links for 2007-06-22
"Orthodox" and "Heterodox" Economics Once Again

Ottoviano-Peri and the CEA vs. George Borjas on the Distributional Consequences of Immigration

George Borjas appears to get the economic theory not quite right:

The Borjas Blog: An Inconvenient Truth That Somehow Didn't Make The CEA Report: As I mentioned in a previous post, the CEA seems to have concluded that if one allows for complementarities between immigrants and natives [i.e., that unskilled native-born workers can serve as translators and team bosses for their coworkers who don't speak Englidh]... the long-run gains from immigration are somewhere between $30 to $80 billion per year. A careful reading, however, indicates that the CEA doesn't quite say that....

As I suspected, the $80 billion number does not mean what most people would probably take it to mean. Economic theory predicts that the long-run gains from immigration to the pre-existing population must be zero—-even when there are complementarities between immigrants and natives and even if those complementarities are incredibly strong. In the long run, capital adjusts fully until firms wither away all the excess profits from the initial wage depression...

Now that's simply wrong: "capital adjusts fully" means that more future investments are made in high-productivity areas to which migrants move and fewer in low-productivity areas from which migrants came. Returns on savings are thus higher--and because the pre-existing population are savers, they benefit. So do the migrants. The long-run model in which Borjas is implicitly working is one in which real wages for non-movers are constant by assumption: so there are no losers, only gainers.

Borjas then shifts to the Ottaviano-Peri model:

The CEA used the Ottaviano-Peri result that the complementarities helped natives and calculated how much natives gained as a result. This is what they say: "Multiplying the average percentage gains by the total wages of US natives suggests that annual wage gains from immigration are between $30 billion and $80 billion." But they completely ignored the fact that the same complementarities that supposedly help natives also hurt [previous] immigrants, and by quite a bit. In other words, the CEA uses a strange definition of who “we” are: including only native-born workers and ignoring the millions of immigrants already here, who are affected by yet more immigrants.... Had the CEA taken the immigrant losses into account, the Bush administration would have had to report that the net gains from immigration for the pre-existing population are equal to... ZERO!

This is true only if you believe that previous immigrants are exactly like brand-new immigrants--that they don't become more like native-born over time as they gain social knowledge and English proficiency.

And there's actually more embarrassing news, for a theorem is a powerful thing.... [T]he average [long-run] wage change [note: not the real income change] in the [pre-existing] population must be zero.... If there were 15 million [previous] immigrant workers, each immigrant worker must lose $3,333 annually--and the $50 billion gain accruing to natives must be entirely offset by the $50 billion loss accruing to immigrants.... Imagine the headlines had the CEA reported that immigration during the 1990s led to a $3,333 drop in the average earnings of pre-existing immigrants! This is not the spin the White House was looking for, but it is a direct implication of the spin they did put out. What an inconvenient truth! I wonder if the compassionate conservatives will shed a tear about the huge wage losses suffered by pre-existing immigrants.

If I had Giovanni Peri here at hand, I think that he would say that increased immigration is very good for new migrants, good for savers worldwide, good for native-born workers, good for previous immigrants who have substantially assimilated--social knowledge, English proficiency, et cetera--and probably bad for previous immigrants who have no assimilated. And he would also say that the model goes haywire and is untrustworthy when the number of non-assimilated immigrants is small, and that that going haywire is where the very large income losses for previous migrants is coming from.

And, of course, the thing to object to in the turn this entire debate has taken has been the failure to focus evenly on the consequences for all stakeholders in global migration--look at what happens to everyone, not just one particular group that is convenient for your current political position.

But I will ask him.

E.P. Lazear et al. (2007), "Immigration's Economic Impact"

G. Ottaviano and G. Peri, "Rethinking the Effects of Immigration on Wages," NBER Working Paper 12497 (2006)