1. In the short run, immigration lowers wages, but returns to land and capital will increase. This explains lobbying efforts by landowners to allow immigration of agricultural workers.
2. In the long run, immigration has no effect on wages: Industries that use labor intensively expand, but others contract (Rybczynski) so that wages do not have to change. This is consistent with the effects of the Mariel boat lift.
3. FDI has analogous effects. In the short run, it should lower the rental on capital and land, but raise wages. In the long run, capital-intensive sectors will expand, while others will contract and factor returns will not change. This is roughly consistent with evidence from Singapore.
4. Both immigration and FDI create potential welfare gains, by moving factors from where the MPs are low to where they are high. This increases world GDP.
Immigration, the movement of workers between countries, potentially affects the wages in the host country in which the workers arrive. In the short-run specific-factor model, a larger supply of workers due to immigration will lower wages. Most immigrants into the United States have either the lowest or the highest amounts of education. As a result, after an inflow of labor from other countries, the wages of these two groups of workers fall in the short run. The majority of U.S. workers, those with mid-levels of education, are not affected that much by immigration. Moreover, the arrival of immigrants is beneficial to owners of capital and land in the specific-factors model. As wages are reduced in the short run, the rentals on capital and land will rise. This result helps to explain why landowners lobby for programs to allow agricultural workers to immigrate at least temporarily, and why other industries support increased immigration, such as H1-B visas for workers in the high-technology and other professional industries.
In a long-run framework, when capital can move between industries, the fall in wages will not occur. Instead, the industries that use labor intensively can expand and other industries contract, so that the immigrants become employed without any fall in wages. This change in industry outputs is the main finding of the Rybczynski theorem. The evidence from the Mariel boat lift in 1980 suggests that a readjustment of industry outputs along these lines occurred in Miami after the arrival of immigrants from Cuba: the output of the apparel industry fell by less than predicted from other cities, whereas the output of some skill-intensive industries fell by more than predicted.
The movement of capital between countries is referred to as foreign direct investment (FDI) and has effects analogous to immigration. In the short run, the entry of foreign capital into a country will lower the rental on capital, raise wages, and lower the rental on land. But in the long run, when capital and land can move between industries, these changes in the wage and rentals need not occur. Instead, industry outputs can adjust according to the Rybczynski theorem so that the extra capital is fully employed without any change in the wage or rentals. Evidence from Singapore suggests that foreign capital can be absorbed without a large decline in the rental or the marginal product of capital, though this is an area of ongoing debate in economics.
Both immigration and FDI create world gains as labor and capital move from countries with low marginal products to countries with high marginal products. Gains for the host country are created because the inflow of labor and capital is paid an amount that is less than its full contribution to GDP in the host country. At the same time, there are also gains to the labor and capital in the country they leave, provided that the income earned by the emigrants or capital is included in that country’s welfare.
161