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Giovanni Peri

Giovanni Peri*

According to a survey in 2008, about 50 percent of Americans perceived immigration as a problem rather than as an opportunity (Transatlantic Trends 2008). Similar surveys conducted in the pre-recession years of 2007 and before also showed that Americans were much less supportive of more open immigration policies than they were of other aspects of globalization such as free trade or free capital movements (Pew Research Center 2007). Since the onset of the recession of 2008-2009 and during the jobless recovery of 2010-11, public opinion about immigration further deteriorated. The idea that immigrants take American jobs, depress national wages, and threaten the U.S. economy has become even more rooted, as often happens during economic recessions. The political discourse accompanying the economic and labor market impact of immigrants is very intense and pervasive in the media but often generates "more heat than light" (Goldin, Cameron, and Balaarajan 2011: 163).

Americans are not alone in fearing immigrants. Europeans have grown extremely concerned, too. Immigration flows have surged dramatically during the last 10 years in some EU countries. From 1999 to 2009, the share of foreign-born in the population in Spain rose from 3 to 13.5 percent, and in Italy from 2 to 7 percent. Other countries with a longer history of immigration and smaller flows during the last decade are still dealing with issues of integrating previous immigrants (e.g., the United Kingdom and Germany). The tone and quality of the debate is, if possible, even more acrimonious in Europe and politicians have sometimes catered to these anti-immigration sentiments. In the UK all the main parties in the 2010 elections advocated lower levels of immigration. In Spain the Socialist government has promoted during the last two years a "pay to go" initiative offering cash-payments for immigrants to leave the country.

Within the current climate of perception of immigration as a cost to the host country, what do economists have to offer? Can we help to increase the "ratio of clarity to volume" that is usually minimized in the public discourse on immigration? By offering the simplified (but also somewhat enlightening) perspective of considering migrants mainly as workers and analyzing the gains and costs that they generate for themselves and for the host country, we can make progress in clarifying misconceptions. In this article, I take a strictly economic perspective on migration and consider migrants as workers. While not all international migrants move with the immediate prospect of a job, many of them do. Those who do not, such as refugees and students, still consider the improvement of their future economic opportunities as one of the main reasons for the move and eventually look for a job.

I begin with a global perspective, which is the best way to understand the significant opportunities migrants generate for the world and for themselves. I then describe today's immigrants in terms of their skills and productive characteristics, and focus on the effects immigrants have on their host-country labor markets - notably on wages and employment. I specifically discuss the recent evidence, and some theory, relative to the U.S. labor market. Throughout the analysis I distinguish between two types of migrants: those with high and those with low levels of education. That distinction is important for analyzing the role migrants play in the labor market and in the productive structure of the receiving economy. I briefly summarize the evidence on immigration and the labor markets in some other rich countries (mainly European) and discuss what we can learn from such comparative perspective. I conclude with some guiding principles for thinking about immigration policies.

Migrations: The World Perspective

In contrast with the popular perceptions described in the introduction, if one looks at several recent reports and studies on international migrations by economists and research institutions, their main emphasis is on the large size of global gains obtainable by increasing, even by a small measure, the mobility of people. A study by the World Bank (2005) estimated that an increase in international migration equal to 3 percent of the labor force of developed countries would produce gains (to be shared globally) of $356 billion. Pritchett (2006) argues that the gains from increasing international mobility, even by a little, are much larger than those that can be obtained by fully liberalizing international trade, estimated in 2005 to be $104 billion. In the more extreme case of a full opening of more wealthy, Organization for International Cooperation and Development (OECD) countries to workers from the rest of the world, Klein and Ventura (2007) calculate a potential massive increase in the world GDP on the order of 150 percent over 50 years. For economists, in short, international migration has the formidable ability of increasing total world income and productivity, generating huge global economic opportunities. The reason is very simple. By allowing people to move to countries where they can produce four to five times more value per hour of work on average than in their country of origin, migrations allow the deployment of world human resources in a massively more efficient way (Clemens, Montenegro, and Pritchett 2009). Migrants receive a large share of these productive gains in the form of increased personal income, and bear most of the costs of migrations. The relevant questions that we need to tackle, however, are these: What is in this exchange for the host country? Are the huge gains of immigrants taking place at the expenses of native workers' jobs and wages? Or can they gain too from this efficient world allocation of workers?

