A misconception about immigration

post by limerott · 2019-08-19T22:37:17.875Z · score: 0 (10 votes) · LW · GW · 10 comments

This is a link post for https://limerott.com/a-misconception-about-immigration/

Contents

  Short and long term
  Narratives
  Remarks
None
10 comments

Edit: I am not arguing for or against immigration. My intent was to explain why the common reaction "Immigrants are robbing us of our jobs" is flawed.

In discussions about immigration, there is a crucial aspect about its economic viability that is often left unsaid: Immigrants create their own demand.

When somebody immigrates to a new country, most things about him remain the same. His set of skills stays the same, so do his traditions, norms and culture. But more importantly, since he is still a human being, there is a long list of services and commodities that he demands: groceries, cloths, a home, a barber, entertainment to name a few of them.

Just by entering another country, he does not suddenly become a one-dimensional economic agent who can take a job but who never consumes anything. Quite the contrary: As he adapts to a new culture, his demand will eventually match that of the native population.

Why is this important? Because for the job that he takes away from the economy, he compensates by increasing aggregate demand. This eventually leads to more jobs. For example, since there is a rise in demand for produce, the supermarket is forced to create a new position. Since the immigrants want to enjoy their native cuisine, a nifty business man starts a restaurant, creating multiple jobs as a result. To get to work, they may commute via bus, which may eventually lead to the opening of an entirely new bus connection. So, just by being a human being, an immigrant creates jobs.

At this point, it is important to note that immigration poses a wide range of challenges: from different social norms to xenophobia to language barriers. But for clarity, we will restrict ourselves to its economic side.

Short and long term

Imagine that there is a town A with 10 people and a town B with 1000 people. Both of them have functional economies.

In one scenario, the political leaders of the two towns decide to unite the two towns. Nothing except the name will change. So, there is now a town C that has 1010 inhabitants. Will town C have a functional economy? Of course! After all, all that was done was subsuming two already functional economies.

In another scenario, a catastrophic event makes town B uninhabitable and forces everyone to leave for town A. In the beginning, it is completely overwhelmed by the foreigners. If there were any open jobs, there will be massive competition for them. If you disregard that the people from town B have demand, this is where the simulation ends: a community unable to deal with a giant influx of immigrants. But, in reality, this is not what happens. To meet what is mostly their own demand, they will rebuild the companies and factories that they used to have. This will create jobs that they will be happy to take, which ultimately will lead to an economic equilibrium.

After the initial shock, the economy of town A had to be restructured to account for the newcomers. This took time and patience, but it was not impossible. Once this was done, a healthy economy was the result. After all: They managed to have a functional economy in their own town, why would they not be able to replicate it somewhere else?

So, in this case, town A now again has a functional economy of 1010 people. But this is exactly the first scenario! Even though the second scenario looked dismal in the short run, in the long run, it produced the same result as the innocuous first scenario.

This means that your views on the economic consequences of immigration entirely depend on which perspective you take. If you consider the short term and disregard the immigrant's own demand, you will see the economy in dire straits. If you consider the long run and take into account the extra demand, there is no problem at all.

Narratives

There are three common narratives of immigration.

The first is the most bleak: the lazy immigrant who is unemployed and is living on social security. From a perspective of fairness, this is certainly unacceptable and typically frowned upon. But from an economic perspective, this kind of welfare immigration amounts to a stimulus package! His government checks turn into demand for the local economy, creating new jobs without taking existing ones[1].

The second type is the low-skilled immigrant. The fear is that he will compete with low-skilled labour, taking their jobs and depressing wages. In the short run, this may be the case! And if you narrow your view only on his own field, this may be permanently true: If there is one factory in town and the amount of people applying for a job there doubles, then wages go down. But it does not hold true for the entire economy. There may not be more factory jobs, but jobs in other areas will emerge as consequence of higher demand. A large chunk of this demand will be demand for low-skilled work, as all people require basic necessities. So, the solution may be to retrain factory workers to work in some of these areas instead, therefore curbing oversupply.

The third type is the high-skilled immigrant. The usual argument in favor of it is this: If a company cannot fill high-skilled positions with locals, they should look for employees abroad. This has very immediate and clear benefits. By filling the position, more and better products and services can be provided, thus increasing revenue. Since the goal was to meet demand that the local population was unable to satisfy for a long time, there is no oversupply and nobody's job is taken.

The allure of this type of immigration is the safe knowledge that the locals can only gain from it. Again, this implies that they would lose if the immigrant was low-skilled. This is not the case in the long run.

If you extend this argument by considering demand, the benefits are even more striking. Since high-skilled positions are usually well-paid, the immigrant will have a significantly higher demand than a low-skilled immigrant. In addition, a large part of it will be demand for low-skilled work. Since he is not taking any of these jobs, this even creates a net increase in this kind of job, as opposed to the low-skilled worker where you come out even. By this reasoning, a high-skilled immigrants is a golden goose for any economy[2].

