Can immigration lead to economic prosperity?

Racial, ethnic and religious conflicts are on the front pages of newspapers.

In fact, many countries, including in Europe, are becoming more diverse. Legal immigrants now represent on average 10% of the OECD labour force – a figure that has more than doubled in the last 20 years (and tripled for the share of immigrants in the skilled labour force). Illegal immigration adds to these figures.

The handling of immigration and immigrants are key policy questions in the coming decade, especially in western Europe which is the main destination for African and eastern European potential immigrants.

Immigration and the economy

What are the implications of this growing diversity for the economy?

Economic theory tells us that diversity generates costs as it makes communication and cooperation more difficult. But it also generates benefits in terms of potential skill complementarity between workers from diverse backgrounds. Existing literature has focussed on ethnic, linguistic and religious diversity and has emphasised its negative effects on economic performance and growth (Easterly and Levine, 1997, Alesina et al., 2003).

In recent research, we revisit this question using a new perspective: birthplace diversity (Alesina Harnoss and Rapoport 2013). This variable, which measures the probability that two individuals drawn at random in a given country have the same country of birth, can be decomposed into a ‘size of immigration’ (or share of foreign-born) component and a “diversity of immigration” component. It is very different from ethno-linguistic and religious diversity, both statistically and conceptually.

• Statistically, ethnic and birthplace diversity have little correlation (the coefficient of correlation is only 0.16).

This may sound surprising but much of ethno-linguistic diversity (for example black people/white people in the US, Flemish/Walloons in Belgium, or the ethnic mosaics of many African countries) owes little to immigration.

• Conceptually, the two are equally very different.

In particular, the notion that people of diverse backgrounds can be complementary due their increasing the set of skills, knowledge, practices and problem solving procedures available to a given set of workers would seem more relevant for people who grew up in different countries and were educated in different school systems than for people of different ethnicities but who were born in the same country and went to the same schools.

Main finding

The main robust result that emerges from our empirical analyses for a large sample of countries is simple, but important:

• Diversity of skilled immigration has a positive impact on the income and productivity levels of the richer countries in our sample.¹

This effect is statistically and economically significant. But what causes what? Is a nation’s success attracting diversity or is it the diversity that is fostering success?

Investigating the direction of causality

We think a bit of both is going on, but we delve deeper into this causality issue. Following a long tradition we use a gravity model to predict bilateral migration flows. This is a model that predicts immigration flows based on variables which are reasonably exogenous. The commonly used variables retained include mainly bilateral geographic (e.g., distance, existence of a common border, etc.) and cultural/historical (e.g., common language, colonial links) variables. Using these variables as a way to predict immigration we can establish that diversity of immigration benefits the receiving country.

Using this procedure we find substantial evidence of causality going from diversity of skilled immigration to productivity of the receiving country.

How much diversity is good?

We then address the question: how ‘diverse’ should immigration be? (This time looking at diversity in terms of cultural proximity.)

• Measuring diversity with distance in terms of language, genetic makeup and other cultural variables across different nationalities, we find evidence that the optimal diversity level seems at an intermediate level of distance between the pool of nationalities of the immigrants and the native population.

This is consistent with economic theory that excessive diversity may be counterproductive. We conjecture that the low productivity effect of diversity that is on the high side is due to difficulties in communication, while that on the low side is to insufficient diversity preventing economies from fully capturing diversity benefits.

Policy implications

The implications for immigration policy are potentially far-reaching.

Typically immigration policies have focused on the quantity – how many visas are issued – and quality – what skills should be required. Immigration policy have neglected the diversity dimension.²

• Our results imply that birthplace diversity also matters.

Moreover, one can also speculate about the formation of political economy vicious or virtuous circles emerging from the interaction between the different dimensions of immigration policy.

• Given that a highly skilled and more diverse immigration is not only economically more profitable but also better accepted by public opinions, it does not take much to imagine a scenario where quantity, quality and diversity of immigration interact to generate more prosperity.

Countries such as Australia, Canada and the US would seem to illustrate the virtuous regime quite well.

• The opposite scenario combines weak, unskilled and poorly diversified immigration where each aspect reinforces the other.

Most European countries seem to fall into the second category. They are stuck in a low-skilled and low-diversity immigration trap. Increasing the size of this type of immigration flows will do little to increase prosperity of the receiving countries. Increasing the diversity and the size of high skilled immigration would help. Certain types of low skilled immigration also are necessary to fill in for jobs not ‘sellable’ to locals, like home care for the elderly.

Europeans need to start thinking about immigration not with a Band-Aid approach, but as major policy question needing a long-term policy approach.

Read more blogs on immigration and economics.

References

Alesina A, A Devleeschauwer, S Kurlat and R Wacziarg (2003), “Fractionalization”, Journal of Economic Growth, 8(2): 155-194.

Alesina A, J Harnoss and H Rapoport (2013). “Birthplace diversity and economic prosperity”. NBER Working Paper No 16883, January.

Easterly, W and R Levine (1997), “Africa’s Growth Tragedy: Policies and Ethnic Divisions.” Quarterly Journal of Economics, 112(4): 1203-1250.

1 Specifically, the richest and most productive half of the sample.

2 The only exception, to our knowledge, is the well-known “green card lottery” (officially the “diversity lottery”) in the US.

This article first appeared on voxeu.org.

Authors: Alberto Alesina, Nathaniel Ropes Professor of Political Economy, Harvard University; and Research Fellow, CEPR. Johann Harnoss, PhD student, Lille University. Hillel Rapoport, Professor of Economics at the Paris School of Economics, University Paris 1 Panthéon-Sorbonne.

Image: A migrant worker worker is seen on a farm in Arizona REUTERS/Jeff Topping.