3 Theories of migration and economic growth
This section outlines the key theoretical models of economic growth that incorporate migration. The macroeconomic effects of immigration are complex and it is unclear whether per capita incomes will increase as a result of immigration, although in the literature there is a general agreement that there is probably a small positive effect on GDP per capita from immigration. Effectively our interest lies in explaining in what circumstances an additional migrant could increase the level of income per head in a country. The key components of such an analysis are obvious; the contribution and costs of the migrant’s own income as well as effects on wider income generation and wider benefits (social and cultural), as well as fiscal costs and benefits must be considered.
The literature identifies a variety of theoretical models that can be used to model the growth effects of migration. In the 1950s, in particular, there was a large body of literature produced on economic growth and migration. This paper does not propose to review all of this literature, nor all of the models available. It surveys some of the main theoretical approaches to migration and discusses some of the main effects on the host and source country that the models predict.
One strand of the literature is firmly rooted in the economics of international trade, while another approach employs methods of labour economics. Some economic growth models have explicitly incorporated migration as an explanatory variable. Another approach involves the use of a growth accounting framework. A further approach, used for example by Chapple and Yeabsley, uses neoclassical economic theory with some short-run Keynesian interactions to identify the channels through which migration affects national welfare (Chapple and Yeabsley 1996).
These models provide different ways of thinking about the impact that immigration may have but, as is often the case, none of these models provides a complete explanation of the effect of migration on economic growth. This section provides a run-through of the main theoretical approaches and then a fuller description of the growth accounting framework which will be used as an accessible way of explaining the main effects of migration on growth in this paper.
3.1 Highly aggregative theoretical models
This section concentrates on some highly aggregative models of trade and labour market theory. These theories are the principal economic frameworks used to assess the effects of immigration. The former analyses the effect of the free movement of labour on the welfare of different countries, mostly using general equilibrium analysis. The latter focuses on the role of the labour market and the effect of migration on the price of labour, typically using partial equilibrium analysis. Most of the literature takes the latter approach, focusing on labour market effects of migration. However, trade theory models are used on the basis that there is no good reason to treat labour mobility differently from the mobility of any other factor of production and because the general equilibrium framework can overcome some of the problems posed by questions such as the impact of immigration on wages that occur in the partial equilibrium framework.
One aspect of the debate in the literature on the effects of migration (for example between George Borjas and Jagdish Bhagwati) is whether the most appropriate tools used are those of general or partial equilibrium. Partial equilibrium analyses will necessarily provide a narrower viewpoint and a focus on effects in a particular sector rather than the broader general equilibrium approach.
A second aspect is whether the viewpoint taken is that of native, national or global welfare. Often only the national viewpoint is taken, and within that the impact on natives. Certainly it is rare to pay attention to measures of world rather than national welfare. Public policy analysis typically utilises a national welfare approach.
Finally, some analyses take a static, rather than a dynamic approach to migration, focussing for example on immediate effects such as the impact on native wages, rather than on dynamic consequences such as the inter-generational effects or the responsiveness of natives to immigration.
3.1.1 Trade models
In the standard Heckscher-Ohlin model, trade and migration are substitutes (that is, migration decreases with trade liberalisation). The movement of productive factors raises world income and these income gains are shared between natives of both source and host counties. It holds that there are mutual gains from migration similar to the conventional gains from trade.
The model predicts that labour migrates from regions where its marginal product is low to regions where its marginal product is high, and that it will cross international borders to do so. In the absence of restrictions, labour migration should tend to bring about wage convergence between the host and source countries. The source country will experience a rise in wages and a fall in returns to capital, a rise in per capita income and a fall in national output (assuming no simultaneous emigration of capital). The host country will see a fall in wages as a result of the influx of workers and a rise in returns to capital. Per capita income will fall although national income rises. However, if wage earners also see some earnings from owning capital (such as pensions, shares or housing), then it is possible that per capita incomes of the pre-immigration population rise with the increasing return to capital. The per capita income of the immigrants is also higher than it would have been in the source country. As a consequence, individuals could be better off even though the host country is worse off. When there is simultaneous emigration of capital (in the form of financial or human capital) the predicted effects are less clear without precise information about the nature, value and ownership of the capital.
