Immigration at Reason and elsewhere

Katherine Mangu-Ward has an excellent column about BoA issuing credit cards to illegal immigrants over at Reason.

Here's the Brown Peril by Peter Bagge

Here's (old) Julian Simon at Cato

Here are Ottaviano and Peri - abstract, paper, presentations.

The basic point of the Ottaviano and Peri paper is pretty simple. Immigrants ain't like us (well, they ain't like the native Americans). But that's a good thing. It means immigrants' skills are more likely to complement natives' skills which means less downward effect on wages for similar groups and a greater positive effect on wages for unlike groups.

The distribution of skill among natives looks like a normal distribution (or some kind of a bell curve). There's relatively few unskilled workers, relatively few very skilled workers and lots of folks in the middle. But for immigrants to US this the distribution is essentially flipped - n-shaped. US is importing lots of unskilled workers, a fair number of very skilled workers (doctors, engineers, etc.) and little in between. In other words US is importing precisely the kind of labor that is scarce in US, which implies much larger overall economic gains.

Ottaviano and Peri go further (much much further then the Borjas papers) and estimate the substitution/complementarity within each skill group. A perhaps somewhat surprising finding is that even within skill groups the immigrants tend to be more complementary/less substituting than you'd think. Even for unskilled workers, the substitution elasticities between natives and immigrants is fairly small, implying only a modest pressure on natives' unskilled wages (and for the most unskilled workers, immigrants actually push up wages a bit).

The presentation linked above makes this point in a pretty straight forward way (if you don't feel like reading the paper with all the technical details). While unskilled workers might be a little hurt by immigration, the magnitude of the immigration effect on their wages is very small compared to other factors.

The authors also account for changes in capital stock which results from changes in the number of people in the economy. If you're a neoclassical growth guy then you think that an increase in the number of workers raises the marginal product of capital. This in turn means that the return to capital is higher prompting more capital accumulation. As capital stock rises the marginal product of labor rises as well and the negative effect on wages is ameliorated. Note that in the standard neoclassical growth model (the Ramsey/Solow model) an increase in the number of workers has no effect on per capita income in steady state since capital/labor ratio remains constant (here there's a bit of a fudge on whether migration increases L or n). It's more complicated with different types of labor and different substitution/complementarity relationships among them, but the end result is that it's an empirical question. An the data are favorable to the immigrants having a large positive overall effect and only a small negative effect on unskilled workers.

In other words, we shouldn't be building fences, we should be paying their relocation costs.
(Or at least sell entrance visas to capture some rents now going to the coyotes and the like)