United States Technological Superiority And The Losses From Migration
This study employs a new approach to examine the impact of
immigration on the U.S. economy. Unlike earlier studies, we do not treat
the movement of immigrant labor into this country in isolation. Older studies assumed that abundant resources and demand for labor was the
primary reason for immigration, assumptions more appropriate to the 19th
century. We start by assuming that the technological superiority of the modern
American economy and resulting high standard of living is the primary factor
motivating immigration. The study also takes into account the new global
economy, including the movement of capital as well as trade. Our findings show
that immigration creates a net loss for natives of nearly $70 billion annually.
Among the report’s findings:
In 2002, the net loss to U.S. natives from immigration was
This $68 billion annual loss represents a $14 billion
increase just since 1998. As the size of the immigrant population has
continued to increase, so has the loss.
The decline in wages is relative to the price of goods and
services, so the study takes into account any change in consumer prices
brought about by immigration.
The negative effect comes from increases in the supply of
labor and not the legal status of immigrants.
While natives lose from immigration, the findings show that
immigrants themselves benefit substantially by coming to America.
Those who remain behind in their home countries also
benefit from the migration of their countrymen.
The model used in this study can be summarized as follows:
High U.S. productivity motivates the entry of foreign workers and capital. As
a consequence, the movement of foreign labor and capital into the United
States expands U.S. exports and reduces exports by foreign countries who now
have fewer workers and less capital. This depresses the prices of U.S. exports
while raising the price of its imports, which is bad for U.S. natives. While
the addition of immigrant workers makes the overall U.S. economy larger,
natives in the United States are worse off because immigrants take not just
the increase in income, but other income as well. This is because American
workers are now competing with foreign workers who, because they have entered
the United States, now have access to superior American technology, which is
the primary source of American workers’ competitive advantage in the
international economy. In other words, American workers are better off
competing with foreigners if the foreign workers stay in their own countries
and don’t have access to American technology. By allowing the foreign workers
into the United States, Americans face competition with foreigners equipped
with American technology.
The Economic Costs of Immigration
America is often described as a nation of immigrants. And so it is. One reason
for immigration has been the promise of liberty. However, even from the start,
a second very powerful reason has been the opportunity America provides for
prosperity. Waves of immigrants have come, particularly from Europe, Asia, and
the Americas (especially Mexico) to enjoy the high wages available here and
escape the relative penury of their native lands. Through the end of the 19th
century and into the 20th century, a prime advantage of America that allowed
it to deliver these high wages was its great abundance of land and natural
resources. Increasingly, though, in the last half of the 20th century, the
principal advantage of America has not been its resources, but rather its
leadership of the world in technology or productivity.
Economists have long been interested in the consequences of immigration. A
large and highly varied theoretical literature has developed that considers
potential sources of gains and losses for a country experiencing immigration.
Surprisingly, these theoretical models almost never have a word to say about
the role of technological advantage as a motive for migration—even though this
is surely the most important reason for the wage advantage in America that is
the proximate reason for most migration. The empirical literature on
immigration has considered a wide variety of questions regarding the impact of
immigration on America. In recent years, an important strand of this has
considered the overall impact of this immigration on the American economy.1
Here, again, the analysis has treated immigration as if it were motivated
principally by an abundance of resources, as would have been appropriate in
the 17th, 18th, 19th, or even early 20th centuries, but that is not
appropriate to 21st century America.
The choice of an intellectual framework within which to examine the
consequences of immigration is not a purely academic squabble. By choosing the
traditional framework, where immigration is motivated by relative labor
scarcity, one has also pre-determined in qualitative terms the outcome of any
empirical study. Such studies necessarily conclude that the principal national
consequence of immigration is the redistribution of income between natives
similar to the immigrants and other factors of production. Likewise, as a
matter of theory, the traditional framework concludes that the economic
consequences for the receiving country as a whole are positive, though
negligible. Empirical work in this conventional tradition cannot alter these
conclusions, only quantify them.
In this essay, we summarize the conclusions of a paper that provides a new
approach to studying the economic consequences of immigration.2 The starting
point for the analysis is that immigration to America is ultimately motivated
by American technological superiority. Once we accept this as a starting
point, though, it is no longer appropriate to study the movement of labor in
isolation. High American productivity does provide a motive for the
immigration of labor. But it also provides an incentive for the inflow of
productive capital. That is, high productivity yields high returns for all
factors of production, which suggests that these inflows should be studied
jointly. This is precisely what our study does.
The theoretical model that we work with predicts that high productivity in
America will lead to large inflows of both capital and labor. Indeed, this is
exactly the pattern we have seen in recent decades. We calculate that the
foreign born in 2002 are 14.3 percent of the U.S. labor force and that inflows
of foreign capital account for (a surprisingly similar) 16.5 percent of the
domestic capital stock.3 Taken together, the inflows of capital and labor have
expanded the size of the U.S. economy by nearly one-sixth. However, theory
teaches us that this may not be a good thing. As a consequence, the United
States needs to find foreign markets for its expanded production and to buy
scarcer foreign products at higher prices.