Let me use a story to illustrate what it would take, in terms of technology, to achieve the same productive results that are achieved for the United States by immigration. Let's think of a spectacular new company, called INTER-MIG U.S.A., that opens for business in the United States and in some less developed countries. This company rents out wonderful machines, computer-robots we may call them. They come in two types: One can perform tasks that are hard and tedious, that may need to be done nonstop night and day or are simply time consuming and require very good manual skills. Examples of those tasks are picking fruit, working in the sun pouring concrete, building walls, mowing lawns, cleaning homes, taking care of young children, assisting old people day and night, or driving vehicles. The rental cost of these machines is reasonable: much less than the wage of an average American worker. Those machines are also very reliable: they are long-lasting and rarely sustain damage or break down. American families, firms and offices would be immensely excited at the new opportunities that those machines open to them. More educated women could finally look for a job, leaving part of the care of the house, children, and parents to these computer-robots. Firms could finally move their workers out of manual tasks and move them to supervise and coordinate the work of these machines. They can better use the skills of their American workers to create new products and services, meet production orders, expand output and cut the costs, thanks to the machines.

The second type of computer-robot performs completely different tasks. These machines work in laboratories and research centers, on engineering projects, and can help scientists to come up with new ideas, new methods, and innovative solutions. Each American engineer or doctor or professor may envision a team of computer-robots increasing the ability of her own laboratory, institute, or research center to produce innovative output. The machines are often better than the American scientists themselves. American law firms, companies, hospitals, and schools can rent the machines, improve their services, and specialize their workers in a way that makes the best use of these prodigious machines. This creates fantastic new opportunities for businesses in the United States.

INER-MIG U.S.A. operates also in developing countries. What it does there, say in Mexico, China, or India, is to associate each machine (of the first or second type) to a worker. Every time that the machine is rented in the United States, the company pays a salary to a worker in that country that is five to six times the local average, and has the worker continue doing what he was doing before: working in agriculture or construction (if he or she is associated with the first type of machine) or in a school or hospital (if he or she is associated with the second type). To workers in the other country this too will look like a fantastic option: performing the same job as before for a salary that is five to six times higher. The company will thrive globally and people will have only good things to say about it. Many other countries will wish they could be next to benefit from the operations of the company.

From the labor market perspective, what is accomplished (with a futuristic technology) by INTER-MIG U.S.A. is exactly what international migration accomplishes for the United States and for immigrant workers. Only, rather than machines, it will be people performing the described jobs in the United States and they will move from one country to another. One would think that the enthusiastic response that U.S. families and firms are likely to have for INTER-MIG U.S.A. is even larger for immigration: people, rather than machines, will do those jobs and people are, after all, much more pleasant, engaging, and inspirational than computer-robots and they bring, along with the manual skills, relational, human, personal, and spiritual values that we cherish and love.

To the contrary, as described in the introduction, the majority of Americans consider immigration a problem. Clearly the actual migration process involves many other aspects, including culture and family, and these may generate complex and problematic dynamics. However, from a pure labor market point of view, the gains and costs for the United States from international migrations are exactly those brought about by the operating of the machines of INTER-MIG U.S.A. Let us keep this example in mind as I describe in a more scientific fashion the recent research on immigrants to the United States and their labor market effects.

Who Are the International Migrants?

Recent research, based on comprehensive data on net migration to OECD countries, has shown that two groups have a much larger probability to migrate both out of rich and out of poor countries. First, Docquier, Ozden, and Peri (2010) show that workers with higher education, and in particular a college education, have emigration rates 4 to 5 times larger than workers with no college education. For poor countries the probability of emigrating increases up to 10 to 12 times with a college degree. Second, several studies show that migrants are young. The cohort with the highest migration probability is the one between 20 and 30 years of age, while after 45 years of age few people migrate. Analyzing recent migration trends across countries, Grogger and Hanson (2011) show that these young and highly educated workers with high migration rates are attracted to countries that pay a high wage premium for college education and where English is the predominant language. Both factors contribute to make the United States a very attractive destination for them. While some countries, such as Australia and Canada, further encourage this selection with immigration policies that favor young and highly skilled individuals (and hence receive a large share of those), the United States does not have an official special preference for these categories. Still, due to its large wage premium for the highly educated and to the dynamic professional environment of its companies and research centers, the United States attracts almost half of all college-graduate migrants in the world. Hence foreign-born are a relatively high percentage of the very highly educated workers in the United States.

