identify as visible

minorities, aboriginals and citizens at birth born outside of Canada Source: Aydemir and Sweetman (2008)

Immig2nd Gen

3rd GenNon-

Vismin

3rd Gen

Vismin plus N

US 14.6 6.0 63.7 15.7 304,165

Cda 22.6 14.3 60.1 3.0 814,054


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(Log) Earnings differences, Males (Females are similar)

5 6 7 8

imm<=11 0.184*** 0.088*** 0.027 -0.018[0.022] [0.021] [0.022] [0.022]

imm>=12 -0.356*** -0.449*** -0.491*** -0.517***[0.014] [0.014] [0.017] [0.017]

Gen2 Vars Yes Yes Yes YesYears of School 0.096*** --- 0.086***

[0.001] [0.001]2 Marital Status vars No No Yes Yes4 Ethnicity vars No No Yes Yes4 or 5 Urban vars No No Yes YesState/Prov Indicators No No Yes Yes

Canada

Age controls in all regressions. Source: Aydemir and Sweetman (2008)


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(Log) Earnings differences, Males (Females are similar)

5 6 7 8

Gen2-Mom 0.133*** 0.059** 0.001 -0.045*[0.024] [0.024] [0.024] [0.024]

Gen2-Dad 0.077*** 0.009 -0.042* -0.082***[0.022] [0.022] [0.022] [0.022]

Gen2_Both 0.189*** 0.087*** -0.001 -0.055***[0.017] [0.016] [0.017] [0.017]

Years of School 0.096*** --- 0.086***[0.001] [0.001]

Immig Vars Yes Yes Yes Yes2 Marital Status vars No No Yes Yes4 Ethnicity vars No No Yes Yes4 or 5 Urban vars No No Yes YesState/Prov Indicators No No Yes Yes

Canada

Age controls in all regressions. Source: Aydemir and Sweetman (2008)


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Overall The big policy story is that there has been a

remarkable decline in the labour market earnings of recent immigrant arrival cohorts The “entry effect” has increased dramatically The “integration rate” appears to have increased, but the

“catch-up” time is much longer than previously This has lead to a substantial increase in poverty for new

immigrants

The decline appears to be larger when control for the observable characteristics of the immigrants (esp., age, education)


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PART 2: Immigration’s economic impact on the domestic economy Little research on this for Canada Some US and other work

Some international lessons, but, not possible to simply apply other country’s results to Canada

SUMMARY: Most analysts suggest that immigration’s impact on GDP/capita is probably positive, but quite small (and some say potentially negative)


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2.1 Two traditional views – differ on direction, but agree that any impact is small in magnitude Macdonald Commission research overview

said:

“The broad consensus is that high levels of immigration will increase aggregate variables such as labour force, investment and real gross expenditure, but cause … real income per capita and real wages to decline” [Marr and Percy, 1985, p 77]


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The Economic Council of Canada (Swan et al. 1991) was more positive on some dimensions and concludes: “In contrast to previous investigators in

Canada and Australia, we do find that immigration enhances economic efficiency within the host community. The effect flows almost exclusively from the greater size of the population that immigration brings.… the gross efficiency gains are positive but very small”


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What is at issue in economic context? Traditionally, economic “impacts” have been

viewed as the value to those already in the country (Canadian born and previous immigrants) of new immigration

Alternatively, (though not taken up here) could look at impact of immigration on new immigrants, or on subset of the population


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2.2 Some key ideas

1) Economic vs. social costs/benefits 2) Aggregate (e.g., GDP) vs. individual (e.g., GDP/capita)

costs/benefits 3) Economies of scale in production4) Complementarities vs. substitutes in production

1) beneficial spillovers vs. displacement

5) Demographics (baby boom aging) 6) Fiscal/tax implications 7) Product market implications 8) International trade implications

1) Also other issues (e.g.,) 1) Supply of physical capital2) Geographic distribution


