Chapter Introduction

From May to September 1980, boatloads of refugees from Cuba arrived in Miami, Florida. For political reasons, Fidel Castro had allowed them to leave freely from the port of Mariel, Cuba, during that brief period. Known as “the Mariel boat lift,” this influx of about 125,000 refugees to Miami increased the city’s Cuban population by 20% and its overall population by about 7%. The widespread unemployment of many of the refugees during the summer of 1980 led many people to expect that the wages of other workers in Miami would be held down by the Mariel immigrants.

Not surprisingly, the refugees were less skilled than the other workers in Miami, as is confirmed by looking at their wages: the immigrants initially earned about one-third less than other Cubans in Miami. What is surprising, however, is that this influx of low-skilled immigrants does not appear to have pulled down the wages of other less skilled workers in Miami.2 The wages for low-skilled workers in Miami essentially followed national trends over this period, despite the large inflow of workers from Cuba. This finding seems to contradict the prediction of basic supply and demand theory—that a higher supply of workers should bid down their wage and that restricting immigration will raise the wages for local workers. The fact that wages in Miami did not respond to the inflow of Mariel refugees calls for an explanation, which is one goal of this chapter.

A similar outcome occurred in a more recent case of sudden migration, the emigration of Russian Jews to Israel after 1989, when the Soviet Union relaxed its restrictions on such departures. From late 1989 to 1996, some 670,000 Russian Jews immigrated to Israel, which increased the population in Israel by 11% and its workforce by 14%. This wave of immigration was especially notable because the Russian immigrants were more highly skilled than the existing Israeli population. But despite this large influx of immigrants, the relative wages of high-skilled workers in Israel actually rose during the 1990s. Careful studies of this episode can find little or no negative impact of the Russian immigrants on the wages of other high-skilled workers.3

These emigrations were of different types of workers—the Cuban workers were low-skilled and the Russian emigrants high-skilled—but they share the finding that large inflows of workers need not depress wages in the areas where they settle. In other cases of large-scale migration—such as occurred from Europe to America during the 1800s and 1900s—wages did indeed fall because of the inflow of immigrants. So the Mariel boat lift and Russian immigration to Israel should be seen as special: they are cases in which the economic principles of supply and demand do not at first glance work as we would expect them to.

In this chapter, we begin our study of the movement of labor across countries by explaining the case in which immigration leads to a fall in wages, as we normally expect. The model we use is the specific-factors model, the short-run model introduced in Chapter 3. That model allows labor to move between industries but keeps capital and land specific to each industry. To study migration, we allow labor to move between countries as well as industries, while still keeping capital and land specific to each industry.

Next, we use the long-run Heckscher-Ohlin model, from Chapter 4, in which capital and land can also move between industries. In the long run, an increase in labor will not lower the wage, as illustrated by the Mariel boat lift to Miami and the Russian immigration to Israel. This outcome occurs because industries have more time to respond to the inflow of workers by adjusting their outputs. It turns out that by adjusting industry output enough, the economy can absorb the new workers without changing the wage for existing workers. The explanation for this surprising outcome relies on the assumption that industries are able to sell their outputs on international markets.

To give a brief idea of how this long-run explanation will work, think about the highly skilled scientists and engineers emigrating from Russia to Israel. The only way to employ the large number of these workers at the going wages would be to increase the number of scientific and engineering projects in which Israeli companies are engaged. Where does the demand for these new projects come from? It is unlikely this demand would be generated in Israel alone, and more likely that it would come from Israeli exports to the rest of the world. We see then that the ability of Israel to export products making use of the highly skilled immigrants is essential to our explanation: with international demand, it is possible for the Russian immigrants to be fully employed in export activities without lowering wages in Israel. Likewise, with the influx of low-skilled Cuban immigrants to Miami, many of whom could work in the textile and apparel industry or in agriculture, it is the ability of Florida to export those products that allows the workers to be employed at the going wages.

The effect of immigration on wages can be quite different in the short run and in the long run. In this chapter we demonstrate that difference, and discuss government policies related to immigration. Policies to restrict or to allow immigration are an important part of government regulation in every country, including the United States. As President Obama began his second term as President in 2013, one of his goals was to achieve a reform of immigration policies. We discuss why reforms are needed in the United States and what they might achieve.

After studying what happens when labor moves across countries, we study the effects of foreign direct investment (FDI), the movement of capital across countries. FDI occurs when a company from one country owns a company in another country. We conclude the chapter by discussing the gains to the source and destination countries, and to the world, from the movement of labor or capital between countries.