Another group that is overrepresented among immigrants to the United States are young workers with very low education levels who are employed in highly manual-intensive occupations. Ordering the schooling levels from low to high, the percentage of foreign-born has a U-shaped distribution across groups. Figure 1 shows the percentage of the U.S. population that is foreign-born by skill group as of 2009. It is clear that immigrants are overrepresented among very high and very low levels of education. The group of immigrants with very low education includes most of the undocumented workers. This is due, in part to the fact that there are very few legal ways of entry for foreign workers with low schooling levels. We will see, however, that the current composition of U.S. immigrants by skill follows the labor market logic. Possibly this is one reason why, even though the current U.S. immigration system is strongly criticized by many, it has been very hard to modify.

Evidence on Labor Market Effects: Productivity, Wages, and Jobs

There are useful models in the economists' toolkit to analyze the partial effect of a variable such as immigration. The labor demand curve is one of them. If technology and capital (machines) are fixed, the labor demand curve will slope downward. Other things being equal, an increase in labor supply reduces the productivity of workers and hence their wages because they are forced to share fixed resources such as land and capital. This partial equilibrium reasoning, however, is often pushed to its Malthusian implication that more people (workers) in an economy means lower wages and lower incomes. In a variation of this type of reasoning, more workers of one type (foreigners) need to displace workers of another type (natives). These partial equilibrium implications are likely to be incorrect, theoretically and empirically, in general equilibrium. Four important mechanisms attenuate and may reverse the partial equilibrium effects of an increased supply of foreign workers on the demand for native workers.

The underlying assumptions of the partial effect analysis are that workers are homogeneous and that other variables are fixed. Both assumptions are incorrect, even in the short run, and particularly in the medium to long run. Recent research has focused on four specific ways an economy and labor market will respond to the inflow of immigrants. I describe them in turn.

Investments

As a consequence of the availability of more workers firms invest: existing firms expand their capacity, and new firms are born. Returns to capital increase when more workers are available, and firms take advantage of this by investing. What matters for the average productivity of labor (and average wage) is capital per worker (the intensity of machines). This, as shown in Ottaviano and Peri (2008), has grown in the U.S. economy at a constant rate (driven by technology) during the whole period 1960-2009. If anything, capital per worker was higher in 2007 (at a peak of immigration) than it was in 1990. Investments, which were responsive to the relatively small and predictable inflows of workers represented by immigration (net immigration was around 0.4 percent of employment per year in the period 1990-2007), maintained the capital intensity of the economy growing at a constant rate. In Peri (forthcoming) I find the same story analyzing individual U.S. states during the period 1960-2005. In each state investment responded to net immigration to maintain the capital intensity of the economy roughly constant over 10-year intervals. Hence immigrants did not crowd existing firms over the long run, but they simply increased the size of the economy. This is, incidentally, what any model of growth, beginning with Solow (1956), would predict for the long run: an increase in the size of population does not affect wages but only the total size of the economy. Wages are determined in the long run by labor productivity only.

Differences among Workers: More and Less Educated

Workers are not homogeneous. In terms of their labor market skills and productive activity there is a large difference between workers with high levels of schooling (tertiary education) and those with secondary or less. They use different skills and take different jobs. It makes sense to distinguish between these two groups as two different production factors. A modified version of the wage effect of immigrants along the labor demand curve is that, if the relative supply of less-educated workers among foreign-born is larger, they depress wages of the less educated relative to highly educated natives. In the United States as a whole, however, because of the combination of immigrants at the top and at the bottom of the schooling distribution, if we consider two groups of workers (more and less educated), immigrants have a distribution similar to that of natives.1 Hence their inflow did not alter much the relative supply of the two groups. Labor economists consider the split between these two education groups (those with and without tertiary education) as the most relevant to understand the effects on the relative wages of relative supply, skill-biased technology, and institutions. (See Acemoglu 2002; Katz and Murphy 1992; Goldin and Katz 2008; and Card 2009.)

