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An economic analysis on the effects of immigration and the key policies to implement

By Ryan Oakmont 


Immigration is a topic that is making waves across Europe and the US; it has shown to be an issue of increasing importance in recent elections, as pamphlets from Trump’s 2016 candidature or even for the US 2020 presidential race show. The debate on immigration is making a dent on international relations and policymaking as it has proved to be an effective fuel to fire nationalist candidates into various governments across the Western hemisphere. It is, nevertheless, curious to see radical and moderate politicians alike propose radically different solutions addressing the same issue.


As it turns out, immigration is not solely an economic issue. There are other factors that influence the people’s vote and, in extension, the elected politicians’ policymaking. In this article we will solely analyze the economic effect that work-based immigration has on the receiving economy and we will propose two key policies, backed by economic theory, that governments could implement in order to maximize the economic benefits of immigration.

The economic effects of immigration vary widely by country and immigrant profile [1]. In this article we will solely focus on the US as it is the country where there is the most peer-reviewed literature regarding the subject matter and where immigration has the most appreciable economic effect.


When a trade takes place, two parties voluntarily exchange something. The transaction will only be effectuated if it is mutually beneficial. Whether a party was born outside the nation where the transaction takes place will not influence the beneficial nature of the transaction. Why then, is there so much controversy with immigration? After all, having more people on a territory means more possibilities to effectuate different kinds of advantageous transactions. It is widely shared that a free flow of people and their skills would be beneficial to both the second party of the exchange, the immigrant, and the receiving economy, which would count with more demand thanks to the individual who has joined the exchange system. Allowing workers to immigrate where they can be most productive, the open-border school of thought holds, could make the world 78 trillion dollars richer [2]. The idea of eliminating immigration restrictions is very attractive but, sadly, incompatible with most societies of the developed world.  The reason is simple: the welfare state in first world countries has rendered the idea of unrestricted skill and human capital travel unfeasible: economics-wise, in a free market economy, the damage the immigrant can make to the national economy is limited to himself; the individual affected by his lack of profitable economic activity is solely the immigrant. Nevertheless, in a welfare system, an immigrant, as well as any other citizen, can have a net positive or negative fiscal impact, in other words, how the amount he pays in taxes compares to how much the government spends on him. Immigration policy is nowadays shifting to individually selecting immigrants based on their skill profile and, to extension, the likelihood that they will be a net fiscal positive for the national economy [3]. Nevertheless, there are a myriad of other factors that are influenced directly and indirectly by migrant flow.


There are three main types of immigrants whose distinct characteristics impact the economy differently: high-skilled immigrants, low-skilled immigrants, and undocumented immigrants. High skilled immigrants are a huge asset to the receiving economy: they have a positive fiscal impact [4] and the increased tax revenue that they bring in can be spent on retiring Baby boomers and rising Social Security costs [5]. In 2015, a quarter of all STEM  workers, a sector where there is more demand for jobs than supply [6], in the US were foreign-born [7]. These workers strengthen the sector, raise native wages [6], create economic growth -more than 60% of the US’s GDP increase since 2011 – as a result of increased research intensity [8], and develop the type of breakthroughs that improve productivity and send GDP soaring [7]. Immigrants are twice as likely to start a business [9] and have won 39% of American-awarded Nobel prizes since 2000 [10]. These immigrants, when they relocate to the US, boost the country’s productive capacity and drive innovation as well as future economic growth, adding all that intellectual potential to the national economy. 

Low skilled and undocumented immigrants can also provide economic benefits as their job is complementary, not substitutive, to that done by natives [11]. There is certain disagreement on particular effects of immigration; the effect that immigration can have on native wages being the most prominent example. Nevertheless, in this case, the wide majority of economists believe that the effect of immigration on native wages is negligible; the very same National Academies of Science Engineering and Medicine asserts that ‘native dropouts tend to be more negatively affected than better educated natives’ but that, on the long run, the impact [that immigration has] on native wages is smaller or even positive [12]. This occurs because population growth via immigration increases the demand for goods which can lead to job creation and higher wages [13]. Moreover, as immigrants, by definition, travel for work, they could help alleviate the negative effects of frictional unemployment [14]. This mobility is an incredibly valuable asset for an increasingly dynamic economy. Generally, first generation immigrants are more costly to governments than are native born but, on the long term, second generation immigrants are among the strongest economic and fiscal contributors in the US population [15].

The question, then, is simple: do these types of immigrants provide a net economic benefit to the country were they migrate? The effects vary widely by country [1]– namely because of the nature of their welfare state- as well as, as we’ve seen, the type of immigrant. In the case of immigration, evidence makes abundantly clear that controlled immigration has, in the long term, a positive effect on the receiving economy through increases in productivity and GDP. 

