The return of the ‘Misery Index’
The United States is currently experiencing its fastest rate of inflation, year over year, since mid-1982. Those of you who are old enough to remember that might also remember the…
At the 2020 Regional Economic Conditions Conference held at the Federal Reserve Bank of Minneapolis recently, a major topic of discussion was demographics, specifically the looming decline in workforce growth as the population ages. We investigated this in depth in our recent report ‘Minnesota’s Workforce to 2050‘. At the Minneapolis Fed conference, an oft proposed solution to this problem was increased immigration. But will this make the average American better off? As I’ve written before, it depends.
From the point of view of American policymakers, the aim is to boost GDP per capita (or per person), which is a commonly used measure of economic welfare. After all, World Bank data shows that China’s total GDP ($10.8 trillion) is 3.7 times larger than that of the United Kingdom ($2.9 trillion) but also that its population (1,392.7 million) is 20.9 times larger than Britain’s (66.5 million). As a result, despite China’s much bigger total GDP, GDP per capita in Britain – and, hence, living standards – are, on average, much higher.
Adding immigrant workers to a labor force will boost total GDP, but it also adds to the number or people that GDP is to be divided among. In math terms, it increases both the denominator (population) as well as the numerator (GDP). The question is which effect will dominate: the boost to GDP or the increase in population. That depends on two things. A numeric example shows how.
To start to see why, we need to know three things; total GDP, total population, and total employment.
According to the Bureau of Economic Analysis, total US GDP in 2018 was $20.6 trillion. The total population of the US that year was 327,167,434. Dividing the one by the other to work out GDP per capita ($20,580,223,000,000 / 327,167,434) gives us a figure of $62,904. The total number of people employed in the US in 2018 was 200,746,000. This gives us an employment ratio of 61.4% (200,746,000 workers / 327,167,434 residents). Dividing the one by the other to work out GDP per worker ($20,580,223,000,000 / 200,746,000) gives us a figure of $102,519.
So, let us increase the population by 10,000,000 immigrants to 337,167,434. Let’s assume that these immigrants are as likely to be employed as those people already resident in the US which means they have an employment ratio of 61.4%. This gives us an extra 6,135,880 workers. Assuming that they are as productive as the average worker already resident in the US (producing $102,519 of GDP), that gives us extra GDP of $629 billion ($102,519 x 6,135,880). If we add this to our 2018 figure for total US GDP we get $21.2 trillion. If we divide that by the total post immigration figure for population, we get a new GDP per capita of $62,904.
As you’ll see, by adding a number of immigrants with the same employment ratio and the same labor productivity as those already resident in the US, we have increased total GDP, but per capita GDP has stayed the same. As the Congressional Budget Office put it recently:
Immigration, whether legal or illegal, expands the labor force and changes its composition, leading to increases in total economic output—though not necessarily to increases in output per capita.
The only way that adding immigrants increases per capita GDP is if those assumptions are wrong, namely, if the immigrants have a higher employment ratio and/or a higher labor productivity than those already resident in the US. If, in fact, the immigrants have a lower employment ratio and/or a lower labor productivity than those already resident in the US, they will actually decrease per capita GDP.
So, from the point of view of American policymakers whose aim is to boost GDP per capita, what they want are immigrants who are highly skilled and highly likely to be employed.
The source of economic growth in the not-much-longer-than-the-short term is increased productivity. That, in turn, flows from new ideas. The raw material of economic growth is not exhaustible stuff like iron and coal but inexhaustible human ingenuity. That is why “tales of eternal economic growth” need not be “fairy tales”, as some suggest.
If we have more people we have more ideas. That is how population growth has been said to have increased economic growth per capita in a famous paper by economist Michael Kremer and, more recently, by economist Charles I. Jones. These, however, are arguments for more children – new people – not more immigration – moving existing people from one place to another (for those interested in this policy avenue, new research suggests that the Alaska Permanent Fund Dividend increased fertility for females aged 20–44 years old).
Research suggests an avenue in which immigrants could raise the productivity of native workers. Papers by economists Giovanni Peri and Chad Sparber and also by Gianmarco I. P. Ottaviano and Peri find that if immigrants and native workers specialize in different tasks they may be complements to each other. In this case, even low skilled immigrants could boost average labor productivity because native workers who otherwise look similar to immigrants in terms of human capital will sort away from certain activities like animal processing and harvesting as immigrants take those jobs. This, so the theory goes, will allow them to sort into higher skilled/paid work. But, if that higher skilled/paid work exists for them to sort into, you have to ask why they aren’t doing so already.
Whether or not immigration is a boon for the economy is a more complicated question than it first seems. It is certainly more complicated than it is often presented as being, something we saw at the recent Minneapolis Fed conference.
Immigration of skilled workers is a good thing for the economy and policymakers looking to boost per capita GDP should look to encourage and expand it. The benefits of the immigration of lower skilled workers are less clear cut, however.
John Phelan is an economist at the Center of the American Experiment.