Hence as immigration did not alter the relative supply of these two groups it is unlikely to have changed their relative wages. At the national level, immigration cannot explain the increase in relative wages of college educated versus high school graduates observed in the 1980s and 1990s (Autor et al. 2008), simply because it did not -significantly change their relative supply.

Specialization and Technology: Job Upgrades.

Even more interesting is the differentiation of skills and productive characteristics between natives and immigrants within each of the two schooling groups. One very strong tendency among immigrant workers with low schooling is to concentrate in manual jobs. In manufacturing, construction and agriculture, for instance, they work as farm laborers, construction workers, roofers, drivers and so on. In services they work in food preparation, house services, child and elderly care. In contrast, similarly educated natives work in jobs which use more intensively communication and interaction skills such as cooks, construction supervisors, farm coordinators, or clerks. In Peri and Sparber (2009) we show that, due to the limited knowledge of the language, immigrants have a comparative advantage in manual type of jobs. Hence they specialize in those, and in firms and sectors that hire immigrants, this produces higher demand for jobs of coordination and interaction typically staffed by natives, whose language skills are superior. This dynamic specialization in tasks according to skills pushes natives to upgrade their jobs (as communication-intensive occupations pay better than manual intensive ones) and protects their wages from competition with immigrants. By taking the manual jobs that natives progressively leave, immigrants often push a reorganization of production along specialization lines that may also increase effectiveness and efficiency of labor (Peri 2011). In a related line of research, Lewis (forthcoming) shows that, in markets with many immigrant workers, firms adopt techniques that are particularly efficient in the use of less educated, manual-intensive type of workers. Hence they are able to absorb a larger number of less-educated manual workers without a loss in productivity and wages. In some studies (e.g., Ottaviano and Peri, forthcoming) the mechanism described here, combined with the other effects described earlier in this section, results in a small positive effect of immigration on wages of less educated native workers. On average that study finds that immigration over the period 1990-2006 affected the wages of native American workers with no high school diploma between −1.0 percent and 1.5 percent, depending on the exact assumptions and on the strength of the three described mechanisms. The same study finds that American workers overall have gained 0.6 percent in their wages because of immigration during the period 1990-2006 once investment, heterogeneity, and specialization are accounted for.

Lower Wages of Immigrants: An Opportunity for Cost Cutting and Job Creation

A more recent line of research considers the opportunities created by immigrants in the labor market for firms to increase their productivity and their employment of native workers. One common empirical finding in the literature is that immigrants are paid less than natives with similar characteristics and skills. This is in part due to the fact that many immigrants, because of less attractive outside options (such as having to go back to their home country), have lower bargaining power with the firm. In this case firms pay immigrants less than their marginal productivity, increasing the firms' profits. Such cost-savings on immigrants act as an increase in productivity for firms. Ottaviano, Peri, and Wright (2010) show that if a firm can cut costs in some productive tasks by hiring immigrants, this allows the firm to expand production and employ more people in the complementary tasks, many of which are supplied by natives. Chassamboulli and Palivos (2010) show that the availability of immigrants pushes firms to create more jobs to take advantage of the lower cost of hiring them. Some of those jobs go to natives, whose unemployment rate can actually decrease as a consequence of this. Notice, also, that as immigrants are employed in productive tasks different from natives, the fact that they are paid less than their marginal productivity is not easily classifiable as "discrimination" because their jobs are not directly comparable to those of native workers.

In summary, an economy will respond to immigration along several margins - through increased investment by firms, specialization of natives, complementarities between natives and immigrants, technological response by firms, and job creation. All those responses attenuate the "partial effect" due to a movement along the labor demand curve generated by increased labor supply. This explains why a long tradition of empirical economic studies (Friedberg and Hunt 1995; Card 2001, 2009; Ottaviano and Peri 2006, 2008; and Peri 2011) has found very small to no effect of U.S. immigration on native wages and employment at the national and at the local level. Other studies (e.g., Borjas 2003, 2006) have found negative wage effects on less-educated workers at the national level in the order of −3 percent over the 1980-2000 period. Even those studies, however, find positive wage effects for workers with a high school diploma and some college education-of 1.0 to 1.5 percent. The small negative wage effects found in Borjas are possible but, in my opinion, they focus mostly on the competition channel and overlook the margins of adjustment described above.

