The Effects of Immigration on the Destination Economy: The Theory
When immigrants enter a country, they affect the destination country’s economy in a variety of ways. This chapter surveys theoretical research since the 1960s on the macroeconomic and microeconomic effects of immigration on the destination country. Macro
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The Effects of Immigration on the Destination Economy: The Theory
Abstract When immigrants enter a country, they affect the destination country’s economy in a variety of ways. This chapter surveys theoretical research since the 1960s on the macroeconomic and microeconomic effects of immigration on the destination country. Macro effects are measured by an ‘‘immigration surplus’’ that is usually positive but very small. The ‘‘micro’’ studies have focused on the distributional effects, and these have been substantial in magnitude. Estimates of how immigration affects natives depends on the assumptions of the model used to frame the analysis, such as the production function, number of goods produced, local immigrant consumption, native migration, and the time frame. We appraise the traditional labor market model’s predictions, and then we move to more detailed models that present a more nuanced story. Finally, this chapter examines how economists have begun to model immigration from a longer-run perspective, which requires the explicit recognition of ‘‘feedback mechanisms’’ that supplement the initial labor market effects covered in the traditional models.
Chapter Overview There have been few issues in economics that stir up as much controversy among politicians, business owners, and consumers as the debate on the impact of immigration on the destination country. Economists have tried to answer some of the questions that seem to concern so many people, such as: 1. Does immigration raise or lower average destination country income? 2. Which native-born people in the destination country enjoy income gains, which suffer losses, and how much are the gains and losses? 3. How does immigration affect product markets in the destination economy? 4. How do answers to the above differ for the short run vs. the long run? The first question concerns the aggregate, or macro, effects of immigration. The second is distributional, or micro, in nature. The second question has received ¨ .B. Bodvarsson and H. Van den Berg, The Economics of Immigration, O DOI: 10.1007/978‐3‐540‐77796‐0_5, # Springer‐Verlag Berlin Heidelberg 2009
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5 The Effects of Immigration on the Destination Economy: The Theory
the most attention and is at the heart of most political debates. The third question has both macro and micro implications in that immigration affects aggregate demand as well as the demand in specific market segments in the destination economy. The demand effect of immigration has been discussed in the business press, but it has been left largely unaddressed by the mainstream economics literature. This is a major failure of this field of economics, especially because the shifts in demand, and thus production, change people’s lives and their culture. There is little doubt that much of the emotion surrounding immigration is directly related to these changes in economic and social structures that immigration is perceived to cause. Finally, the fourth question concerns the dynamic effects of immigration that determine the full conseque
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