Chapter Study Outline

21.1 Immigration and Outsourcing: The Evidence

  • The U.S. experience three broad phases of immigration in the last two centuries.
    • The First Great Migration occurred between 1850 and 1920, when large numbers of Europeans emigrated to the United States.
    • From 1920 through 1960 very few people (as little as half of a million in some decades) emigrated to the United States.
    • The Second Great Migration consists of legal and illegal immigrants who are mainly from Asia and Latin America and has been taking place from 1965 to the present

21.2 Immigration: Labor-Market Effects

  • Under competitive conditions immigration tends to lower the wages of native-born workers.
    • The magnitude of this effect depends on the underlying shapes of the supply and demand schedules for labor.
    • The owners of U.S. firms (including U.S. workers, who are often shareholders) benefit from the decrease in wages because it boosts their profits.
    • The reduction in wages reduces production costs and prices of goods, which benefits U.S. consumers.
    • In practice, immigration leads to divisive distributional shifts and wealth, which result in winners and losers from immigration.
  • Immigrant flows are affected by local labor market conditions, so isolating the wage and employment effects of immigration is difficult.
  • The principal findings of immigration studies, in contrast with the basic supply and demand model, find that immigration has no effect on the labor-market outcomes of native workers.
    • The simple competitive model may be an inadequate descriptor of local labor markets.
    • Because of the costs of finding workers, it is conceivable that immigrant inflows might actually raise the wages and reduce unemployment of native workers.
  • The value of immigration depends on the quality of schools as well as the accessibility of healthcare and welfare systems.
  • A country could become a welfare magnet if it offers high levels of non-wage benefits.

21.3 The Assimilation of Immigrants

  • To measure the assimilation of immigrants it is necessary to define a suitable reference group, a group of native-workers that is statistically similar to the immigrants whose outcomes are to be measured.
  • The general earnings patterns that are observed in the immigration assimilation data have the following properties:
    • Immigrants earn less than natives when they first enter the United States.
    • The earning of immigrants rise more rapidly than the earnings of native workers.
    • The earnings of immigrant workers overtake those of native workers after approximately 15 years in the United States.
  • The assimilation hypothesis attempts to explain the earnings patterns seen in the immigration assimilation data.
    • At first, immigrants are at a disadvantage relative to native workers because they often have limited English-speaking skills and a limited network of contacts.
    • The earnings of immigrants eventually overtake those of native workers because only those workers with the greatest drive to succeed and the greatest ability will invest in immigrating.
  • The same earnings patterns that are consistent with the assimilation hypothesis are also consistent with a gradual decline in the productivities of successive immigrant cohorts.
    • If cohorts productivities are declining, the apparent assimilation of immigrations observed in the cross-sectional data is a statistical artifact.

21.4 Illegal Immigration

  • Between 12 and 13 million illegal immigrants currently reside in the United States, with additional annual inflows of about a half million.
  • Policy makers have two tools with which to control illegal immigration.
    • Border policing efforts reduce the number of illegal immigrations but raises the equilibrium wage.
    • Fining employers who hire undocumented workers reduces the number of illegal immigrants and lowers the equilibrium wage.
    • Angelucci (2004) finds that tighter border controls on immigration flows from Mexico decrease on the inflow rate of illegal immigrants but cause illegal immigrants already residing in the United States to stay in the there rather than returning to Mexico.

21.5 Outsourcing

  • Outsourcing occurs when there is overseas trade in services and the buyer and seller physically remain in their respective geographic locations.
  • Direct Foreign Investment refers to the purchase, by a U.S.-based company or individual, of foreign commercial assets, such as a factory, for productive purposes.
  • Much of the recent growth in outsourcing is directly attributable to the information technology revolution, which makes buyers and sellers able to communicate and send large amounts of data quickly and reliably.
  • Insourcing occurs when U.S. companies and individuals export their services abroad.
  • Outsourcing results in a more efficient allocation of labor in both countries since it leads to a transfer of scarce resources to those who place the greatest value on them.
  • Outsourcing from the United States can harm some U.S. workers.
    • Those whose jobs are outsourced must find a new source of employment.
    • For the U.S. economy as a whole, the process of adjusting to a new supply-demand equilibrium is costly and time-consuming.
  • Outsourcing can foster new job creation.
    • The jobs currently subject to outsourcing are those at the low end of the technology spectrum.
    • The resulting reduction in costs for the services outsources increase the incomes of most skilled U.S. workers, which encourages entry into those occupations.
  • Direct Foreign Investment is contentious because it creates winners and losers.
    • Individual U.S. citizens are limited by their budget-constraint, so the purchase of a foreign asset may mean they will not buy a domestic asset.
    • A U.S. firm is far less constrained by a budget-constraint than individuals because lending institutions are more likely to extend large amounts of credit to a firm than to individuals.