Can increased immigration boost per capita incomes?

I wrote last Friday about Minnesota’s alleged labor shortage. If this drives up wages it could be a good thing for workers. But some see it as a “crisis” which will cripple economic growth.

What matters for Minnesotans is per person economic growth. If the number of Minnesotans increases by 50% and state GDP also increases by 50%, then the average person is no better off. There are three sources of per capita GDP growth.

Can we increase the participation rate?

The first is growth of the participation rate. This refers to the number of people who are either employed or are actively looking for work. GDP per capita is defined as total GDP divided by the number of people in the country (state, in this case). If more of those people are working then there is more GDP to divide among them.

But it is unclear how much scope there is for this in Minnesota. Unemployment rates are low, hence this discussion. Encouraging seniors to remain in the workforce can help to some degree, but the jobs they do are likely to be those with low productivity.

Is immigration the answer?

At this point people often mention immigration as a solution. But increasing the number of workers is different to increasing their participation rate.

Remember that

1) GDP per capita = 2) Total GDP / 3) Population

A rise in the participation rate increases 2 and, as a result, 1.

A rise in immigration, however, increases both 3 and 2.

Does immigration also increase 1? That depends on how productive the immigrants are relative to the population average. Immigrants with above average skills will increase 2 proportionately more than they increase 3. This will increase 1. By contrast, immigrants with below average skills will increase 3 proportionately more than they increase 2. This will decrease 1.

A letter from 1,500 economists

In April, 1,470 of the nation’s top economists signed an open letter to the Trump administration

…to express our broad consensus that immigration is one of America’s significant competitive advantages in the global economy. With the proper and necessary safeguards in place, immigration represents an opportunity rather than a threat to our economy and to American workers.

The economists went on to outline four chief benefits from immigration

Immigration brings entrepreneurs who start new businesses that hire American workers.

Immigration brings young workers who help offset the large-scale retirement of baby boomers.

Immigration brings diverse skill sets that keep our workforce flexible, help companies grow, and increase the productivity of American workers.

Immigrants are far more likely to work in innovative, job-creating fields such as science, technology, engineering, and math that create life-improving products and drive economic growth.

Three of these points (the first, third, and fourth) support the conclusion that skilled immigrants are good for the economy. This isn’t seriously doubted. Policies which keep them out, such as requiring foreign graduates of US colleges to leave on graduation, are harmful in most cases.

Of course, there are other arguments for increasing immigration. But if policymakers want to use immigration as a tool to boost per capita GDP, they should focus on skilled immigrants. This is true both nationally, and in Minnesota.

John Phelan is an economist at Center of the American Experiment and recent immigrant to the United States.