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Labor Economics of Immigration Assignment

With the open market trend the world markets are engaging in, one can not deny that human, like goods and as capital are traded for certain reasons. Albeit immigration may be favorable to the migrant, certain repercussions of such human capital movement fall, especially on the country’s economic performance. Human migration is the movement of people from one place to another seeking permanent or semipermanent residence.

Many reasons drive people to move to other countries or to other region of their countries, in which to name some of them, are the economic potential of the receiving country, the welfare benefits and opportunities perceived to be available and some cultural interests. However, immigration of course has some costs namely the travel time and costs, house settlement decisions, modes of transportation, adjustments to climate and cultural barriers (Xpedition 2005). People are most likely to migrate to a nearby state or country.

But of course this is not the only scenario of immigration for many varied countries in terms of distance and characteristics experience inter-migration. Internationally, the estimated number of migrants is increasing. During the 1960’s the estimated number of international migrants around the world is about 75 million which almost 2. 5% of the total world population. Four decades later, it dramatically rose to 177 million which is 2. 9% of the whole population.

The descriptive statistics on the proportion of international migrants according to destination region showed that from 1960 to 2005 migrants prefered to settle in developed countries (EEA 2006). This scenario could give us a notion that the richer the country is, the more enticing it is to the immigrants. Some recent researchers hypothesized that the more generous the welfare system is the more the immigrants are attracted. Boeri, Hanson and McCormick (2002) and Pedersen et al (2004) believe that Europe offers a generous immigrant welfare system but that welfare magnet effects re not a powerful draw for migrants.

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In neoclassical economics migration is considered a disequilibrium that ends once equilibrium is reached again. Lewis (1954) said that the big differentials in wages, employment and returns to capital between countries lead to capital migration and human migration. Other economists such as Keynes did not focus on the wage effects of immigration rather on the fact that it can actually eliminate or dampen the differences in unemployment.

Others insist that the main effect of immigration collectively falls on the expected level of income taking into account the employment conditions of the receiving country (Harris and Todaro 1970). On the industries’ side, if employers face a labour shortage they would prefer to employ immigrants rather than raise wage levels to attract native workers. This is proposition is an example of migration mainly determined by the nature of labour demand in the destination country (Piore 1979).

Other literature in microeconomic theories of migration include that of Sjaastad (1962) and DeJong and Fawcett (1981) which chiefly focused on the valuation of immigrant as the main criterion for his or her migration decision. Sjaastad (1972) insisted that migrants decide the destination that will maximize the net present value of their projected future income minus the cost of migrating. This sounds that immigration is like a long-run or even a lifetime investment.

DeJong and Fawcett (1981) included the subjective criteria of migrants such as their personal values and desires which of course does not only cover economic explanations rather social and psychological ones as well. It can be observed that the literatures then are focusing on different aspects of the immigrations such as its driving factors, its effect short-run effects on the level of income and/or unemployment and the employment attitudes of the firms. However, these theories are not enough to thoroughly explain the phenomena of the dynamic business of immigration.

Accompanied by globalization and much open world market, immigration is said to be rampant just like the trading of goods. These manifestations may be the causes why there was an increased interest on studying immigration as it is already a part of the world business. Stark and Bloom (1985) suggested that household migration strategies may be a form of risk management rather than a form of maximizing expected income. Stark (2003) stated that relative income differentials stimulates resentment over the home country and thus urging migration to country/state of much higher income.

The theories devised did not include some of the critical interests of migrations such as the bases of migration policies, the skill composition of the immigrants as well as their educational attainment, and immigration’s real impact on the wage and employment opportunities of the natives. Studies by Card (2004) and Borjas (1995, 2003) attempted to put a light on the issue by considering some economic theories to put up a methodology that will best answer the wage and opportunities of the natives questions. In United Kingdom, Dustman (2005) pioneered the immigration studies in UK context.

Evidently, globalization has influenced the scholars to re-examine the economic theories to best explain the happenings in our modern world economy. Immigration can mean transfer of potential workers. If a country is losing its potential workers, it is said that it experiences what we term as ‘brain drain’ while the country receiving those potential workers can enjoy the advantage. Intuitively, the impending problem is if the economy is not growing and there are no new job openings, will the receiving country deprive its native workers of opportunities?

Skill composition is therefore important in determining the net impact of immigration. Theoretically, skills can be transferable and there are skills highly rewarded depending on how the economy poses values on their work. As skill level advances and if wages offered abroad is more inelastic than that of their home country, high-skilled workers tend to migrate abroad (Figure1), conversely, if wages offered in the home country is more inelastic than that of what is offered abroad, this will encourage migration of low-skilled workers (Figure2).

Both of the scenarios are respectively illustrated in the Figures 1 and 2 from lecture of Smith (2008). For closed economies, inflow of immigrants can increase the wages of the natives if the skills are complementary because it will compensate the skill shortages (Figure 4). If the skills are substitutable, wages are probably going to decrease (Figure 3). It can be inferred here that effects on the employment of the natives depend on how elastic their current country’s labor supply is, combined with the relationship between migrants and natives skills. Immigration

Increases total employment (E0 to E1) A shifts in labour demand from (D0 to D1) but reduces native employment (E0 to E2) puts upward pressure on wages (W0 to W1) and increases total employment (E0 to E1) Yet closed economies will not be enough to suit the explanation on how immigration will change natives’ wages, if ever it has. Analysis should be brought into an open-economy picture which, as most recent researchers believe, immigration will not have any wage impact in the long-run. Card (2004), Borjas (1995, 2003) and Dustmann (2005) conducted studies on the US and UK as the destination countries.