Indeed, our study finds that these costs gave rise to a net loss of $136
billion for American natives in 2002, or about 1.3 percent of U.S. GDP. These
are big numbers. They are equivalent in magnitude to standard measures of the
loss from all U.S. trade barriers and three to four times larger than recent
calculations of the cost of the U.S. business cycle.
It is important to place these numbers in context. Our framework, like the
conventional approach, implies that such flows of productive factors increase
world economic efficiency. The divergence between the conventional results and
ours is that the conventional approach, based on relative factor abundance,
concludes that migration is like trade in the sense that there are aggregate
benefits for natives of both countries (sending and receiving). In our
approach, there are aggregate income gains for the world as a whole. However,
more than all of these gains accrue to natives of the sending countries.
Receiving country natives (here the United States) experience losses.
There is, no doubt, more research that needs to be done in this area.
Immigrants may bring U.S. natives direct and indirect economic benefits in
ways not captured by our model. The challenge for those who believe this is so
is to show that one can actually identify these effects and that the magnitude
of these benefits is sizable. In addition, it is important to recognize that
showing that there are economic costs of immigration for U.S. natives need not
imply that immigration is bad. The benefits to the immigrants themselves,
which likely are a multiple of the costs to U.S. natives, may be sufficient
justification. There may be non-economic benefits to U.S. natives. Our aim
here is not to pronounce a judgment on immigration per se, but to consider and
quantify a new approach to measuring the economic costs and benefits of
In the remainder of this essay, we will sketch out the main ideas underlying
the conventional approach and our own approach to analyzing the impact of
immigration. We will follow this by sketching our methods for applying our
approach to the data.
The Conventional Approach to Immigration
The essential insights underlying
the conventional measurement of the economic impact of immigration can be
outlined simply. Suppose that the United States produces its output with land
and labor. For a fixed amount of land, total income in the United States
depends on the amount of labor employed. Figure 1 illustrates this with a
declining marginal product of labor curve with the height of the curve showing
how much extra income is generated as each additional worker is added to a
fixed amount of land. In this figure, the wage before immigration flows is
determined by the intersection of the fixed U.S. native labor supply with the
marginal product of labor curve (at the level w0).
The consequences of immigration are easily illustrated. Immigrants shift the
domestic supply of labor to the right by the amount of immigration. The new
equilibrium is determined as before, but with respect to the new (larger)
total labor supply. The immigration has several consequences. With land fixed
and a larger total labor supply, the marginal product of labor—and so the
wage—falls to w1. The immigration causes the total income in the United States
to rise by the area under the marginal product curve over the interval of
immigration (the sum of areas D and E). Of this, only part (area E) is paid as
wages to the immigrants themselves. The remainder (area D) accrues as an
“immigration surplus” for U.S. natives.
Several points in the conventional approach need emphasis. The first is that
the existence of an “immigration surplus” arises purely from theory, even
before one has looked at the data. This emphasizes the importance of thinking
carefully about the appropriateness of the underlying analytic framework. The
second point is that, even subject to this caveat, the immigration surplus is
economically small. This is particularly true when considered relative to the
redistribution that immigration occasions from labor to other factors of
production in the economy receiving immigration (area B). Finally (although we
have not spelled out the details here), when the immigration arises due to
differences in relative labor availability, the natives of both sending and
receiving countries benefit in terms of aggregate income.
A New Approach to Immigration and Factor Flows
The starting point for our
approach is to recognize that while wage gains are the proximate reason for
immigration, the ultimate source for the high wages is the technological
superiority of the United States. This suggests the value of using a Ricardian
approach to studying immigration, since this traditional trade model features
precisely the technological differences of interest. While our empirical
applications will consider data based on capital flows, and immigration of
both skilled and unskilled labor, it is easiest to grasp the basic idea by
working with a model with a single factor of production that we can for now
We can develop a very simple statement of this in the case of the standard
Ricardian textbook trade model. Consider a world of two countries, the United
States and Foreign. Assume that there are two goods that can be produced,
aircraft and textiles. For definiteness, assume that the United States has an
absolute productivity advantage in both goods, although this advantage is
relatively stronger in aircraft. The higher U.S. productivity in both goods
will give it a higher wage even in autarky, before trade.
If the countries now open to free trade, the standard Ricardian model tells us
that specialization will be according to comparative advantage, that is
according to relative productivities. The United States will tend to
specialize in and export aircraft while Foreign will tend to specialize in and
export textiles. As is standard in this type of model, with sufficient
specialization both Foreign and the United States enjoy gains from trade.
We can now move on to consider the consequences of immigration. Even with free
trade, the United States continues to enjoy a higher real wage than Foreign,
which derives from the superior U.S. technology. If we took this to an extreme
and removed all barriers to migration, all Foreign workers would move to the
United States, lured by the higher wage available there; Foreign would
essentially cease to exist. However, with all labor now in the United States,
the prices of goods would return to their level in autarky, prior to the
opening of trade. That is, perfectly free migration entirely eliminates the
gains from trade that U.S. natives had enjoyed. World income rose with the
migration, but the natives of Foreign in this case received more than all of
this rise, since the income of U.S. natives declined.
