Effects Of Immigration On The Us Economy Economics Essay

The success of America over the centuries has been helped enormously by immigrants into the country. However, immigration is now a very controversial issue in US. Many of the immigrants working in the country at the moment are illegal, for example, workers who have come over the border from Mexico. These immigrants want to be recognized and allowed to work in the US officially, and on May Day 2006 over a million of them protested in rallies held in major cities across America

According to data from the US Department of Homeland Security, 1.1 million people became legal permanent residents of the US in 2005. Mexico was the most common country that they came from, accounting for 14% of the total. However, each year, up to a million illegal immigrants also enter the country, mostly from Latin American nations. There are now more than 11.5 million of them living in the US. Over 2.5 million are based in California and over 1.4 million are in Texas.

The immigrants mainly work in particular industries. For example, around 22% of all construction jobs are held by illegal workers. Other popular sectors are farming, cleaning and preparing food. Typically, these are low-skilled, low-paid jobs. Overall, immigrants account for around 5% of the workforce. Some argue that immigrants push down wages for everyone and take jobs away from Americans. Others argue that they provide a bigger workforce and help the economy. Defenders of immigration argue that the government receives tax receipts from immigrants and that the benefits paid to them are usually low; for example, most immigrants return home and do not retire in the US, and so do not receive pensions.

Based on the following questions analyze this case study:

How does immigration affect the production possibility frontier of an economy?

In what ways can immigration help economy?

Do you think economies should welcome immigration?

How does immigration affect the production possibility frontier of an economy?

An increase in immigration would represent an increase in population, and the labour force. This would shift the PPF outward, a higher level of production possible frontier.

In what ways can immigration help economy?

“On balance, immigration usually produces economic benefits for the receiving country. Immigrants are more economically active than the native population; are paid less than natives with similar skills; are more energetic than natives; and more willing to take undesirable jobs.” Adapted from an article by Professor John Kay in the Financial Times

Some of the economic benefits of immigration:

An expansion of the labour supply

Reduced pressure on wage inflation

A fall in the NAIRU (non-accelerating inflation rate of unemployment)

Aggregate demand effects

Entrepreneurship

Higher trend growth

An expansion of the labour supply – migration can extend the pool of available labour for firms: for example, skilled migrants may alleviate shortages in sectors such as the NHS, agriculture, construction, computing industries and state education – allowing the government to meet targets for improving public services. Migrants tend to be young adults – so a rising trend of migration can help to increase the population of working age and also the flexibility of the labour market. Many migrants into the UK are highly skilled people, drawn particularly to the quaternary service sector, especially in finance, in London and South-east England.

Reduced pressure on wage inflation – an increase in labour supply from migration is likely to restrain wage growth in the short term, given the amount of labour that firms demand. This is shown in the diagram below. A slower rate of increase in wages has the effect of easing cost-push inflationary pressure which might then give the Bank of England more leeway to keep interest rates low. Immigrants are usually prepared to work for lower wages than domestic workers. This can mean lower costs of production for suppliers which can then feed through into lower retail prices for consumers.

A fall in the NAIRU – If migration effects are strong, then it is plausible to argue that the non-accelerating inflation rate of unemployment might fall. Because when labour demand is very strong, whereas normally this could put upward pressure on wages, if labour supply can adjust flexibly to rising demand, then there is less risk of acceleration in wage and price inflation. However, we should be cautious about this idea – for there are always natural and institutional barriers to the geographical mobility of labour. And the levels of migration we are seeing in the UK are not particularly large at the current time

Aggregate demand effects- economic migrants are likely to earn more than they spend contributing to the growth of the local or regional economy

Entrepreneurship – supporters of a more relaxed approach to migration claim that many of the migrants are younger and have the potential to be entrepreneurial in their approach – another potential supply-side gain for the economy

Higher trend growth – taken as a whole, a positive rate of migration can add both to short-term economic growth (via a rise in aggregate demand) and also a slightly faster trend rate of growth (which brings economic benefits in the long run). The UK Treasury has estimated that the economy might grow each year by an additional quarter of a percentage point-worth £2.5 billion -until 2006. That handy annual addition to GDP should also boost government tax revenues by about £1 billion every year. This assumes a net migration of between 160,000 – 180,000 per year

The costs of migration

Depressing the real wages of domestic workers

Doubts about productivity effect

Increased pressure on the welfare state

Unemployment concerns

Increased pressure on scarce resources

Depressing the real wages of domestic workers – e.g. an inflow of new workers will lead to an increased supply of low skilled workers and therefore drive down the equilibrium wage for domestic low-skilled employees

Doubts about productivity effect: Many immigrants, especially those from poorer countries, have a low educational level and are more likely to be unemployed or economically inactive than the domestic population.

Increased pressure on the welfare state (benefits, education, housing and health) – the taxpayer may eventually have to pay for the increased level of government spending needed to extend the economy’s infrastructure

Unemployment concerns: There is a risk of higher unemployment if the skills profile of migrants does not match the demands of the growing industries in the economy

Increased pressure on scarce resources: The inflow of immigrants into an area may increase the demand for housing and push up the cost of living. To compensate their workforce many employers are likely to raise money wages