More Labor Market Effects of Immigrants

There is another interesting labor market effect of less-educated immigrants, recently studied, that is worth mentioning before discussing the impact of highly educated immigrants. In the United States (and in many European countries) one sector in which the presence of the foreign-born has been large and growing fast is that of home services (cleaning, food preparation, gardening, and similar) and personal services (child and elderly care). These are often characterized as "household production" services. This has allowed a significant share of female workers, often highly educated, to afford these services and to join the formal labor force outside the home or to increase their hours worked. Cortes (2008) shows that the inflow of less-educated immigrants reduced the cost of those household production services by almost 10 percent over the period 1980-2000. Moreover, as a consequence of this, Cortes and Tessada (2011) show that women, especially those with higher education, increased their work week by an average of about half an hour because of less-expensive services. Low-skilled immigrants, therefore, allowed the large productive potential of highly educated women to be used in the labor market by substituting part of their tasks in household production.

Much less needs to be said to convince the reader of the positive contribution to productivity and employment of highly educated immigrant workers. They are a huge asset for the U.S. economy that, as we said above, attracts the best and brightest from all over the world. A large share of them are scientists and engineers (Gauthier-Loiselle and Hunt 2008). They account for about one third of U.S. innovation as measured by international patents issued to U.S. residents (Kerr and Lincoln 2010). One quarter of all U.S.-based Nobel laureates of the last 50 years was foreign-born (Peri 2007). They have been founders or co-founders of 25 percent of new high-tech companies with more than $1 million in sales in 2006 (Gauthier-Loiselle and Hunt 2008), hence generating income and employment for the whole country. Over the period 1975-2005, according to NSF (2005), the whole net growth in the number of PhDs in the United States was due to the foreign-born. Currently about half of PhDs working in science and technology are foreign-born. Innovation and technological change are the engines of economic growth, hence the attraction of human capital at high and very high levels of skill is key to the continued economic success in technologically advanced countries such as the United States. Several economic analysts have emphasized that the inflow of highly educated immigrants is a valuable competitive edge that the United States has over other advanced and competing countries such as Japan and Germany. Japan has essentially closed the doors to all kinds of immigrants (Figure 2), while Germany attracted many fewer immigrants in the past decade than it used to. Ultimately, labor productivity, the sole driver of wage growth in the long run, depends on innovation and technological development. Hence highly educated immigrants in science and technology contribute, through scientific innovation, to rising productivity and income per person. Notice that the huge increase in the wage premium for the highly educated in the United States during the past few decades, as documented in Autor et al. (2008), among others, is a sign of increasing demand relative to supply for this type of worker. The recent slowdown in the growth of graduation rates from college for U.S.-born natives and the massive increase in demand for them imply that highly educated immigrants are likely to fill a demand gap rather than put downward pressure on native wages (Card 2011).

A Quick Look at Other Countries

The largest immigration rates among developed countries during the past decade were not experienced by the United States or by the other traditional countries of immigration (such as Australia or Canada). Figure 2 shows the increase in foreign-born as a percentage of the population in some representative OECD countries. Spain, Ireland, and Italy had a net inflow of immigrants equal to 11.1 percent, 9.8 percent, and 5.0 percent of their populations, respectively, during the period 1995-2008. The United States, in comparison, experienced net immigration equal to 3.8 percent of the population during the same period (OECD 2011: Table GE3). As mentioned above, this rapid growth has stirred an intense debate in Europe on the costs and benefits of immigration. Several studies on the impact of immigrants on European economies confirm some of the findings for the United States. In particular the small, usually insignificant, effect of immigration on wages and employment of natives seems to hold true for European countries as well (Kerr and Kerr 2011). I would like, however, to emphasize two differences between immigration to the United States and to Europe. They both reveal a competitive advantage for the United States. First, most countries in Europe, especially those in Continental Europe, attracted fewer of the very highly educated immigrants. Probably because wage premiums for the highly educated are smaller in Europe, and because taxation is more progressive and the protection of local professions is stronger, highly educated migrants seem less willing to try a career there. The UK, Canada, and Australia are the biggest international competitors of the United States for these mobile brains. Continental Europe is losing the competition for those highly educated migrants (as well as for many of its native brains) to the Anglo-Saxon countries (Saint-Paul 2004). This implies large losses in the potential for growth, innovation and technological progress for Continental Europe, especially in the long run.

