Ramifications of migration on origin and destination countries
In a recently available paper (di Giovanni, Levchenko, and Ortega 2013), we measure the welfare ramifications of migration from a worldwide perspective in a way analogous to how economists measure the gains from international trade. Namely, we compare the welfare on the globe economy under current degrees of migration to welfare in a counterfactual, no-migration equilibrium.
The main top features of our framework are:
- We model a big amount of worker heterogeneity by level of skill, country of birth, and country of residence.
- We incorporate international remittances.
- We take into account each country’s amount of openness to trade.
That is potentially important because, in a number of economic models, the consequences of immigration are mitigated by the amount of trade openness. Finally, building on Melitz (2003), we assume a monopolistically competitive economy where heterogeneous firms face both variable and fixed costs of serving each export market, and our model highlights the interplay between workers and firms. We distinguish between your long run, where the group of potential firms throughout the market adjusts to fulfill the free-entry condition, and the short run, where the group of potential (however, not actual) projects throughout the market is fixed. The model is calibrated to complement country-level productivity, openness to trade, degrees of migration and remittances, the firm-level productivity distribution, and the observed skill distributions of natives and immigrants (predicated on the data made by Docquier et al. 2009, 2010).
We then utilize the model to perform the next thought experiment: all OECD migrants are repatriated back again to their countries of birth. We make reference to this scenario as the no-migration equilibrium. We compute the change in the utility of the common native stayer in each country, which inside our model coincides with average real income per person.
The long-run effects
The solid dots in Figure 1 display the welfare impact of migration over time (under free entry) for every country. The horizontal axis reports the percentage change in the populace in the no-migration counterfactual in accordance with the baseline. Thus, countries below zero on the x-axis could have less population in the no-migration equilibrium, and so are mainly the wealthy OECD countries. The vertical axis reports the percentage change in average income per person in each country in the no-migration counterfactual in accordance with baseline. Thus, a poor number implies that a country will be worse off in the no-migration equilibrium.
Figure 1 . The welfare impact of migration in the long and the short run
For the OECD countries, welfare falls absent migration due to a market size effect. How big is the welfare loss is roughly monotonic with regards to the decrease in population. At the extreme bottom left of the plot, Australia would go through the largest drop in population (23%) and welfare (12%). A smaller workforce reduces firms’ profitability and, subsequently, fewer firms choose to pay the first-stage exploration cost. This reduces the option of domestically produced varieties, increasing firms’ costs and reducing consumer choice.
The countries whose population will be larger in the lack of migration – typically low or middle class countries – are mostly worse off in the no-migration equilibrium. For example, Jamaica’s population would increase by about 30%, yet average welfare would fall by 7% over time. Associated with that the marketplace size effect fuelled by the inflow of return migrants will not compensate for the increased loss of remittances. It is necessary to stress that if remittances was not contained in the analysis we would have developed the contrary result.
Needlessly to say, trade openness mitigates the consequences of migration. As noted by Iranzo and Peri (2009), receiving immigrants permits an expansion of domestic variety but entails a loss in import varieties. However, from a quantitative standpoint this effect turns to be of second order. We also show our findings are robust to accounting for selection into migration and imperfect transferability of skills across borders.
The short-run effects and distributional consequences
The hollow red dots in Figure 1 plot the welfare changes in the short-run, where we contain the firm-level (latent) productivity distribution fixed. For the countries that could lose population, that’s, the OECD countries, it really is striking that there will be no noticeable changes typically welfare in the short run. That is perhaps surprising considering that market size, and firms’ profitability, would shrink as a result of loss in workforce. However, only minimal productive firms opt to turn off. Under our calibration, which makes up about the fat-tailed distribution of firm-level productivity, the varieties made by these firms take into account negligible shares of consumers’ and firms’ spending.
For the countries that in the no-migration counterfactual could have higher population welfare losses are larger in the short run. Associated with that, besides the lack of remittances, the wave of newly returned migrants is absorbed through the creation of new firms with below-average productivity.