All of these studies concluded that immigration has an insignificant impact on the wages and unemployment of native workers. This may be due to factor price equalization (Smith 2008), change in the output mix across economy, internal migration and change in technology (Ruhs 2006). In reality, countries are not oblivious of the impending problems and are not passive in dealing with such thus government intervenes through its regulations so as to dampen the short-run shocks and imbalances immigration may cause. On the macro level, the impact of immigrants on the UK government finances rises over time.

Sriskandarajah et al (2005) affirmed that migrants are large net contributors to government income as they pay more in taxes than they draw in benefits. The description above is supported by the findings of Riley and Weale (2006) which reported that immigration from 2001-2006 added 0. 5% to the working age population per year and those immigrants contributed 17% of the total economic growth in 2004 and 2005 (Smith 2008). Another Macroeconomic phenomenon shows the adverse relationship between unemployment and inflation, which was first observed by Phillips.

As illustrated by Figure 5, there has been a significant net inflow of economic migrants from abroad since the late 1990s, reversing earlier net outflows. At the same time, it is noticeable from Figure 3. 3, real wages have also remained remarkably muted (which can be associated with lower wage inflation) just after 1994. In fact annual real earnings growth has averaged just 1. 5% since 1995. This is considerably lower than the 4. 5% average annual rate during the first half of the 1970s. Where does this relationship come from?

One explanation is, as people find it increasingly easy to move across borders, so firms may find it easier to hire additional lower paid workers from overseas without having to raise wages significantly which, however rises the unemployment rate among native workers. Relatively high unemployment tends to be associated with decreased wage pressure due to the shifting balance of bargaining power between employers and employees. In closing, Immigration (assuming they are close substitutes) has a negative effect on native workers, as illustrated in Figure 3 above; however that would only hit a small proportion of the industry.

The benefits of low inflation across the country would eventually outweigh the costs. In The impact of immigration of British Labour Market supported that immigration once it changed the skill composition in the industries leads to disequilibrium between supply of and cost-minimising demand for labour types at existing wages and output levels. Reinstatement of equilibrium should be expected therefore to involve short-run changes in wages and employment levels of different skill types and may or may not require long-run changes as we allow the output mix to adjust through governmental and industrial adaptations (Dustman 2005).

He implied not to expect effects if immigrants resemble the skill composition of natives. Dustman (2005) provided a step-by-step empirical econometric analysis approach using time-series cross-sectional data of UK. He borrowed Borjas (1999) ‘spatial correlation’ approach in analysing relationships between immigrant labour inflows and changes in natives’ overall labour market outcomes. He has seen the variation in economic outcomes variation to be spatially correlated in immigrant densities because of common fixed influences resulting to positive or negative statistical correlation.

Having seen autocorrelation as a problem Dustman eliminated the common fixed influences by changing economic outcomes according to the ratio of immigrant concentration. By doing so, I think it would already eliminate somehow the bias between labour market outcomes and level of immigrant shares so right after, can proceed to further analysis as time-series’ data natural problems has been remedied.

However, it leaves causality between immigrant inflows and labour market outcomes of the natives and to address this, measures of historic settlement patterns as instruments for immigrant inflows were used because immigrants are to be attracted to settle where there exists a social network. Clearly, Dustmann respected the opinions of earlier researchers that immigrants are likely to migrate to countries near to their vicinity and to their culture which, again, is not the most likely trend as immigration decisions are not solely based on the said proposition.

In-migration within UK was also considered in this study, as suggested by Hatton and Tani (2003) and it has negative correlation between immigration to one region from abroad and in-migration. Dustman remedied the situation by incorporating observable native outflows into the estimation but doing so will leave a simultaneous equation because outflows are correlated to local economic shocks i. e. short-run wage changes. From here, three regressions of OLS, difference, and IV were run to see the difference in significance of factors such as the skill level distributions and the education of the immigrants.

But with all the hard work done, none of them fell gave any sufficient significant estimates to conclude the actual effect of immigration to the over-all employment, wages and output level of the natives. If we look piece-by-piece at the conclusions of Dustman, we will infer that it is for those with intermediate education who will experience the negative effects. This gives us an impression that immigration studies are advancing but such studies need substantial, if not extensive, amount of data as Dustman complains the UK does not have.

In the United States, statistics show that their immigrants are likely to be belonging in the semi and low-skilled type of workers. The United States tried to address immigration by agreeing to the North American Free-Trade Agreement (NAFTA) with Mexico and Canada. This is seen to alleviate the desire to break through the barriers by giving opportunities to the low-skilled or agricultural workers in Mexico, whose are close substitutes to native workers in the USA.

Under NAFTA all non-tariff barriers to agricultural trade will be eliminated and many tariffs will be eliminated over periods of 5 to 15 years (USDA c. 2008). This is one of the steps advanced by US to regulate immigration. Undeniably, immigration can be a threat to an economy even if it would only in the short-run. Governments should be focusing on its natives’ welfare first before accommodating aliens hence further studies on its own country’s capacities and nature of labor should be studied as they will be fair bases of migrant accommodation.

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