If there are only two factors of production (capital and labour) the model’s results hold. But if there are more than two factors, then the results of factor migration being a perfect substitute for trade in causing factor price equalisation may no longer hold. When economies of scale in production are possible, then migration and trade may act as complements, rather than substitutes. Since with economies of scale it is always cheaper to produce in one location rather than two, production expands until either demand or economies of scale in one country are exhausted. Production in one country will be reduced as production in the other expands. Factors will shift to the location of expanding production. This would increase the host country’s capacity to export, as well as increasing its domestic market for imports.
Davis and Weinstein argue that a conventional approach to assessing the returns from immigration only considers discrete inflows of a single factor to the economy. They use a variant of the standard Ricardian trade model to take into account the origins of factor price differences that motivate migration. They argue that in the case of the United States its position as a technologically superior economy encourages immigration which wants to exploit the technological advantages and that consequently “natives in the country that receives immigrants always lose relative to a baseline with free trade” (2002, p4). Their use of a Ricardian model results in the finding that immigration creates a loss for the receiving country. They conclude that the combination of labour immigration and net capital inflows impacts negatively on US native incomes, assessing this at losses of almost 1 percent of GDP, which equated to approximately $72 billion in 1998 (2002, p36). They caution that Pareto gains could be achieved under their model due to the flow of factors enhancing world efficiency, that their analysis applies specifically to America and that despite the findings of losses to native incomes there is a redistributional effect to migrant workers resulting in higher world income overall. They also leave open for debate the idea that immigrants are likely to bring with them other important benefits that they do not reflect in their analysis.
A major criticism of the trade theory models is that they cannot hold in an economy where there is no free movement of people or where there are more than two factors of production. These limitations reduce the relevance of this model as a suitable way of explaining growth effects of migration in New Zealand.
3.1.2 Labour market models
An alternative approach is to investigate the impact of migration using a model of the labour market in the host country. This approach has been particularly associated with the work of Borjas (2000). The immigration surplus (shown in Figure 3) is used to analyse the impact of an increase in migration on the host country.
In the model, wages and employment depend on the relationship between labour supply (S) and labour demand (which in the short run is determined by the marginal product of labour, MPL). Before the arrival of immigrants, wages are at W0 and only native workers are employed (N). When immigrants enter the country, the supply of labour expands (represented by a shift in the supply curve to the right from S0 to S1) and the market wage falls to W1 (all other things being equal). As a result, native workers earn a lower wage. Total employment increases to N + 1. The economy’s total output also expands. Total output is represented by the area under the marginal product curve and to the left of the supply curve. This area is larger following the increase in labour supply. The expansion in output generates an increase in income for the owners of capital in local firms (and, of course, income for immigrants). Under certain conditions the loss in income for native workers is more than offset by the increase in income accruing to the owners of capital. The result is a net increase in national income. This increase is referred to in the labour economics literature as the “immigration surplus”. The surplus is represented by the triangular area in the diagram.
In essence, the surplus arises because immigrants increase national income by more than the cost of hiring them. If there are positive externalities from immigration, the gain is even greater. Certain conditions are required to produce an immigration surplus. The model assumes that the supplies of capital and of both native and foreign-born labour are perfectly inelastic, and that immigrant workers are perfect substitutes for native workers.
Using the same formula as Borjas, Poot presents a calculation of the immigration surplus in New Zealand (Poot, Nana and Philpott 1988). In his calculation the increase in national income due to immigration comes out at approximately 0.16 percent of GDP. As emphasised by Borjas (1996), Poot highlights the importance of redistributional effects which are potentially much more important than the net gain in national income because native workers may lose income while owners of firms gain income.
It is suggested that neither the trade model theory nor labour market theories are satisfactory in explaining the relationship between migration and economic growth. In particular, for our purposes, the labour-market models do not focus on growth in GDP per capita. This leads us to suggest alternative ways of thinking about how to explain the relationship. Growth models provide a useful way to consider the pathways through which migration may lead to economic growth.