A Matter of More Than Economics

Immigration is set to be among the most – if not the most – controversial topics of the 21st century. If our aim were to maximise global economic output, we would abolish restrictions on the movement of people. But recipient countries have a right to serve the interests of their own citizens. Economic benefits to potential migrants are irrelevant.

Yet in a competitive economy the gains from migration should largely accrue to migrants themselves, leaving little over for the recipient community. In theory, the latter will enjoy an economic surplus. But this is likely to be small. According to George Borjas of Harvard University, if immigration were to generate a 10 per cent increase in labour supply and to lower wages by 3 per cent, that immigration surplus would be a mere 0.1 per cent of gross domestic product.

Moreover, as Prof Borjas notes, "this small net gain . . . disguises the fact that there may have been substantial wealth transfers from native-born workers to the capitalists who employ the services that immigrants provide". By increasing the relative supply of labour, immigration will normally raise the returns on physical capital and land. But its effects on resident workers will depend on the precise characteristics of the immigrants. Immigration of unskilled labour will lower the relative wages of unskilled workers, while immigration of skilled workers will benefit the unskilled.

According to the latest Trends in International Migration from the Organisation for Economic Co-operation and Development, about half of the recent increase in the British population has been due to immigration. For the European Union as a whole, immigration accounts for close to all the rise in population (see chart). A country that combines tight restrictions on the release of building land with a relaxed policy on immigration makes existing home-owners better off at the expense of prospective purchasers and renters.

In addition to such distributional effects, there are also "externalities" – or benefits and costs not directly perceived by those making decisions. The important externalities come via the impact on fiscal revenues, import of human capital, gains and losses from diversity, economies of scale in the use of infrastructure, and congestion.

If immigrants pay more taxes than they receive in benefits, there is a gain to the rest of society. What matters is not a single year's balance, however, but the present value of the streams of receipts and expenditures. Temporary immigrants who are highly paid and unlikely to be unemployed are the best source of such net revenue.

From a country's selfish point of view, it also makes sense to extract human capital from the rest of the world, at the lowest possible cost. The UK does an almost disturbingly good job of this: in 2002, more than 30,000 nurses of foreign origin were working in its National Health Service. Some 42 per cent of foreigners resident in the UK had tertiary level educations in 2001 and 2002, against just 29 per cent of the native population.

Another indirect effect of immigration is diversity, which can bring economic gains through the availability of a larger number of languages, greater understanding of trading partners' cultures and so forth. But it can bring costs if it erodes trust. The belief that it does helps explain Japanese resistance to permanent immigration.

Finally, greater population density will raise productivity if infrastructure is then more fully used. But, as densities rise still further, this will be offset by increased congestion. In densely populated European countries, the countervailing argument, from congestion, is far more compelling

How then does this analysis help us address two contemporary controversies – those from "labour shortages" and those from rising old-age dependency ratios?

The notion of labour shortages needs to be divided into generalised overheating and excess demand for specific skills. The solution to generalised overheating is lower real demand. Feeding such overheating through migration would make sense only if more populous societies were bound to have higher average standards of living than less populous ones. This is simply not the case.

A more interesting question is whether sectoral shortages should be satisfied through immigration rather than through changes in relative wages and greater training. Immigration saves some of the cost of training people. It also keeps wages lower than they would otherwise be. Nurses are paid very little in the UK because the country imports so many. In the absence of immigration, wages of plumbers and electricians would also rise further above those of many graduates and more would then be trained. Would this be a bad thing?

Again, in a society with a very low birth rate, the decline in the population could have dramatic effects on the labour market. Without large-scale immigration, wages are likely to rise sharply, at the expense of the dependent old. In this case, the standard economic gains from migration might be sizeable. Yet it is also important to note how large migration might have to be. A United Nations analysis indicates that, to stabilise the age-dependency ratio of the current EU through immigration, its population would have to reach 1.2bn by 2050. Immigrants age, too.

My conclusions are these: first, the strongest economic case for liberal attitudes to migration rests on global, not national, welfare; second, a rich country wishing to maximise its own gains would focus on importing skilled workers, preferably on a temporary basis; third, immigration has sizeable distributional consequences that cannot be ignored in the debate; fourth, sizeable immigration will also have substantial indirect effects, some positive, such as greater diversity, and some negative, such as greater congestion in densely populated regions; and, fifth, whether immigration is significantly advantageous to the receiving country depends on its precise characteristics.

Yet the most important conclusion is that one's assessment of the desirability of sizeable immigration is a matter more of values than of economics. It is not a choice between wealth and poverty, but of the sort of country one desires to inhabit.