Immigration is surging, with big economic consequences

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Immigration is surging, with big economic consequences

The Economist | April 30, 2024

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The rich world is in the midst of an unprecedented migration boom. Last year 3.3m more people moved to America than left, almost four times typical levels in the 2010s. Canada took in 1.9m immigrants. Britain welcomed 1.2m people and Australia 740,000. In each country the number was greater than ever before.

Big movements of people have big economic consequences. According to the IMF, the foreign-born labour force in America is 9% higher than at the start of 2019. In Britain, Canada and the euro zone it is around a fifth higher. America’s immigration surge means that its economy will be 2% larger over the next decade than had been forecast. The influx of workers also helps explain the country’s strong economic growth. But immigration’s impact goes well beyond an arithmetical effect on GDP—it extends to inflation, living standards and government budgets. And recent arrivals differ from previous ones in an important way: more are low-skilled.

What about immigration’s impact on economic growth? Although new arrivals are clearly boosting GDP, they appear to be dragging down GDP per person—the yardstick by which economists usually assess living standards.  This reflects a shift in the type of immigration. 

Industries that are most vocal about a lack of workers and are hiring lots of migrants, such as agriculture and hospitality, tend to require no qualifications or experience, and offer poor pay and conditions. Meanwhile, higher-paying sectors that do require qualifications or experience tend not to be benefiting much from the migration surge.

Hence the concern that low-skilled migrants are reducing incomes. Yet measures of GDP  per person do not tell the whole story. When a low-skilled immigrant arrives and works for a below-average income, GDP per person falls even if their presence boosts every individual’s income.   Local workers are left better off by migration because they take up higher-wage, more productive jobs while leaving physical and poorly paid labour to immigrants. In effect, immigration creates a more diverse workforce, allowing for more specialisation. People most likely to see their wages fall as a result of migration are those most similar to the migrants, which is typically previous generations of foreign workers.  Some also worry that cheap labour discourages companies from making productivity-boosting investments, although this is wide of the mark for similar reasons.

The crucial question is whether new arrivals on net contribute to or drain from the public coffers. High-skilled types make enormous net fiscal contributions. But for low-skilled workers the question is harder to answer.

Potential trouble comes later. Immigrants age and retire. Social-security systems are often progressive, redistributing from rich to poor. Thus a low-earning migrant who claims a government pension—not to mention uses government-provided health care—could end up as a fiscal drag overall. 

Quite how this shakes out depends on the country and immigrants in question. A review by America’s National Academies of Sciences, Engineering and Medicine in 2016 estimated that the 75-year fiscal impact of an immigrant with less than a high-school education, at all levels of government and excluding public goods like national defence, was a negative $115,000 in 2012 dollars.  If the fiscal impact is positive, it will not be felt unless the government invests accordingly. A windfall is no good if public services are allowed to deteriorate anyway, as in Britain, where the government is cutting taxes ahead of an election. Similarly, if regulations stop infrastructure from expanding to accommodate arrivals, migration risks provoking a backlash. 

3 key takeaways from the article

1. The rich world is in the midst of an unprecedented migration boom.  Big movements of people have big economic consequences.
2. Immigration’s impact goes well beyond an arithmetical effect on GDP—it extends to inflation, living standards and government budgets. And recent arrivals differ from previous ones in an important way: more are low-skilled.
3. If the fiscal impact is positive, it will not be felt unless the government invests accordingly. A windfall is no good if public services are allowed to deteriorate anyway, as in Britain, where the government is cutting taxes ahead of an election. Similarly, if regulations stop infrastructure from expanding to accommodate arrivals, migration risks provoking a backlash. 

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Topics:  Immigration, Global Economy, Rich World, Productivity, GDP, Inflation, Housing