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

STOPPING THE IMMIGRATION OF PARENTS AND GRANDPARENTS – FAIRLY

There has been much huffing and puffing by politicians, the media and immigrant lobbyists about the government’s plan to reduce the number of parents and grandparents joining their immigrant offspring in Canada next year.

Yes, the policy change is unfair. Many immigrants have come to Canada having been promised that their parents and grandparents could join them so that they can continue the cultural traditions of their homelands and receive help with family chores and child care.

While immigrants clearly benefit from the existing policy, the reality is that the benefits to immigrants come at the expense of Canadian taxpayers. New data and studies show just how great this fiscal burden is.

Official statistics indicate that recent immigrants have lower average incomes and tax payments than other Canadians, even ten years after their arrival. At the same time, these immigrants on average absorb at least the same amount of social benefits as other Canadians.

As a result, $6,000 is annually transferred to the average immigrant at the expense of Canadian taxpayers. In 2006 the value of these transfers to all of the 2.7 million immigrants who arrived between 1987 and 2004 and still live in Canada came to $16.3 billion. Taking account of the 1.5 million immigrants who arrived since 2004 the fiscal burden comes to $25 billion in 2010. These fiscal costs represent a significant proportion of the $55 billion deficit of the federal government projected for the fiscal year 2011.

Important here is the fact that parents and grandparents lower the observed low average incomes of all immigrants. The reasons are obvious. They tend to be elderly, have poor language skills and possess few marketable skills. The numbers of immigrating parents and grandparents are high: 84,917 or 6.7 percent of the 1.3 million immigrants admitted during 2006-2010.

The fiscal transfers to parents and grandparents are much higher than those of the average immigrant not only because of their low incomes but also because they tend to be of an age where their demand for costly medical services is at its highest level. In addition, many arrive in Canada with medical conditions that went untreated in their home countries. Recently, at the Dubai airport I noticed a long line-up of elderly persons in wheelchairs about to enter a plane headed for Toronto, presumably in transit from India.

In the light of these facts it is obviously in the interest of Canadian taxpayers to end the admission of parents and grandparents. This can be done fairly by stipulating that immigrants arriving after some future date will no longer have the right to have their parents and grandparents join them as permanent residents, though temporary visits would be allowed. Important for the present debacle, immigrants already in Canada or arriving before the set date should continue to be able to have their parents and grandparents join them permanently.

Under the proposed policy, the number of parents and grandparents admitted into Canada annually would decrease and ultimately become zero. The fiscal burden they impose on taxpayers would similarly decrease through time. These outcomes are not as prompt and large as is desirable fiscally, but this disadvantage is outweighed by the absence of the ethical and political costs of the alternative of reneging on past promises.

One problem with the proposed policy is that it may discourage some potential and otherwise desirable immigrants from applying for visas. However, Canada’s pool of applicants for immigration is very large and while it may shrink somewhat, there should remain enough highly qualified economic immigrants to be selected for admission.

Politically, the proposed policy would be a winner. All Canadians would welcome the fiscal benefits it would bring, including recent immigrants whose offspring would also face lower tax burdens in the future.

Reducing Canada's Deficits by Reducing Immigration

There are no ways to eliminate fiscal deficits that are easy on Canadians and good for politicians. The availability of social program benefits is considered to be a right and woe politicians who favour cutting them. Spending that serves special interests cannot be cut without incurring the wrath of its beneficiaries. Canadians hate tax increases and politicians know it.

However, there is a simple way to balance budgets and avoid all of these problems: reduce significantly the level of immigration. Foreigners do not vote in Canadian elections.

Reduced immigration reduces fiscal imbalances because Canada’s welfare state provides social benefits to immigrants worth much more than what they pay in taxes. The costs do not show up in any official budgets, but they are large and will grow as more immigrants are admitted.

The costs stem from the fact that immigrants and their families receive on average the same government benefits as other Canadians – education for their children, health-care, employment insurance and welfare benefits. In addition, immigrant families are provided with special services to help them integrate into Canadian society and the economy – language instruction, settlement and legal advice and housing subsidies.