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2.2.1 Economic vs. Social/Cultural Impacts Note that an impact is a change from what

would otherwise have been the case E.g., How much more are people earning

because of new immigration? Distinct question from “how much are people

earning?” Very difficult question to answer

The focus today is on economic issues BUT, could alternatively look at, for example,

social and/or cultural impacts


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2.2.2 Absolute versus per person (or per capita) Confusion between the impact of immigration on the aggregate

size of the economy, in contrast to the impact per capita Consider GDP (not ideal measure, but …)

Immigration clearly has an impact on the total size of the Canadian economy GDP increases as more people are economically active

However, most people care about GDP/capita That is, the standard of living of Canadians Future immigration’s impact on the standard of living of those already

in the country is not well understood Probably small effect Economic impact is more than labour market earnings (eg price of goods)

Distribution of different impacts across the population Individuals experience very different economic impacts


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2.2.3 Economies of scale in production (key traditional economic benefit of immigration) IDEA: Holding the structure of the economy

constant, what happens when its size is increased? Immigration is, of course, never a “pure” scale effect

Most observers think constant returns to scale (CRS) is most reasonable today No benefit or harm from modest changes in size Increased global trade decreases need for local markets Personally: perhaps still small benefits from scale for

Canada Implies no (or little) economic benefit from “pure”

scale increases


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2.2.4 Benefits from Compositional Changes Most observers think that any economic benefits

derive from beneficially altering the composition of economic factors of production

Want complementarities (as opposed to substitutes) in production (e.g.,) DIFFERENT Age distribution Different skill distribution (filling holes when/where

shortages) Education, trade expertise, entrepreneurship But, stopped (now restarted) occupational targeting Physical/financial capital

Want (net) positive externalities


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If structure of new immigrant flows too similar to existing stocks (esp. where no shortages), then general equilibrium effects imply some displacement of existing resources may occur Some concern about new factors of

production reducing the value of existing factors, or changing their relative value A large inflow of skilled workers might require a

large amount of complementary physical capital to be productive – if physical capital not fast enough in adjusting, could alter short run capital/labour ratio and increase economic return to owners of physical capital relative to human capital (Beaudry and Green)


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Displacement in the labour market Methodologically difficult question to address In-country geographic mobility may undo “local”

effects so that immigration has national wage impacts

Controversial Canada-US-Mexico study finds a 1% increase in the immigrant population depresses wages 0.3 to 0.4% (Aydemir & Borjas) But, uneven across skill groups

E.g., New high skilled workers likely mostly substitute for existing high skilled workers (may complement low skilled workers) – wage effects follow

New domestic entrants into the labour market are, on average, also highly skilled


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2.2.5 DEMOGRAPHICS - Immigration’s effect on the demographic structure is very modest Immigration can, clearly, be quite effective at

increasing the size of the population/ labour force Less effective at changing the composition/structure Even doubling current immigration rate would have

relatively small impacts on the age distribution over long periods

However, (though neither has major impact) As the Canadian population ages impact might grow

But, new immigrant average age is also increasing Could alter policy to focus toward younger immigrants

Age densities for Permanent residents, 2001

0.0

1.0

2.0

3de

nsity

0 20 40 60 80age

Immigrants Non-immigrantsRecently landed immigrants, 1991-2001

Source: Author’s calculation from the 2001 Canadian Census PUMF.


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2.2.6 Fiscal/Tax issues

Very little is known (Good area for future research)

New immigrants inherit share of outstanding flow of costs (e.g., existing government debt), and also share of benefits (e.g., natural resource endowment) Not clear how this balances on the margin

Taxes and transfers Lower immigrant earnings imply lower taxes and greater

social transfers (Devoretz & Pivnenko) May be unexpected redistributional effects

US taxpayers in states with high fractions of immigrants do not benefit, whereas those in states with few immigrants do (costs local; benefits national)


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2.2.6 Product Market Effects

Even less is known than on fiscal side Some arguments that were it not for

immigration: Entire industries would not exist (or would be

dramatically smaller) Product market prices would be a lot higher for

some goods But, unclear how this interacts with international trade


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2.2.7 International Trade

Again, very little is known

Head and Ries (1998) find that a 10% increase in immigration is associated with a 1% increase in source country exports, and a 3% increase in imports

