1. Immigration is controversial because it hurts some people and benefits others. Are there overall benefits from immigration, just as there are overall benefits from trade? Yes.

2. Gains from Immigration
Use specific-factors. Draw a graph with wages on the vertical axis and world labor on the horizontal axis, with the number of workers at Home measured from left to right.
a. Wages at Home and Abroad
The Home wage curve is negatively sloped, since immigration lowers the Home wage. Conversely, the Foreign wage curve is positively sloped. Long run equilibrium occurs at a common wage and full migration.
b. Gains for the Home Country
Motivate the welfare triangle for Home: Foreign workers who migrate to Home when there is less than full migration have VMPLs in excess of the wage.
c. Gains for the Foreign Country
Count the wages of Foreign migrants at Home as part of Foreign income (even if they are not remitted). Mimic the preceding argument to motivate the welfare triangle for Foreign.
d. World Gains from Migration
Approximate measure of the gain from migration. Intuition: These gains are the increase in world GDP permitted by migration. Discuss moving and physical costs of immigration.

Paul Krugman compares the Asian miracle to the rapid growth of the Soviet Union in the 1950s and 1960s.

The Myth of Asia’s Miracle

A CAUTIONARY FABLE: Once upon a time, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by a set of Eastern economies. Although those economies were still substantially poorer and smaller than those of the West, the speed with which they had transformed themselves from peasant societies into industrial powerhouses, their continuing ability to achieve growth rates several times higher than the advanced nations, and their increasing ability to challenge or even surpass American and European technology in certain areas seemed to call into question the dominance not only of Western power but of Western ideology. The leaders of those nations did not share our faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and were willing to limit individual liberties in the interest of the common good, take charge of their economics, and sacrifice short-run consumer interests for the sake of long-run growth would eventually outperform the increasingly chaotic societies of the West. And a growing minority of Western intellectuals agreed.

The gap between Western and Eastern economic performance eventually became a political issue. The Democrats recaptured the White House under the leadership of a young, energetic new president who pledged to “get the country moving again”—a pledge that, to him and his closest advisers, meant accelerating America’s economic growth to meet the Eastern challenge.

The time, of course, was the early 1960s. The dynamic young president was John F. Kennedy. The technological feats that so alarmed the West were the launch of Sputnik and the early Soviet lead in space. And the rapidly growing Eastern economies were those of the Soviet Union and its satellite nations.

Source: Excerpted from Paul Krugman, 1994, “The Myth of Asia’s Miracle,” Foreign Affairs, November/December, 63–79. Reprinted by permission of FOREIGN AFFAIRS, November/December. Copyright 1994 by the Council on Foreign Relations, Inc. www.ForeignAffairs.com.

This same graph could be used to make another point: In a world with free trade and no factor mobility, wages would equalize (factor price equalization) so exactly the same allocation of labor would occur with trade and no factor mobility as without trade but with factor mobility. So trade and factor mobility are in a sense substitutes for one another.

Draw the lesson that migration increases the size of the world's pie, just like trade does. This follows from the preceding comment.

Data on remittances by immigrants from different countries. Are they sufficient to compensate home countries for the loss of their labor? Bhagwati’s idea of a “brain-drain tax.”

Immigrants and Their Remittances

Immigrants often send a substantial portion of their earnings back home, which we refer to as “remittances.” According to estimates from the World Bank, remittances to developing countries were $406 billion in 2012, up from $372 billion in 2011. In 2011, official aid to foreign governments was $156 billion, less than half the amount of remittances from immigrants back to their home countries. The countries receiving the largest amount of remittances in 2011 were India ($64 billion), China ($62 billion), Mexico ($24 billion), and the Philippines ($23 billion). As a share of GDP, however, remittances are highest in smaller and lower-income countries, including Tajikistan (31%), Lesotho (29%), Samoa (23%), Kyrgyz Republic (21%), and Nepal and Tonga (20% each). In 2011, there were about 215 million immigrant workers in the world, so the remittances of $372 billion translate into each immigrant worker sending home approximately $1,800.