Second, European countries have attracted very large inflows of young, less-educated immigrants, who have performed, even there, the manual and household production services that natives still demand but do not supply. However, while generating some upgrading of native jobs (Amuedo-Durantes and De La Rica 2011), the higher rigidity of the labor markets, the protection of insiders, and the high costs of job transition have reduced the working of this mechanism (D'Amuri and Peri 2011). Paradoxically, the labor market protection for native workers has hurt natives and particularly the less-educated ones by preventing the occupational mobility that shielded them from wage competition with immigrants in the United States. European countries with lower employment protection (lower unemployment subsidies, lower costs of hiring and firing) such as Denmark and Ireland have responded better to immigrants, experiencing more intense job upgrading by natives and less wage competition.

Finally, let me note that in Europe, as in the United States but to a larger extent, immigration has been the main contributor to growth of the labor force during the last decade. The fast aging of the population and the shrinking of the younger cohorts are generating imbalances by increasing the dependency ratio (measured as retirees divided by workers), and reducing the supply of new workers. Immigrants can alleviate the consequences of these phenomena. From a demographic point of view, the more balanced composition between young and old workers in the labor force and the larger number of workers relative to retirees are the big benefits that immigration can bring to Europe.

Conclusion

Immigrants, especially those who move from poor to rich countries, create the potential for huge productivity and income gains at the global level. These gains accrue in large part to the migrants themselves. However, the host country as a whole is likely to benefit as well. Moreover, while there are some categories of workers in the receiving country that may lose, not all of the less-educated native workers lose and in fact, on average, they may even gain.

This article has viewed immigrants as workers and focused only on issues that concern their effect and role in the labor markets. While this is necessarily only a limited analysis, it can bring clarity and new ideas to the debate.

From a labor market point of view it makes sense to distinguish between more-educated immigrants (with tertiary education) and less-educated ones. They are two distinct groups and the policies for their labor market access should be designed separately.

A refocus of U.S. immigration policy toward labor market needs and away from family reunifications would have several advantages. Granting the unity of the nuclear family (head and dependents of the household), more distant family ties should not be preferred to productive characteristics of immigrants.

For the highly educated, the H1-B visa program, started in 1990, has certainly been the main channel to bring to the United States the best and the brightest. Given the large, long-run benefits that this group generates for the whole economy, eliminating the cap on skilled immigrants would make sense. Even allowing automatic legal permanent residence for PhDs in science and engineering from a list of highly rated international institutions would make sense. People coming to the United States to pursue graduate studies should be given the opportunity of staying if they graduate.

For less-educated immigrants, the United States needs to find a way to allow them legal entry and legal residency. The ongoing demand for immigrants in occupations such as construction, home services, hospitality services, agricultural, and so on requires that temporary visas, with possibility of renewal, should be granted to less-educated workers under the sponsorship of the employee. Clearly the demand for immigrants in these kinds of jobs is one of the driving forces that have contributed to the problem of undocumented immigration. Without finding a legal way to satisfy that demand and the continued employment of those undocumented, there will not be a solution to the issue.

Finally, the inflow of immigrants as new workers in the U.S. labor market will continue to produce the right incentives for natives. The more vulnerable among them, those in manual jobs with low qualifications, should be helped to transition toward better skills and better jobs that use more communication and cognitive skills. Improved quality of schooling and continued training and upgrading on the job is what will equip U.S. workers with the tools to realize the most benefits from and mitigate the cost of new immigrants. This has been happening in recent decades, but can be enhanced and made easier. Immigration, like trade and foreign investment, is ultimately a driving force of continued growth and can be used to improve the competitive advantage of American workers and companies. Recognizing those facts and adapting immigration policies to better enable native-born Americans to prosper would increase political cooperation and reduce the partisanship and prejudice often involved in debating immigration policy.

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1Using American Community Survey data, 38 percent of new immigrants in the decade 2000-09 had only a high school education or less, exactly the same percentage as natives as of 2009.