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

A Proposal for the Reform of Canada's Immigration Policy

On October 25, 201, I had the opportunity to discuss with the members of the Standing Committee on Citizenship and Immigration (CIMM) of the Parliament of Canada my views on how the government should deal with a large existing backlog of applicants for immigration.

This backlog was created by a Liberal government policy enacted in 2002, which promised consideration for immigration permits to anyone who had paid a small submission fee. The backlog consists of about one million applicants and keeps on growing, in spite of the fact that the government has increased the acceptance of applications and raised the level of immigration to the highest levels in decades.

Here is my message to the Committee:

Let me begin my presentation with a radical proposition. The question before this committee should be whether or not to get rid of the backlist altogether, not on how to make is shorter.

The question about the best immigration levels to shorten the list involves a moral, bureaucratic, political and practical morass. As you will have noticed already, no witness has produced any objective criteria for determining the number of immigrants. The reason is simple. There are none. All recommendations of numbers are basically arbitrary and driven by hidden moral and political motives.

Let me suggest that instead moral and political criteria should be replaced by the following fundamental principles:

• Let us set policies so that immigrants benefit Canada, not so that Canada benefits immigrants – a slogan clearly inspired by President Kennedy’s famous “Do not ask what the country can do for you, ask what you can do for the country”.

• Let us use our country’s desire to help foreigners only after we have provided adequately for the many of our compatriots who need healthcare, caregivers, housing, special educational attention, help with their addictions and many other problems. If we want to contribute to the welfare of foreigners, let us continue to admit genuine refugees and send foreign aid to the needy abroad.

My suggestions are based on the realization that there is almost universal agreement among economists that immigration has no significant positive effect on the incomes of Canadians but if it involves large numbers, depresses wages and raises profits, effects which are deemed undesirable by many citizens.

This traditional view on the merit of immigration that I have taught and written about for decades as a professor of international economics has become obsolete with the existence of the welfare state in which everyone in Canada is entitled to a large array of social benefits and the progressive income tax system requires recent immigrants with average low incomes to pay fewer taxes than the average Canadian.

In a joint study with Patrick Grady, we have estimated that these provisions of the welfare state are putting a fiscal burden of about $20 to $30 billion on Canadians every year. Since we do not wish to get rid of the welfare state, immigration does not benefit Canadians. Instead, it results in higher taxes and contributes to the current deficit.

All traditional arguments about the merit of immigration are bogus and do not stand up to careful analysis. To mention just a few of these arguments, immigrants are not needed to fill job vacancies, in fact they can create shortages with their demands for housing, infrastructure and doctors. They do not solve the problem of unfunded liabilities of social programs and may worsen it. Their contributions to multi-culturalism are marginal and at the border line of becoming negative. Many countries without immigration are doing very well indeed economically and socially, from Korea and Singapore, to China and India.

For these reasons, I recommend that we should adopt policies, which bring into Canada only immigrants who pay taxes high enough or have access to funds that match the costs they impose on our social programs.

Before I offer some thoughts on a system for attaining this objective, let me present my radical proposal for dealing with the backlog. Simply, pass a law, which repeals the existing legislation promising that anyone who pays a fee is guaranteed consideration for an immigrant visa. Dissolve the existing backlog by sending each applicant a letter saying, in diplomatic language of course, that “the parliament has decided that Canada is no longer obligated to consider your application. Attached to this letter is a refund of the fee you have paid, including interest.”

Parliaments pass this kind of legislation all the time. The Wheat Board will be dissolved. The Gun registry will be scrapped. The National Energy Policy no longer exists. Transfers to the Provinces were changed in the 1990s. I could go on, but the point is clear. No past legislation is immune from change or repeal by current parliaments. All such changes are accompanied by much opposition and debate, sometimes very heated, but this is not something to be regretted or feared. It is intrinsic to democracy. Elections are the ultimate arbiter of the public on the merit of such changes.

Now to a brief discussion of an immigration policy that brings benefits to Canadians living in the welfare state. Issue immigration visas only to applicants who have a pre-approved employment contract at a pay at least equal to the average earned by Canadians and subject to passing normal health and security standards. Parents and grandparents should be given such visas only if their offspring posts a bond large enough to cover their expected costs of healthcare and pays for their living expenses they might need. Under these provisions, immigrants no longer impose fiscal burdens on Canadians.

The principle underlying my proposal is simple and clear. Let market signals, not politicians, technocrats and vested interests determine who should be admitted and how many immigrants should enter Canada annually. Relying on market signals in the operation of the economy has served Canadians and the rest of the world well. It should do so for the selection of immigrants.

Let me conclude with some observations about the politics of immigration policy. Recent opinion surveys show clearly that most Canadians are in favour of reduced levels of immigration or the maintenance of current levels.

In considering these survey results it is important to note that these sentiments are strongest in the country’s largest cities, where immigrants have settled in the past but where, importantly also, the largest numbers of parliamentary seats are at stake.

Through my own limited contact with immigrants I have noticed that they are very much aware, more than the average Canadian, of the cost immigrants impose on us, fiscally, through congestion and pollution, high housing costs and other channels.

For these reasons, parties that embrace policy reforms of the sort I am proposing can expect electoral gains rather than losses in ridings in which immigrants reside in large numbers. To verify the correctness of my views, I urge politicians to make their own surveys and remain critical of survey results produced by organizations that may be supported by the immigration industry and allege to show that Canadians want more immigrants.

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.