In Table 5-3, we show the remittances received by some developing countries in 2010, as compared with their net foreign aid. For all countries except Sudan, the income sent home by emigrants is a larger source of income than official aid. Sudan was experiencing a humanitarian crisis in 2010 so official aid was high. Remittances and official aid are especially important in other African countries, too.

The fact that emigrants return some of their income back home may not be enough to compensate their home countries for the loss of their labor. To calculate any gain to the home countries from the emigration of their workers, we need to include all the earnings of the emigrants in their home countries’ income. In reality, however, emigrants do not send all of their income home, so the countries they leave can lose from their outflow. Consider, for example, the case of highly educated migrants. In 2000 there were 1 million Indian-born people with college educations living in the 30 wealthy countries of the Organisation for Economic Co-operation and Development (OECD). That amounts to 4.3% of India’s large number of college graduates. In 2008, 53% of Indian-born migrants living in the OECD had a postsecondary education. For Asia as a whole, 38% of migrants living in the OECD had a postsecondary education. But for some individual countries, the outflow is much larger. Almost 47% of Ghana’s college-educated labor force lives in OECD countries, and for Guyana, the percentage is 89%.15 Unless these migrants return most of their earnings back home, those countries lose from the outflow of these highly educated workers.

To address this concern, Jagdish Bhagwati, an Indian-born economist now at Columbia University in New York, has proposed that countries impose a “brain-drain tax” on the outflow of educated workers. The idea is to tax the earnings of people living outside the countries in which they were born and, through an organization such as the United Nations, return the proceeds from the tax to the countries that lose the most workers. In that way, countries with an outflow of educated workers would be compensated, at least in part, for the outflow. A brain-drain tax has been widely debated, but so far it has not been used in practice.

This may elicit chuckles in class.

This mirrors the low estimated benefits of free trade too, as might be expected from the preceding comments.

Various estimates of the gain from migration, surprisingly low.

e. Gains from Foreign Direct Investment
Symmetrical argument to gains from migration.

Gains from Migration

How large are the gains from immigration? For the United States, a study by the economist George Borjas puts the net gain from immigration at about 0.1% of GDP (one-tenth of 1% of GDP). That value is obtained by using a stock of immigrants equal to 10% of the workforce in the United States and assuming that the immigrants compete for the same jobs as U.S. workers. If instead we assume the immigrants are lower-skilled on average than the U.S. population, then the low-skilled immigrants can complement the higher-skilled U.S. population, and the gains from immigration in the United States are somewhat higher, up to 0.4% of GDP. These estimates are shown in the first row of Table 5-4. The net gains to the United States in this case equal the increase in U.S. GDP.

Borjas’s estimates for the U.S. gains from immigration may seem small, but lying behind these numbers is a larger shift in income from labor to capital and landowners. Labor loses from immigration, while capital and landowners gain, and the net effect of all these changes in real income is the gain in GDP that Borjas estimates. For the net gain of 0.1% of U.S. GDP due to immigration, Borjas estimates that capital would gain 2% and domestic labor would lose 1.9% of GDP. These figures lead him to conclude, “The relatively small size of the immigration surplus [that is, the gain in GDP]—particularly when compared to the very large wealth transfers caused by immigration [that is, the shift in income from labor to capital]—probably explains why the debate over immigration policy has usually focused on the potentially harmful labor market impacts rather than the overall increase in native income.”

Other calculations suggest that the overall gains from immigration could be larger than Borjas’s estimates. In the second row of Table 5-4, we report figures from a study by Kremer and Watt that focuses on just one type of immigrant: household workers. Foreign household workers, who are primarily female, make up 10% or more of the labor force in Bahrain, Kuwait, and Saudi Arabia, and about 7% of the labor force in Hong Kong and Singapore. The presence of these household workers often allows another member of that household—typically, a highly educated woman—to seek employment in her Home country. Thus, the immigration of low-skilled household workers allows for an increase in the high-skilled supply of individuals at Home, generating higher Home GDP as a result. It is estimated that this type of immigration, if it accounts for 7% of the workforce as in some countries, would increase Home GDP by approximately 1.2% to 1.4%.

