The Economic Case for Mass Immigration Is as Strong as Ever

Only the political rhetoric has changed

Several prominent conservatives like Vice President JD Vance, mercantilist lawyer Oren Cass, and EJ Antoni are making excuses for why less immigration isn’t boosting employment or lifting wages like they predicted. Cass seems especially surprised. He has claimed for years that native-born Americans would take jobs freed up by deportations. In a classic case of Cassian obfuscation, he now says the economy will shrink because immigration is like a sugar rush. The Trump administration is so displeased that it’s blaming corrupt statisticians and failing to accept reality. We’re one recession away from prominent conservatives arguing that poverty is good for social cohesion, the nation, or another abstraction. The economists have been correct the entire time, the restrictionists have been wrong, and they should have listened.

The economic case for immigration is explained below, with links to other research for interested readers. The biggest omission is that there’s no mention of how immigrants affect innovation because that would require thousands more words, and this blog post is already long enough. These commentators and others who thought that the economic case for immigration had collapsed couldn’t be more wrong. No research, empirical evidence, or theoretical advances have undermined the economic case for mass immigration.

Labor Markets

There has been no fundamental change in the economics of labor markets or economists’ understanding of them that would lead you to predict that a decrease in the supply of workers would lead to real wage growth. Demand for labor is determined by the worker's marginal value product (MVP), a fancy term for the quantity of stuff a worker makes multiplied by the market price. Workers cannot sustainably be paid more than they produce, or their employer goes out of business. The worker’s productivity is affected by his own human capital, the price of physical capital, land, and the quality of entrepreneurship. Most importantly, labor demand is elastic in the long run, which means that an increase or decrease in the supply of workers doesn't much affect wages. Those worried about worker wages should focus more on labor demand than supply.

Economic theory does not predict that a decrease in the supply of workers would increase wages in the long run, it only predicts that relative wages would be affected. An increase in the supply of workers might push down wages in the short run, but that increases the relative price of capital. Remember that capital is important in affecting worker productivity and, hence, demand for workers. The effect is that owners of capital earn higher profits that incentivize investors to supply additional capital that entrepreneurs and firms can buy. That extra capital then increases worker MVP, which raises wages.

For example, imagine a construction site with 10 workers using 10 hammers to build a house. Each worker has one hammer. If the entrepreneur hires an 11th worker and all 11 workers must now share 10 hammers, then the wages for all workers would fall because they would all be less productive. Passing hammers back and forth and waiting for a hammer wastes time on the clock. The lack of hammers also makes hammers relatively more valuable compared to laborers and thus raises the price of hammers. That higher price incentivizes hammer manufacturers to supply more hammers that the entrepreneur will buy for the 11th construction worker. Once that 11th construction worker gets a hammer, his MVP increases, and so will his wage and the wage of the other workers if they were previously sharing the hammer. If the employer does not raise the worker's wages then another entrepreneur with enough hammers can hire away the worker for a higher wage. Economists call the point where all those adjustments have occurred "the long run." At that point, economic theory predicts that overall wage levels will be unchanged, but there might be some relative changes where some workers will have wages higher or lower relative to other workers. Note that’s not an absolute wage change, as some workers will have lower relative wages but higher real or nominal wages. The empirical evidence shows that this happens.

The real-world empirical evidence for the above is unambiguous, and no research has overturned or made us reconsider those theories. We don't see much of a relative decline of high school dropout wages compared to high school graduation wages, which must be especially confounding for immigration restrictionists who expected rapid wage growth after closing the border.

The empirical evidence is even better than that.

The wage elasticity measures how much an increase in the supply of workers affects the wage. It’s easy enough to understand. A 1 percentage point increase in the supply of workers leads to a +0.1 percentage point increase in wages, so the wage elasticity is +0.1. Vitally, the wage elasticity of native-born workers in response to changes in the supply of immigrants is the relative change in wages. That means that even if the elasticity is negative, that does not mean that wages actually declined. It just means that wages for one group of workers declined relative to another, but since wages change constantly, that doesn't mean the wages fell. In the real world, those relative changes obscure that wages went up for all workers and a lot more for some workers than others.

A 2017 publication by the National Academy of Sciences (NAS) surveyed the empirical economics literature and reported that the long-run range of wage elasticities for all native-born Americans and native-born high school dropouts is between –0.4 to +0.1. This means that a 1 percent change in the supply of labor caused by immigrants affects relative wages by between negative 0.4 and positive 0. Those effects are differences based on the wages and experience of the workers.

The two pillars of this vast empirical wage literature are by economists George Borjas and Gianmarco Ottaviano and Giovanni Peri. Those papers are part of the so-called skill cell subset of the economics literature that uses structural methods to study how immigrants with specific levels of experience and education affect the relative wages of natives with the same levels of experience and education. The cells are defined by education and experience. The structural methods are essential here because they estimate the speed and extent to which capital adjusts to changes in the price of labor and the elasticities of substitution between workers by skill.

