Can immigration boost per capita GDP growth?
Minnesota, like much of the developed world, is forecast to have a shrinking share of its population working over the next couple of decades. This could slow the growth of GDP per capita in the state. GDP per capita, after all, is just GDP divided by the population. If a smaller share of that population is working to produce GDP, there will be less GDP to divide among the population.
A commonly proposed solution is increased immigration. But, as I’ve written before, this relies on two assumptions.
The first is that the new arrivals will have a labor force participation rate at least as high as that of the population already here. If they do not, they actually will lower the labor force participation rate, exacerbating the very problem they are proposed to solve. There is good news here. According to U.S. Census Bureau data, the labor force participation rate among Minnesota’s foreign-born population was 72.7 percent in 2016, above that for native-born Minnesotans.
The second assumption depends on the new arrivals being at least as productive as the workers already here. Remember, the key measure of economic well-being is GDP per person, and immigrant workers add to the denominator (population) as well as the numerator (GDP). If these workers increase the population by a greater percentage than they increase GDP, they will lower GDP per head.
Economic theory offers another way that increased immigration can help grow per incomes. Here, we assume that research and development (R&D) activity leads to new technologies which, in turn, lead to higher GDP growth. And, as the economist David N. Weil explains,
If two countries devote the same fractions of their labor force to inventing new technologies, then the country with more people will have more workers doing R&D. It stands to reason that more people doing R&D should be able to come up with more inventions, so the more populous country should have faster technological progress.
That is the theory. In practice, as Weil writes,
This finding would suggest that, over time, countries with more people should have higher levels of technology, and thus should be richer, than countries with fewer people. Yet this prediction does not hold true in the data: There is no evidence that countries with more people either grow faster economically or are systematically richer than countries with few people.
In terms of per capita incomes, what matters is productivity. Immigration will help boost per capita GDP to the extent that it boosts productivity. From an economic standpoint, we want more skilled immigrants in Minnesota. Policies which will reduce this, such as the administration’s attempts to restrict the H-1B visa scheme for highly skilled workers, should be opposed. But neither should we fall for the mistaken belief that increasing immigration per se will sustain per capita incomes in the future.
John Phelan is an economist at the Center of the American Experiment.