These costs are offset to some extent by the taxes paid by immigrants. The problem is that they pay considerably less than Canadians for two main reasons. First, Canada’s personal income tax system is very progressive. The top ten percent of all income tax filers pay about one half of all taxes while the bottom half of filers pay only about 5 percent. Second, recent immigrants after arrival have much lower earnings than Canadians: On average their earnings are 65 percent in the first year, rise gradually over the next 9 years to a maximum of 80 percent of the earnings of Canadian workers with similar demographic characteristics.

These two facts imply that few of the recent immigrants are in the top decile, many are in the bottom half of income tax payers and that their asset holdings are relatively small. Using these basic facts, I have estimated that on average immigrants pay 21 percent of the income taxes, only 80 percent of sales and other taxes and even smaller percentages of corporate income and property taxes than do Canadians.

Attaching dollar figures to these percentages implies that immigrants who arrived in 1990, on average in 2000 consumed government services worth $6,300 more than they paid in taxes; the 216,000 immigrants who arrived in 1990 generated a net transfer of $1.36 billion in 2000 while all of the immigrants who arrived during the last decade of the century, in the year 2000 generated transfers to themselves worth about $18.3 billion and will do so for in coming years.

The preceding calculations are rough and based on many assumptions, but they are the only ones available. More studies may show that the net costs are higher or lower, but it is clear they exist, are likely to be substantial and will continue to persist and grow if present immigration policies are continued.

But will immigrants not bring benefits to Canadians that match or even exceed these fiscal costs? Consider the following types of alleged benefits.

First, the economy benefits as immigrants fill jobs that other Canadians do not want or are not trained for. The problem is that these immigrants lower the wages of other Canadians competing with them and cause poverty levels to be higher than they would be otherwise and requiring more spending on anti-poverty programs.

Most fundamentally, in the absence of immigrants, there would be no long-lasting labour or skills shortages because wages on presently undesirable jobs would rise until they are filled by Canadians; higher wages for skilled workers would encourage more Canadians to get the needed education and training; and employers would invest more capital to raise labour productivity, which would allow them to maintain profits while paying workers the higher wages.

Second, many people believe that immigrants provide an easy solution to the looming crisis of unfunded liabilities for public health care and pension programs. Simulations using official estimates of population dynamics show that to maintain the present ratio of retired to working people in Canada in the year 2050 alone would require 7 million immigrants and a population level of 165 million. Canada could not absorb immigrants in such large numbers and might well not be able to recruit them. There are much less costly methods for defusing the pending crisis of unfunded liabilities, such as increasing the age of retirement.

Third, immigrants are believed to generate economies of scale that lower the average cost of infrastructure like roads and municipal services for all Canadians. This benefit from immigration existed in the past. In recent years and in the future, immigrants add significantly to congestion, pollution and the prices of scarce land and housing.

The magnitude of these problems is not widely recognized but may be gleaned from the fact that currently immigrant families arriving in the BC Lower Mainland every week of the year need 200 new housing units that require electricity, water and sewers. These families send children to school, put cars on the road and use public transit. It is ironic that meeting these needs of immigrants results in labour shortages that in turn are used to justify further immigration.

Finally, some Canadians believe immigration should continue in the spirit of the country’s proud tradition of helping poor and oppressed people find a land of opportunity. This feel-good benefit of immigration cannot be measured, but should rationally be compared to the costs it brings. The estimate above suggests that this benefit is very expensive indeed.

The possible reduction of immigration levels to balance the budget in the future is not discussed publicly by politicians, who fear the resultant loss of immigrant votes. But these politicians should consider whether the loss is as great as is commonly assumed since recent immigrants in surveys often express the view that immigration should be reduced. They should also ponder whether the loss of immigrant votes really is greater than the loss of votes due to spending cuts and tax increases that are mandated by the present fiscal imbalances.