How migration makes the world richer

One defining feature of the world economy in recent decades is increasing migration. These cross-border flows have led to concerns in immigrant-receiving countries about the effects of migration on labour markets and welfare states. In turn, the countries of origin worry about the potential negative consequences of this human ‘brain drain’.

Thus there is growing interest in understanding and quantifying the costs and benefits of migration. However, as noted by Hanson (2009), global welfare analyses of migration are scarce, particularly when compared to the attention researchers have paid to estimating the effects of international trade.

Effects of migration on origin and destination countries

In a recent paper (di Giovanni, Levchenko, and Ortega 2013), we evaluate the welfare effects of migration from a global perspective in a manner analogous to how economists evaluate the gains from international trade. Namely, we compare the welfare in the world economy under current levels of migration to welfare in a counterfactual, no-migration equilibrium.

The main features of our framework are:

• We model a large degree of worker heterogeneity by skill level, country of birth, and country of residence.
• We incorporate international remittances.
• We account for each country’s degree of openness to trade.

This is potentially important because, in a variety of economic models, the effects of immigration are mitigated by the degree of trade openness. Finally, building on Melitz (2003), we assume a monopolistically competitive economy where heterogeneous firms face both variable and fixed costs of serving each export market, and our model highlights the interplay between workers and firms. We distinguish between the long run, in which the set of potential firms in the economy adjusts to satisfy the free-entry condition, and the short run, in which the set of potential (but not actual) projects in the economy is fixed. The model is calibrated to match country-level productivity, openness to trade, levels of migration and remittances, the firm-level productivity distribution, and the observed skill distributions of natives and immigrants (based on the data produced by Docquier et al. 2009, 2010).

We then use the model to perform the following thought experiment: all OECD migrants are repatriated back to their countries of birth. We refer to this scenario as the no-migration equilibrium. We compute the change in the utility of the average native stayer in each country, which in our model coincides with average real income per person.

The long-run effects

The solid dots in Figure 1 display the welfare impact of migration in the long run (under free entry) for each country. The horizontal axis reports the percentage change in the population in the no-migration counterfactual relative to the baseline. Thus, countries below zero on the x-axis would have a lower population in the no-migration equilibrium, and are mainly the wealthy OECD countries. The vertical axis reports the percentage change in average income per person in each country in the no-migration counterfactual relative to baseline. Thus, a negative number means that a country would be worse off in the no-migration equilibrium.

Figure 1. The welfare impact of migration in the long and the short run

For the OECD countries, welfare falls absent migration because of a market size effect. The size of the welfare loss is roughly monotonic with respect to the reduction in population. At the extreme bottom left of the plot, Australia would experience the largest drop in population (23%) and welfare (12%). A smaller workforce reduces firms’ profitability and, as a result, fewer firms choose to pay the first-stage exploration cost. This reduces the availability of domestically produced varieties, increasing firms’ costs and reducing consumer choice.

The countries whose population would be larger in the absence of migration – typically low or middle income countries – are mostly worse off in the no-migration equilibrium. For instance, Jamaica’s population would increase by about 30%, yet average welfare would fall by 7% in the long run. The reason is that the market size effect fuelled by the inflow of return migrants does not compensate for the loss of remittances. It is important to stress that if remittances had not been included in the analysis we would have obtained the opposite result.

As expected, trade openness mitigates the effects of migration. As noted by Iranzo and Peri (2009), receiving immigrants allows for an expansion of domestic variety but entails a loss in import varieties. However, from a quantitative standpoint this effect turns to be of second order. We also show that our findings are robust to accounting for selection into migration and imperfect transferability of skills across borders.

The short-run effects and distributional consequences

The hollow red dots in Figure 1 plot the welfare changes in the short-run, where we hold the firm-level (latent) productivity distribution fixed. For the countries that would lose population, that is, the OECD countries, it is striking that there would be no noticeable changes on average welfare in the short run. This is perhaps surprising given that market size, and firms’ profitability, would shrink due to the loss in workforce. However, only the least productive firms decide to shut down. Under our calibration, which accounts for the fat-tailed distribution of firm-level productivity, the varieties produced by these firms account for negligible shares of consumers’ and firms’ spending.

For the countries that in the no-migration counterfactual would have higher population welfare losses are larger in the short run. The reason is that, besides the loss of remittances, the wave of newly returned migrants is absorbed through the creation of new firms with below-average productivity.

The lack of an average impact in the OECD countries, however, masks substantial distributional effects. Figure 2 plots the welfare change of the skilled and the unskilled separately, in the long and the short run, along with a 45-degree line. If a country is on the 45-degree line, the skilled and the unskilled experience exactly the same welfare change.

In the long run, the distributional effect is limited: most points are close to the 45-degree line. However, the picture is very different in the short run. For many countries, workers of different skill levels experience welfare changes of opposite signs, and much larger in absolute terms than the overall average effect. The differences in the skill distributions of natives and immigrants in each country drive the direction of these effects. For example, Australia’s immigrant population is more educated on average than its native population. In the counterfactual no-migration scenario the relative supply of skilled labour would fall, which would lead to a 2.5% welfare increase for the skilled natives but a 2.5% welfare loss for the unskilled natives.

Figure 2. Distributional effects; percentage change in welfare for skilled (college graduates) and unskilled (non-college graduates) native workers

Summary and implications

The main conclusion of our analysis is that migration appears to benefit practically all origin and destination countries. OECD countries benefit because of greater domestic product variety. In turn, most migration source countries also benefit because the remittances sent by migrants more than offset the costs associated with smaller market size. Essentially, this is because the typical migrant moves from a low to a high labour productivity country, increasing the worldwide effective units of labour. Remittances are the vehicle that allows for those gains to be partly transferred back to the origin countries.

While, above, we do not discuss the gains for the migrants themselves, as expected the real-income gains to migrants are an order of magnitude larger than the welfare changes for non-migrants, and probably well above the costs entailed by migration.

We conclude with two important caveats:

• The finding that the receiving countries benefit from immigration may seem unappealing because it appears at odds with the widespread opposition to immigration in high-income countries.

We note that these gains materialise only in the long run, after new cohorts of firms have responded to the potential gains from a larger market size. The short-run gains are much smaller and, in many instances, are accompanied by important distributional effects that can significantly affect views on immigration policy.

• Our analysis has ignored the implications for the welfare state.

The great disparity in the size and design of these systems makes a global analysis of this aspect infeasible. We simply note that adding a welfare state would have an ambiguous effect on our findings. On the one hand, countries receiving large numbers of unskilled immigrants may have to finance greater public expenditures by means of distortionary taxation. On the other, these workers tend to be younger than the average natives, which may provide important labour-market complementarities (as in Cortes and Tessada 2011, or Farré et al. 2011) and help alleviate shortfalls in the pension system.

This article first appeared in voxeu.org

Authors: Julian di Giovanni, Economist in the Research Department at the International Monetary Fund. Andrei Levchenko, Assistant Professor of Economics at the University of Michigan. Francesc Ortega, Dina N. Perry Associate Professor at Queens College, City University of New York.

Image: Spanish nurses disembark from a plane in Amsterdam to take up work REUTERS/Marcelo del Pozo