Addressing the Debate over the Economic Impact of Migration Remarks for the Conference on “Can Migration Work for All in Europe?” - David Lipton, First Deputy Managing Director, IMF - Brussels, Belgium
Over the past year, we have been thinking about how best to respond to the rising criticism of globalization. Despite the many benefits for rich and poor alike, the downsides of globalization have generated a powerful political backlash. That has forced policy makers to ask how to address the discontent and what to do for those left behind by economic integration.
We face a similar conundrum over migration. The issue has taken center stage here in Europe as tensions have risen over both the longstanding flow of migrants from Eastern Europe and the newer wave from the Middle East and Africa, including many refugees.
The politics and scholarship of migration are at odds. While scholars have long debated the economic costs and benefits of migration, and there remain some disagreements, a consensus has emerged that it is beneficial—a point I will return to in a moment.
But the rising tide of populism in the U.S. and Europe over the past few years that has pronounced a negative verdict on globalization has also drawn a harsh judgment on migration. Over the last year, that tide has swept away leaders in a few countries and threatens others.
So just as with globalization, economists and policy makers ought to pause and consider why public opinion seems to reject the positive conclusions of research on migration. Some reconsideration may well help us develop a deeper understanding of the issues and the analysis, and better refine the policy response.
There are three possible explanations for the strong public reaction. First, people may be placing less value on the economic benefits of migration, because they dislike the social and cultural change that they fear inevitably comes with immigration. Second, they may not be perceiving the real benefits that economists have shown to exist. Or third, economists may not have figured everything out. Perhaps there is an element of truth to all three.
Surveys about migration tell us that the fear of crime and the threat to culture or national identify show up as powerful forces affecting public opinion. Political scientists tell us that the reaction to these perceived threats expresses a profound insecurity. We, as economists, must not discount those aspects. At the same time, we do not have an easy way to factor them into our analysis.
What can we say about the economics?
The economic argument that immigration is damaging comes largely from a simple observation: by raising the supply of labor, it exerts downward pressure on wages, harming native workers--at least those of similar skill levels. Popular antipathy to immigration most often relies on this perspective, which is essentially what economic literature would call the partial equilibrium view. People see immigrants come into their communities, and believe they and others in their communities face worse job prospects accordingly. Many have particular experiences in the workforce that reinforce this view.
The economist’s response to that view is that the labor supply argument requires that all else be held constant, and that is surely not true. Most arguments that immigration brings benefits point to one or more factors not held constant: in other words, to what we would call general equilibrium and dynamic effects. Among these factors:
- Immigrant workers may complement, rather than substitute, for native workers.
- Immigrants will surely spend much of what they earn and thus raise demand, including the derived demand for labor, thus boosting wages and creating new jobs.
- Businesses will eventually invest to better equip immigrants with capital, raising productivity and reducing downward wage pressure.
- And native-born workers will retrain and attain higher paying jobs, or move to places with stronger labor markets.
The literature has identified many such factors that, in theory, can generate benefits and has shown that, in practice, they actually do.
Regardless of the broad agreement among economists about the benefits of immigration, the partial equilibrium view has currency in the realm of public opinion. And this currency does not represent an entirely peculiar or isolated reaction. In fact, much of the skepticism on migration bears a striking resemblance to skeptical views on trade. Those of us trying to understand the economics of immigration in order to shape policy proposals ought to reflect on the congruence of the debates over immigration and trade.
First, like trade, even if immigration brings net benefits to an economy, it may generate winners and losers.
Second, just as trade leads over time to specialization in line with comparative advantage, it may take time for the dynamic effects of immigration to take hold, as they depend on adjustment by businesses. So there may be many losers for a while.
Third, just as with trade displacement, effected natives may need to retool or move to become beneficiaries of migration.
And fourth, and perhaps most relevant right now, when many things are changing in the global economy, workers may not be able to discern which change is responsible for the decline in living standards they are experiencing. We have come to recognize a paradox: while the political debates in the US and Europe place much of the blame for sluggish wage growth and rising job losses on the globalization of trade, we suspect that much of the impetus actually comes from the powerful and lingering effects of the global financial crisis and from the persistent incentives for labor saving technological change.
So this is my message: the economic benefits of migration are well established. But as we are doing in the broader debate around globalization, we also must recognize that more work must be done on the topic, particularly to obtain a clearer picture of who may be hurt by migration—and how we can mitigate the impact.
As we review what we have learned from the research and experiences of migration, let us be careful to sort out what holds in theory, what seems to hold in practice, and how confident we are about our conclusions. As in the discussion of the globalization of trade, we should try to cast light on the subject, in order to guide policy makers in their tasks. But as in the trade debates, we should also be frank about winners and losers, transition periods, retraining and relocation needs, and impacts on fiscal finances and welfare programs. In essence, we need to be frank about politics.
This admonition should hold for academics examining the rapid changes brought by migration in this century, as well as governments grappling with the policy challenges these flows have brought in their wake. It certainly applies to the work of the IMF.
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