Remarks

In these discussions, people often cite that immigrants are more likely to start a business on average. This is a misleading statement: It implies that those who don't start a company are robbing the economy of jobs. But this is only temporarily true. In the long run, their demand creates jobs elsewhere.

It is instructive to consider robots in this context. They replace local human workers like immigrants, but unlike immigrants, they do not have the same demand profile as humans. In return for their work, they ask for energy, machinery and engineering. This type of demand undoubtedly creates fewer jobs for humans compared to an immigrant worker. So, when it comes to the health of the economy, you should fear robots much more than immigrants.

Fear of immigrants is still widespread. But more often than not, people are generally willing to accept foreigners, but have a queasy feeling about the effect they will have on their job market. They believe that their economy cannot handle them. But the truth is that once people have immigrated, they become the economy, which then merely grows in total size. Hopefully, getting rid of this misconception will allay some of these fears and pave the way for cultural integration and acceptance.


  1. The tacit assumption is that we talk about modern economies which tend to be limited by demand and not supply. For example, if there is already not enough food for everyone, immigration would only exacerbate the problem. Also, this kind of stimulus is not without its own problems. ↩︎

  2. This does not come without a price. But this price is paid by the immigrant's home country, which suffers a terrible economic blow as a result. ↩︎

10 comments

Comments sorted by top scores.

comment by financebot211 · 2019-08-20T21:33:19.231Z · score: 10 (7 votes) · LW · GW

"The first is the most bleak: the lazy immigrant who is unemployed and is living on social security. From a perspective of fairness, this is certainly unacceptable and typically frowned upon. But from an economic perspective, this kind of welfare immigration amounts to a stimulus package! His government checks turn into demand for the local economy, creating new jobs without taking existing ones."

This is called the broken windows fallacy. This person isn't a boom for the local area he costs them in taxes and inflation through borrowing. If he didn't exist the community would have more capital to invest in productive enterprise. Very basic stuff.


comment by limerott · 2019-08-20T17:37:37.010Z · score: 3 (3 votes) · LW · GW

What is your definition of productive enterprise, what is non-productive enterprise?

How about this? The person uses his social security to buy a new phone. This purchase increases the capital available to the manufacturer for R&D of new phones.

I googled the broken windows fallacy and this is the argument I got: "If he hadn't paid for the broken windows, he could have gotten himself a pair of new shoes." But the point is that he didn't buy the pair of new shoes (he instead hoards the money), but he is forced to buy the new window (since it's windy otherwise), creating demand.

comment by Viliam · 2019-08-20T20:09:57.767Z · score: 13 (3 votes) · LW · GW

The idea behind the broken windows fallacy is that when you move money from point X to point Y, and start talking about the effects of having more money at point Y, it would be fair to also mention the effects of having less money at point X. Otherwise you are drawing a false picture.

To highlight the mistake you made, let's take the situation into extreme. Imagine that there are so many immigrants that the population literally doubles. Let's assume that all of them are the lazy type: none of them gets a job, ever, all of them are living on welfare. To prevent starvation, the government issues a law that everyone who previously had a job must now work for 16 hours a day, to produce enough goods to satisfy everyone's needs.

I suppose we would agree that such outcome would be a bad thing... for those working 16 hours a day. (We could make a utilitarian argument that by improving the lives of those on welfare it is still a net good. But it makes it obvious why most of the original population would try to prevent such outcome.)

Now let's look at your argument: economy is growing, there is more work -- fantastic, isn't it?

By the way, the argument "more economy = better" is itself problematic. First, it probably should be measured per capita; having X% more whatever because you have X% more people, leaves the same amount for everyone, on average. But even measured per capita: I think that a hypothetical Western society where people consume 20% less, but only work 4 hours a week, is not obviously a worse place. (I am not talking about societies where "consuming 20% less" = literally starving, of course.) Similarly, working 6 days a week and consuming 20% more, is not an obvious improvement.

comment by G Gordon Worley III (gworley) · 2019-08-20T18:21:28.366Z · score: 2 (3 votes) · LW · GW

This doesn't exactly apply because most welfare spending (and in fact most government spend) is leveraged against future economic growth and inflation, so it actually is possible to create self-fulfilling prophecies via stimulus spending so long as that spend eventually produces real growth. This case might or might not be the most efficient way to do that, but governments are rarely trying to maximize efficiency at the expense of all else so we shouldn't really count that against the argument. So this would seem a neutral, at worst, scenario rather than one of dead-weight loss as you argue.

comment by waveman · 2019-08-20T02:12:37.249Z · score: 8 (5 votes) · LW · GW

You yourself are ignoring a huge part of the issue - capital.