Having less the average impact in the OECD countries, however, masks substantial distributional effects. Figure 2 plots the welfare change of the skilled and the unskilled separately, in the long and the short run, plus a 45-degree line. If a country is on the 45-degree line, the skilled and the unskilled experience a similar welfare change.
Over time, the distributional effect is bound: most points are near to the 45-degree line. However, the picture is quite different in the short run. For most countries, workers of different skill levels experience welfare changes of opposite signs, and far larger in absolute terms compared to the overall average effect. The differences in the skill distributions of natives and immigrants in each country drive the direction of the effects. For instance, Australia’s immigrant population is more educated normally than its native population. In the counterfactual no-migration scenario the relative way to obtain skilled labour would fall, which would result in a 2.5% welfare increase for the skilled natives but a 2.5% welfare loss for the unskilled natives.
Figure 2 . Distributional effects; percentage change in welfare for skilled (college graduates) and unskilled (non-college graduates) native workers
Summary and implications
The primary conclusion of our analysis is that migration seems to benefit practically all origin and destination countries. OECD countries benefit due to greater domestic product variety. Subsequently, most migration source countries also benefit as the remittances sent by migrants a lot more than offset the costs connected with smaller market size. Essentially, the reason being the normal migrant moves from a minimal to a higher labour productivity country, increasing the worldwide effective units of labour. Remittances will be the vehicle that allows for all those gains to be partly transferred back again to the foundation countries.
While, above, we usually do not discuss increases in size for the migrants themselves, needlessly to say the real-income gains to migrants are an order of magnitude bigger than the welfare changes for non-migrants, and probably well above the expenses entailed by migration.
We conclude with two important caveats:
- The discovering that the receiving countries reap the benefits of immigration might seem unappealing since it appears at odds with the widespread opposition to immigration in high-income countries.
We remember that these gains materialise only over time, after new cohorts of firms have taken care of immediately the potential gains from a more substantial market size. The short-run gains are much smaller and, in most cases, are accompanied by important distributional effects that may significantly affect views on immigration policy.
- Our analysis has ignored the implications for the welfare state.
The fantastic disparity in the size and design of the systems makes a worldwide analysis of the aspect infeasible. We simply remember that adding a welfare state could have an ambiguous influence on our findings. On the main one hand, countries receiving many unskilled immigrants may need to finance greater public expenditures by way of distortionary taxation. On the other, these workers have a tendency to be younger compared to the average natives, which might provide important labour-market complementarities (as in Cortes and Tessada 2011, or Farré et al. 2011) and help alleviate shortfalls in the pension system.
Cortes, Patricia and Tessada, José (2011), “Low-skilled Immigration and the Labor Way to obtain VERY SKILLED Women”, American Economic Journal: Applied Economics 3(3), July.
Docquier, Frederic, Lowell, B Lindsay, and Marfouk, Abdeslam (2009), “A Gendered Assessment of VERY SKILLED Emigration”, Population and Development Review 35(2), 297-321.
Docquier, Frederic, Ozden Caglar, and Peri, Giovanni (2010), “The Wage Ramifications of Immigration and Emigration”, December, NBER Working Paper No.16646.
di Giovanni, Julian, Andrei A Levchenko, and Francesc Ortega (2013), “A WORLDWIDE View of Cross-Border Migration”, RSIE Discussion Paper 585, CReAM Discussion Paper 121, IZA Discussion Paper 6584.
Farré, Lidia, González, Libertad, and Ortega, Francesc (2011), "Immigration, Family Responsibilities and the Labour Way to obtain Skilled Native Women", The BE Journal of Economic Analysis & Policy, 11(1), 34, DOI: 10.2202/1935-1682.2875.
Hanson, Gordon H (2009), “The Economic Consequences of the International Migration of Labor”, Annual Overview of Economics 1, 179-207.
Iranzo, Susana and Peri, Giovanni (2009), “Migration and Trade: Theory with a credit card applicatoin to the Eastern-Western European Integration”, Journal of International Economics (2009), 79(1), 1-19.
Melitz, Marc J (2003), “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity", Econometrica, November 71(6), 1695-1725.