Both Borjas and Ottaviano and Peri find about the same overall wage impact on native-born Americans from immigration at +0.6 percent relative increase from Borjas and +0.5 percent increase from Ottaviano and Peri when they assume some complementarities in the labor market (these are not elasticities, but the effect of immigration on the relative wages). However, they find different effects on the wages of native-born American high school dropouts. Borjas finds that the wages of native-born American dropouts fell by a relative –1.7 percent compared to Ottaviano and Peri who found a relative +1.1 percent wage increase for the same group. Minute differences in methodology explain the slightly different results in these two papers. It's hard to see that small difference in relative wages and care, but legal-trained economics pundits like Cass and our current vice president are very worked up about it.

Immigrants have a much larger effect on the wages of other immigrants than native-born Americans. Borjas and Ottaviano and Peri agree that immigrants lower the relative wages of other immigrants more because they are the most substitutable. Every education group of immigrant workers experiences relative wage declines from immigration, whereas native-born American workers mostly experience relative wage gains. New immigrants substituting for and lowering the relative wages of older immigrants is a common empirical finding. This is why other writers who oppose liberalized immigration focus on how immigrant wages are most affected by other immigrants. But could you imagine Cass, Vance, or other immigration restrictionists making the case for reducing immigration to help immigrant workers? The very idea sounds like the topic of an Onion article.

Many other labor market effects reduce competition between immigrant and native-born workers and other research that finds similar results. For instance, immigrants and native-born workers specialize in different occupations that results in less competition and complementarities, immigrants don’t knock natives out of the labor force, there is no lump of labor, search and matching models find that immigrants increase wages by reducing frictional unemployment, how reductions in immigration don’t increase wages in the long run, and the vast quasi natural experimental literature (more here, here, here, and here).

The bottom line is that immigration doesn’t lower the wages of native-born Americans and reducing immigration doesn’t increase wages, just as economic theory predicts. More recent research confirms the findings. There was no shift in the effects of immigration on the labor market that has been theorized or observed.

Land and Housing Markets

Immigrants rent property and buy houses. When housing supply curves are upward-sloping, increased immigrant demand boosts housing prices. Housing supply is relatively inelastic, partly because of government land use restrictions and other reasons, but higher demand will increase prices. This effect is larger than in any other market with a 1 percent increase in the population caused by immigrants increasing rental prices by 1 percent. We can’t stop at the demand side because immigrants are also more likely to be construction workers than native-born Americans, thus disproportionately increasing the housing supply (the quasi-experimental design here is flawed). The effect is that housing values are about $5.7 trillion higher than they would have been in 2022 due to immigration. My analysis could well be too pessimistic on the supply side, but immigrants increase the price of land and housing on net.

Entrepreneurship and Capital Markets

Immigrants increase labor demand by starting firms, among other positive effects of firm creation. Immigrants start more firms than native-born Americans do at every size of firm. Based on administrative data, the rate of entrepreneurship in the 2005-2010 period shows that 0.83 percent of immigrants in the workforce started a firm compared to 0.46 percent of native-born Americans. Immigrants thus exhibit an 80 percent higher entrepreneur entrance rate. Immigrant-founded firms are slightly more productive which explains why wages are almost 1 percent higher there than native-founded firms. As more detailed administrative data becomes available, our estimates of self-employment continue to rise for native-born Americans and immigrants. The supply of capital expands with the workforce, but the type of capital deployed changes with the skill composition of the workforce.

Fiscal Effects

The fiscal effects of immigration are more mixed and depend on the age of immigrants when they arrive and their skill level, but they are largely positive in the United States. Small changes in American fiscal policy would make them unambiguously and universally positive. Some of those reforms are further reducing non-citizen access to welfare benefits, allowing all immigrants to legally work, and raising their eligibility for Social Security.

What Needs to Change

The large number of illegal border crossings during the Biden administration convinced people to oppose immigration. Chaos Theory, as I call it, is the idea that voters saw the border chaos and reacted by opposing all immigration. The lesson is that a politically sustainable pro-immigration policy agenda will do three things. First, it will expand legal immigration. Second, it will let the market decide the skill mix, occupations, wages, destination, and quantity of immigrants to the maximum extent politically possible. Third, it will accomplish those goals in a way that minimizes chaos and guarantees that migrants aren’t crossing the border illegally or clambering for asylum as a substitute for being on guest worker visas. The economics of immigration have not changed, but the political focus must change toward championing order and recognizing that mass legal immigration will bring that.

The economics of immigration remain the same as they always have. Immigration benefits the American economy, Americans benefit, the immigrants themselves benefit, their friends and families left behind in other countries benefit, and humanity benefits by moving from the less free and poorer places to the land of opportunity. Immigration is an amazing machine that reallocates scarce and valuable resources to where they are more valuable. The negative externalities are puny and largely controllable by minor state interventions that governments around the world police, like crime and terrorism. Freedom of association, individual liberty, and free markets flourish with more voluntary movement. The economics of immigration have not changed, nativists are just louder than they used to be. If anything has changed, it is a surge in the supply of anti-immigrant analysis emboldened by politics.