Another larger estimate of the gains from immigration was obtained in a study by Giovanni Peri, who wrote Headlines: The Economic Windfall of Immigration Reform, seen earlier in the chapter. Peri and his co-authors measured the inflow of foreign workers to the United States who are scientists, technology professionals, engineers, or mathematicians—or STEM workers, for short. The H-1B visa program has allowed between 50,000 and 150,000 of these immigrants to enter the United States annually since 1991. Many have remained in the country as permanent residents. By 2010, foreign-born STEM workers accounted for 1.1% of the population in major cities in the United States, and accounted for 24% of the total STEM workers (foreign or U.S.-born) found in these cities. Peri and his co-authors measured the productivity gains to these cities from having this inflow of foreign talent, and they found that the gains were substantial: as mentioned in the earlier Headlines article, they found that 10% to 20% of the productivity growth in these cities can be explained by the presence of the foreign STEM workers. These productivity gains can come from new start-up technology companies, patents for new inventions, and so on. Adding up these productivity gains over time, the presence of the foreign STEM workers accounted for a 4% increase in GDP in the United States by 2010.

In part B of Table 5-4, we report results from estimates of gains due to migration for several regions of the world. The first study, by Walmsley and Winters, found that an increase in labor supply to developed countries of 3%, as a result of immigration from the developing countries, would create world gains of 0.6% of world GDP. This calculation is similar to the triangle of gains ABA* shown in Figure 5-14. The next study, by Klein and Ventura, obtains larger estimates of the world gains by modeling the differences in technology across countries. Under this approach, wealthier regions have higher productivity, so an immigrant moving there will be more productive than at home. This productivity increase is offset somewhat by a skill loss for the immigrant (since the immigrant may not find the job for which he or she is best suited, at least initially). Nevertheless, the assumed skill loss is less than the productivity difference between countries, so immigrants are always more productive in the country to which they move.

In their study, Klein and Ventura considered the recent enlargement of the European Union (EU) from 15 countries to 25.16 Workers from the newly added Eastern European countries are, in principle, permitted to work anywhere in the EU. Klein and Ventura assumed that the original 15 EU countries are twice as productive as the newly added countries. During the first 10 years, they found that the population of those 15 EU countries increased by an estimated 0.8% to 1.8%, and the combined GDP in the EU increased by 0.2% to 0.7%. The range of these estimates comes from different assumptions about the skill losses of immigrants when they move, and from the psychological costs of their moving, which slow down the extent of migration. As time passed, however, more people flowed from Eastern to Western Europe, and GDP continued to rise. Klein and Ventura estimated that in 25 years the combined GDP of the EU will increase by 0.6% to 1.8%, and that over 50 years, the increase in GDP would be 1.7% to 4.5%.

Next, Klein and Ventura considered a common labor market within the North American Free Trade Area (NAFTA), established in 1994, which consists of Canada, Mexico, and the United States. Although NAFTA allows for free international trade between these countries, labor mobility is not free. So the experiment that Klein and Ventura considered allowed workers from Mexico to migrate freely to the United States and Canada, which are assumed to have workers who are 1.7 times as productive as those from Mexico. During the first 10 years, they predicted that the population of the United States and Canada would increase by an estimated 1.0% to 2.4% due to the immigration from Mexico, and the combined GDP in the NAFTA region would increase by 0.1% to 0.4%. After 25 years, they estimated that the combined GDP of the region would increase by 0.4% to 1.0%, and over 50 years, the increase in GDP would be 1.3% to 3.0%. These estimates are hypothetical because they assume free mobility of labor within the NAFTA countries, which did not occur. In the next chapter we will discuss some other estimates of the gains due to NAFTA, based on the actual experience of the countries involved with free international trade, but without free labor mobility.

But presumably Mexico would benefit relatively more, just because the Mexican economy is so much smaller.