If there is excess capital then this is not relevant. But this is not usually the case. Each immigrant requires capital to support their life and their work. The numbers involved are huge, perhaps $300,000-500,000 per person.

Using econometric data from Australia I estimated that about 25% of its GDP is expended just keeping up with population growth, mostly from (highest in the western world) immigration. New roads, hospitals, schools, colleges, fire stations, houses, power stations, subways etc have to be built. This is why many roads that used to be free to drive on are now toll roads even though the traffic is slower. Taxes go up to pay for new public services.

The rate of spending here is proportional to the rate of growth. For a static population you only need to pay for depreciation and maintenance.

This issue is why it is a cliche in development economics that high population growth rates make it almost impossible for poor countries to get rich. All the growth is consumed paying the the higher population.

It also explains why Japan remains prosperous, clean and a nice place to visit in spite of low GDp growth. With more or less zero population growth the need for new infrastructure is low, free up ~25% of GDP.

Another (more widely viewed) form of capital is land. Combined with restrictive land use regulations in many parts of the rich west, this is a recipe for higher and more volatile land and house prices. See e.g. https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd1e00ek4ebabms.cloudfront.net%2Fproduction%2F3175bb18-2ceb-4125-b48e-a386bef8d43c_FINAL.png?source=Alphaville

Your essay reads - to me - a bit like you are working backwards from a preordained conclusion rather than working forward from the data. Could I suggest going back to square one and taking another look at the whole question.





comment by limerott · 2019-08-20T17:10:02.647Z · score: 1 (1 votes) · LW · GW

First of all, I am not directly advocating immigration nor am I against it -- I am analyzing one particular aspect of it. A common reaction towards immigration is "they are robbing our jobs" and I tried to outline the faulty logic underneath that. They are not stealing anything, but becoming part of the economy.

Immigration is a complex issue that has to be decided on a case-by-case basis. If there are food shortages in a country, adding more people makes no sense. If there is, as you say, an excess of capital, but not enough people to invest it into, it does make sense. Australia is only one particular case.

Since the argument I am making is a priori, I don't need data.

Can you elaborate on the connection between capital and immigration? In particular, who is paying the aforementioned $300,000 - $500,000? It's not like every immigrant is getting a paycheck. If these are public expenses paid over a long period of time, I don't see the problem. You are right in saying that excessive population growth or immigration is detrimental, though. (This is why I made the distinction between short-term and long-term)

If the population growth is organic and at a sustainable rate, doesn't this lead to a higher GDP, which is a desirable outcome?

comment by cousin_it · 2019-08-20T07:38:40.720Z · score: 5 (2 votes) · LW · GW

It is instructive to consider robots in this context. They replace local human workers like immigrants, but unlike immigrants, they do not have the same demand profile as humans. In return for their work, they ask for energy, machinery and engineering. This type of demand undoubtedly creates fewer jobs for humans compared to an immigrant worker. So, when it comes to the health of the economy, you should fear robots much more than immigrants.

According to my beginner understanding of econ, this part seems wrong. In aggregate, a household or country will benefit more from a robot which cleans floors at the expense of a little electricity, than from an extra person who does the same job but also requires room and board.

comment by limerott · 2019-08-20T17:25:33.673Z · score: 1 (1 votes) · LW · GW

It depends on how you look at it. In terms of productivity (output per labour cost), more robots is better. But if all cleaning staff is replaced by robots, the robot manufacturer profits while the displaced workers have less disposable income, thus there is less demand for the local economy (local groceries store, gas station, hairdresser, realor etc.), which suffers as a consequence.

comment by cousin_it · 2019-08-20T18:10:01.969Z · score: 3 (2 votes) · LW · GW

I think splitting it up only obscures the overall effect: for the economy as a whole, giving an external agent fewer goods and services for the service of cleaning is better than giving more for the same.

comment by Ben Pace (Benito) · 2019-08-20T18:15:09.182Z · score: 4 (2 votes) · LW · GW
In one scenario, the political leaders of the two towns decide to unite the two towns. Nothing except the name will change. So, there is now a town C that has 1010 inhabitants. Will town C have a functional economy? Of course! After all, all that was done was subsuming two already functional economies.

I feel a bit wary of using this as an axiom for further thinking about immigration between countries. I've not really thought about this issue before, but my guess is if two countries with very different levels of economic development open their borders to each other this could be fairly damaging. It might substantially increase prices and demand of land in the less economically developed country, causing upheaval (e.g. poorer people in the more developed country buying out middle class people in the less developed country); it may damage a lot of their industries where the more economically developed country has more efficient abilities. I also think, especially if there's big cultural and language barriers that a lot of basic norms for interacting with strangers and such can be very confused and cause damage in the years/decades it takes to integrate.

I don't have much of an opinion here, just thought I'd mention that I got off the bus a bit at this part of the argument.