Tuesday, June 11, 2013

The Effect of Immigrants on the Incomes of Native Workers

The results of a recently published study of the economic effects of immigration in the United States are very relevant to Canada. It found that immigrants living in the United States have increased the country’s annual national income by $1.6 trillion, of which $1.565 trillion goes to the immigrants themselves in the form of wages and benefits and the remaining $35 billion goes to the native population. This $35 billion is equal to 0.2 percent of national income and is known as the "immigration effect".

Given the similarity of the Canadian and US economies and the fact that Canada has a greater stock of immigrants (18.8 vs. 12.8 percent of the population), the immigration effect in Canada comes to at least $3.5 billion annually.

The empirical documentation of this effect vindicates the views of advocates for more immigration since it shows that immigration benefits everyone. Libertarians will welcome it especially since at the same time freedoms of association and movement in the world are increased. The study is particularly interesting because its author is Professor George Borjas, who teaches at Harvard University, is considered to be America’s foremost expert on the economics of immigration and has based his conclusions on his review of all of the relevant academic literature in the field.

However, Borjas’ analysis does not end with the estimate of the immigration effect. He also reports that it was accompanied by a massive income redistribution effect, which applied to Canada implies that there has been a $43.5 billion increase in the earnings of employers and a $40 billion decrease in the income of labor.

Many Canadians may be expected to be unhappy about this redistribution of income from labour to capital. If the government responds to their demand for higher taxes on the employers and increased subsidies to the workers, incentives to work and invest will be distorted. Productivity and national income will be lowered, quite possibly by more than was gained from the immigration effect worth $3.5 billion.

In addition, the immigration has serious fiscal implications, which the Borjas study did not take into account. According to a Fraser Institute study by Herbert Grubel and Patrick Grady, recent immigrants imposed a fiscal burden of at least $20 billion annually (1.1 percent of GDP) on Canadian taxpayers, mainly because the income taxes paid by these immigrants were about half those paid by Canadians, while both groups received the same benefits from government spending.

Very similar fiscal implications were found for France by Jean-Paul Gourevitch, who estimated that the annual fiscal burden imposed by immigrants on French taxpayers is 3.2 billion Euros. This amount comes to 0.9 percent of the country’s GDP, which is remarkably similar to that found for Canada.

In the United States, the fiscal burden imposed by illegal immigrants alone amounts to $103 billion annually, according to a recent study by Robert Rector and Jason Richwine, which was published by the Heritage Foundation, the largest conservative think tank in the United States.

In all of these countries, the fiscal burden exceeds by far the immigration effect and implies that recent immigrants have lowered the after-tax incomes of natives by large amounts.

Critics of the estimates of the fiscal burden often claim that immigrants bring other benefits not considered in these studies, such as reductions in the unfunded liabilities of social benefit programs, savings in education expenditures, above average incomes of immigrants’ offspring and enrichment of the cultural mosaic.

Careful studies of these and other alleged benefits reveal them to be trivial, non-existent or negative. Immigrants age and quickly burden public pensions and health care programs; they do not improve the education budget since their children need to be educated; first-generation immigrants have below average incomes and multiculturalism is under heavy criticism for its negative impact on national culture and cohesion.

The results of these new studies on the economic and fiscal effects of immigration suggest that policy makers in Canada, France and the United States interested in maximizing after-tax and transfer incomes of their citizens and in preventing the development of greater income inequalities have to reduce significantly the number of immigrants and admit only those with high income potential and tax payments.

Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University