Why then, have we not modeled our immigration system to best take advantage of this trend? Why hasn’t the US developed an immigration system that best takes advantage of the economic literature’s findings? The answer is pretty straightforward: immigration is not solely an economic issue; there are other factors at play. It is a political issue and, as such, we have found politicians promoting solutions based on perception and not on effectiveness. For far too long we have focused on the visible costs and not on the larger but less visible benefits of immigration. An effective immigration policy would solely focus on maximizing the benefits of immigration –through improving the economic welfare of the country’s residents- while minimizing the costs.


From the perspective of economics, the primary problem with the current immigration policy is that it is excessively restrictive. We have made it far too difficult for valuable workers and taxpayers to enter the US. The United States’ STEM sector is nowadays suffering from a severe skills shortage as there are 3 million more job openings than the number of available, trained workers willing to take them [16]. And demand isn’t keeping up with supply: it is expected that the number of job openings will raise to 4 million by 2020 [17]. It is imperative to raise the H1B visa quotas – under which most STEM workers enter the US [18]- in order to alleviate this shortage that is so severely constricting the US productive capacity. H1B recipients that entered the US to fill this shortage would even be creating jobs as every STEM position supports 2 complementary jobs for low-skilled workers [19]. Furthermore, the entrance of skilled workers in the STEM sector would increase American productivity as a result of higher collaboration between native and immigrant professionals and the subsequent higher rate of innovation that would take place within the industry [20]. On top of that, raising the H-1B visa quotas would expand the taxpayer base as high-skilled immigrants generally have, as we’ve previously seen, a positive fiscal impact [12]. In fact, doubling the current quota would result in increased tax revenues of 69 billion dollars [21]. In recap, the H1B visa quotas must be raised in order to alleviate the dramatic skills shortage the STEM sector is experiencing, expand the economy’s productive capacity and foster innovation as well as long-term economic growth [22]. The US STEM sector has been used as an example because of the severity of the case, but the main take here is that any nation could -and should- use public policy to regulate the entrance of work-based immigrants to fill employment demand not being covered by natives, thereby bringing the economy’s productive capacity to its fullest potential. Moreover, immigration policy could be used to supply cheap immigrant labor to labor-intensive industries, such as agriculture -where in the US there is also a worker shortage due to its dependency on immigrant labor and the general immigration rate slowdown [23]- , to help them remain economically profitable at home and competitive in the global stage. 

Immigration policy should not only focus on filling employment demand with immigrant labor but also on regulating migrant flow, especially since the overwhelming majority of economic literature insists that immigration is essential for sustained economic growth [24]. An effective immigration policy would, therefore, regulate the flow of said immigrants into the economy in order to maximize the general welfare of society by focusing on economic growth. In response to these criteria, a pro-cyclical immigration policy would be the optimal policy to implement in order to regulate the entering migrant flow. Data shows that short-term immigration quotas could be adjusted in response to the stage of the business cycle in order to maximize growth during economic booms and reduce hardship during slowdowns [25]. This is due to the fact that a high percentage of work-based immigrants are employed in the industries that are most impacted by the rises and falls of the economy [25]. Because of this data, a larger migrant population is associated with a higher impact of the business cycle on the whole population [26]. Therefore, implementing a policy that sets short-term quotas in response to the stage of the business cycle would be highly beneficial to the destination economy [27]. In times of economic downturn, excessive immigration leads to increased competition for a limited number of jobs, exerting downward pressure on wages and exacerbating unemployment, consequently magnifying the effects of the recession [25]. Thus, by limiting immigration during times of economic downturn, the effects of the recession could be minimized. Nowadays, the fixed immigration quotas are insensitive to the stage of the business cycle and the short-term migration quotas do not respond effectively to changes of the economy [28]. It is crucial to implement a pro-cyclical immigration policy or else the labor market will be inundated with workers during the next recession, aggravating the situation. On the other hand, migration during episodes of economic expansion makes the economy more productive and efficient [29]. If the US implemented a procyclical immigration policy, the entrance of work-based immigrants during episodes of economic boom would magnify the expansion [30] as they would fulfill the high demand for labor while increasing the GDP and fostering innovation. In summary, the goal of maximizing native welfare by focusing on expanding the economy can be better achieved through the implementation of a pro-cyclical immigration policy that adjusts the short-term migration quotas to the state of the economy in order to maximize growth in times of economic expansion while minimizing the severity of recessions in times of economic slowdown. 


Immigration is a very powerful tool. One which, when used effectively, can greatly improve the receiving economy. Policymakers have focused for far too long on offering the most appealing solutions in lieu of using economic analysis to craft the most effective policies. It is now time to leave our political differences aside in order to act not based on fear or emotion but rather to join in the common goal of bringing immigration to its fullest potential.



References and endnotes


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M. Clemens, «Economics and emigration: trillion-dollar bills on the sidewalk?,» Center for global development, p. 30, 2011. 


S. T. Cotton, «Congress.gov,» Bill S.1103, 10 04 2019. [En línea]. Available: https://www.congress.gov/116/bills/s1103/BILLS-116s1103is.pdf.


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