Why Does America Need Immigration?

One Answer: It is in our self interest

Given the furious debate over immigration that is happening in America, it is worth revisiting why we need and should have immigration according to basic economics.

First though, there is a strong moral case for Americans to support more immigration: we live in a democracy founded on the idea of the United States being a safe haven for those fleeing persecution and looking for a place to prosper. America as a refuge is built into its founding.

On the economic argument there is a strong case for immigration as well. We see the weight of the evidence showing that immigration has little effects on wages while leading to more innovation and productivity in the economy.

Some economists posit that immigration negatively affects the wages of lower skilled native workers (those without a high school diploma), but that research has been called into question by others from a theoretical and empirical perspective, and the best evidence actually suggests positive effects.

That debate about whether immigrants are good or bad for the economy and their distributional impacts is quite technical. It also tends to obscure the simple reality of why immigration can be so beneficial, which has to do with population dynamics.

The fact is that the health of the US economy in the long run depends on economic growth, which is determined by the growth of three main inputs:

(1) the number of workers (the labor supply)

(2) the capital stock in the economy (think machines)

(3) productivity (how effective workers are)

A big component of (1) the labor supply in turn is the age distribution in the United States. This is natural as the more workers there are in the prime age range, the higher the share of the population that is expected to be working, and the higher the economic output produced by labor.

It is likely too that the age distribution affects (3) productivity as younger workers are likely to be more productive as well. Research from the IMF on the Eurozone finds that productivity growth there has slowed due to an aging population.

Given this, immigration of younger individuals in the right age range then can be a boon to a country with an aging population and a slowing birth rate. That is the state of things in the United States today.

Immigration has allowed the US population to increase in the right age groups and has largely kept us from suffering the problems of a rapidly aging population that have plagued Europe and Japan.

The comparison with Japan is especially illustrative.

Let’s first look at real GDP in current USD over time for both Japan and the US. Real GDP and its trend over time is how we measure economic growth, adjusting for the number of people in a country.

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Real GDP over time for both US (blue) and Japan (orange).

We see that the real GDP in the US was actually below that of Japan in the 1990s, but later that decade Japanese economic growth began to slow and has never quite recovered while US growth has continued apace such that today real GDP per capita in the US is about $20,000 higher than it is in Japan.

This ten year slowdown in Japanese growth from the 1990s to the 2000s is known as the lost decade. The exact cause of this low growth period is debated, but the demographic distribution of Japan likely played a role in its extent.

Looking at data on fertility rates and migration over time highlights this as a potential cause as well. Fertility rates in Japan slowed down in the 1980s while in the US they rose towards the end of that decade. This rising in the US and fall in Japan coincided with a rise in net migration to the US while Japan has never had large levels of immigration.

Note too that this change in fertility rates seems to precede the slowdown in Japanese economic growth by about 20 years, which is roughly when those people born in the 1980s would be entering the work force.

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Fertility rate in US (blue) and Japan (orange) on left. Net migration (immigrants minus emigrants) in US (blue) and Japan (orange) on right.

None of this is to say the descriptive evidence here implies causal effects of the slowdown in birth rates on the slowdown in growth of the Japanese economy, but it squares pretty well with an understanding of the determinants of economic growth.

We know too that a large reason for the lack of a slowdown in fertility rates in the US is due to the fact that immigrants have children at a higher rate and that immigrants who come to the US are younger than the native born population, which we can see in the plot below that shows the average age of those born in the US vs. those who are foreign born (immigrants).

Immigrants are on average almost 10 years younger than the native population.

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Data from the Census bureau on average age of native and foreign born (immigrants) by current population survey year.

So are immigrants the only reason for the stronger economic growth in the US compared to Japan?

No, economic policy and other sources played a role too, but the fact that the US has much higher levels of immigration in the right age range to offset the aging native population definitely helps a lot.

The funny thing about demographics is that their effects take a long time to understand and see. The changes we make to immigration policy today will reveal their impact on the US economy in the coming decades.

Given current trends, if anything we need even more immigration today to counteract demographic headwinds than less. We should recognize that immigration is crucial to ensuring the continued economic success of the US and adjust our policies to reflect that reality.

Data Sources:

Data obtained from the World Bank and IPUMS websites.

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