Various discussions about international competitiveness go in opposite directions

Not clear how flows of workers and good counterbalance each other


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3. Conclusion

Immigration is part of the fabric of Canadian society Clear social/cultural benefits

But, labour market outcomes for new immigrants have declined substantially over a few decades Useful to distinguish between, for example,

earnings, and earnings conditional on characteristics


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Despite popular beliefs in the economic and demographic benefits (or, some argue, costs) of immigration, the evidence does not currently appear to support there being either large economic benefits or costs However, there is scant evidence on impacts and it is

controversial Small total economic benefits is probably the best summary

at the moment There is likely a broad distribution of effects with different

sets of individuals experiencing different impacts Given, for example, issues of complementarities and

substitution, the details of immigration policy and the management of the immigration system likely have important ramifications for the economic impact on sub-populations and the nation as a whole


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Suggestions for further reading (mostly overviews) Aydemir, Abdurrahman and George J. Borjas. 2006. “A comparative analysis of the labor market impact of international migration:

Canada, Mexico, and the United States.” NBER Working Paper Series No. 12327. Aydemir, Abdurrahman and Chris Robinson. 2006. “Return and Onward Migration among Working Age Men.” Analytical Studies

Research Paper Series, No. 273. Catalogue no.11F0019. Ottawa: Statistics Canada. Aydemir, Abdurrahman and Arthur Sweetman. 2008. “First and Second Generation Immigrant Educational Attainment and Labor Market

Outcomes: A Comparison of the United States and Canada.” Research in Labor Economics, 27: 215-70. Beaujot, Roderic. 2003. “Effect of Immigration on Demographic Structure.” Canadian Immigration Policy for the 21st Century, eds. Charles

Beach, Alan Green and Jeffrey Reitz. Kingston, Ontario: McGill-Queen’s U. Press, 49-91. Borjas, George J. 1999. “The Economic Impact of Immigration.” Handbook of Labor Economics, Vol. 3A, eds. O. Ashenfelter and D. Card.

Amsterdam: North-Holland, 1697-1760. Dustmann, Christian, Francesca Fabbri, Ian Preston, Jonathan Wadsworth. 2006. “The local labour market effects of immigration in the

UK.” Home Office Online Report, 06/03. Lowenstein, Roger. 2006, July 9. “The Immigration Equation.” The New York Times Magazine: 36-43 & 69-71. Marr, William L., and Michael B. Percy. 1985. “Immigration policy and Canadian economic growth.” in John Walley, ed., Domestic Policies

and the International Economic Environment, Studies of the Royal Commission on the Economic Union and Development Prospects for Canada, vol. 12 (Toronto: University of Toronto Press).

“Introduction to Economic and Urban Issues in Canadian Immigration Policy” by Hugh Grant & Arthur Sweetman, Canadian Journal of Urban Research, 13(1):1-24.

“The Deteriorating Economic Welfare of Immigrants and Possible Causes: Update 2005" by Garnet Picot & Arthur Sweetman, Statistics Canada Analytical Studies Branch research paper series, No. 262.

“Chronic Low Income and Low-income Dynamics Among Recent Immigrants” by Garnett Picot, Feng Hou and Simon Coulombe, Statistics Canada Analytical Studies Branch research paper series, No. 294.

Smith, James P. and Barry Edmonston. 1997. The New Americans: Economic, Demographic, and Fiscal Effects of Immigration, Washington, D.C.: National Academy Press.

Swan, Neil, et al. 1991. Economic and social impacts of immigration: a research report. Ottawa: Economic Council of Canada (Supply and Services Canada).

Sweetman, Arthur. 2005. “Canada: Immigration as a Labour Market Strategy” (broad overview) http://www.migpolgroup.com/infopages/2548.html

(UK) HOUSE OF LORDS, Select Committee on Economic Affairs, 1st Report of Session 2007–08, 2008. The Economic Impact of Immigration.

Warman, Casey and Christopher Worswick. 2004. “Immigrant Earnings Performance in Canadian Cities: 1981 through 2001” Canadian Journal of Urban Research 13(1): 62-84.

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