This has been a special case based on perfectly free migration. However, the
story doesn’t differ in its essentials when only some of the Foreign natives
can migrate. This can be looked at in two different ways. The entry of Foreign
workers into the United States expands output of U.S. exports and contracts
that of Foreign. This depresses the prices of U.S. exports while raising the
price of its imports. This is bad for U.S. natives. Alternatively, one can
think of part of the income that U.S. natives enjoy as being based on their
monopoly of access to the superior technology. Immigration erodes this
monopoly, leading to gains for immigrants and losses for U.S. natives.
In short, this model shows that when migration is driven by technological
differences we need to revise—indeed reverse—our prior conclusions. In the
conventional framework, immigration gives rise to small gains for U.S.
natives. In the more realistic Ricardian framework, immigration gives rise to
large losses for U.S. natives. The remainder of this essay will seek to
establish the magnitude of those losses.
Quantifying Losses from Immigration
In this section, we have three tasks. The first is to discuss the
reasonableness of our use of the Ricardian (technology difference) model for
studying immigration. The second is to establish a baseline empirical estimate
of the economic costs of immigration. Finally, we need to consider a variety
of extensions or objections that might be raised regarding the analysis.
Reasonableness of the Analytic Framework
The framework for our analysis is
the Ricardian model, a standard model for analysis of trade, yet one that is
rarely applied to the question of immigration (and never previously in an
empirical study). There are two features of the simplest Ricardian model that
are distinctive, and so verifying that these features are reasonable
approximations to reality will likewise suggest this is a reasonable framework
for studying the consequences of immigration. The first distinctive feature is
that in the complete model trade (and migration) is based on cross-country
technological differences. The second distinctive feature is that the standard
presentation of the model is based on the existence of a single productive
That the United States is one of the highest productivity countries in the
world is indisputable. This is confirmed directly in studies by Islam (1995,
2001) and Hall and Jones (1996). U.S. total factor productivity (TFP) is
frequently two, five, even 20 times that of many developing countries that are
important sources of U.S. immigration. And there is no question that this high
TFP also translates into high wages for workers in the United States—hence as
a key motive for immigration. This point has been addressed more directly by
Hendricks (2002). He notes that if the cross-country wage differences were a
result of quality differences then, even after immigration, there should be
large wage gaps between immigrants and natives of a magnitude not observed. He
concludes that productivity (TFP) differences are very important for the wage
gains enjoyed by immigrants to the United States. In short, the data strongly
confirm the Ricardian model’s assumption that productivity differences are an
important reason for immigration.
The high TFP of the United States should make location here attractive for all
mobile factors of production. Labor should want to come for the high wages.
Capital should seek to enter for the high returns. Our simple model above
presumes that there is only a single productive factor (we loosely termed
“labor”) rather than the multiple factors of the real world. This need not be
an unreasonable simplification, as a first pass at analysis, if the factors
entered the United States in similar proportions (hence as if a composite
factor). As it turns out, this is very close to the reality. In 2002, our
calculations show that 14.3 percent of the U.S. labor force and 16.5 percent
of the U.S. capital stock were due to immigration and net capital inflows
respectively.4 These are surprisingly close and confirm again the
reasonableness of our employment of the Ricardian model for analyzing
Magnitude of the Losses
A first calculation of the economic costs of the
inflow of factors (immigration and capital flows taken together) for U.S.
natives is very simple in this framework. We need to calculate how this
changes the relative supplies of the United States (expanding) and the rest of
the world (contracting) goods in the world and then to see how these changes
in relative supplies translate into deterioration in the U.S. terms of trade.
In this first approach, the calculation of the impact on outputs is very
simple given that both labor and capital in the United States expanded by
around 15 percent. For the impact on the terms of trade, we rely on a study by Acemoglu and Ventura (2002), which studies precisely this question of how a
rise in output (for whatever reason) translates into deterioration in terms of
trade. Our calculations show these costs of factor inflows were $136 billion
in 2002, or approximately 1.3 percent of GDP. This is very large in absolute
terms and huge compared to the previous calculations of what were thought to
be gains from immigration.
We also consider the robustness of this calculation. Although we do not have
space to discuss the detailed methodology here, in order to obtain the
estimates discussed above, we disaggregate labor into skill types and allow
for the possibility that actual inflows may expand import competing sectors,
and as a consequence improve U.S. terms of trade. However, our calculations
show that the skill structure of immigrants tends to worsen the terms of trade
even more than one might expect given the aggregate inflow. We conclude that
our analysis is robust to such questions. Secondly, our analysis is driven by
both the inflows of capital and labor. We therefore repeat our analysis
assuming that U.S. investment is unaffected by foreign capital flows. This
produces a loss to natives from immigration alone of $68 billion or 0.6
percent of GDP.
It is possible and useful to raise additional
questions about the analysis. On the analytic side one could ask, for example,
whether it matters that many immigrants are employed in non-traded sectors.
The answer is “no.” We have understood for a long while that high productivity
in traded goods can give rise to price and wage differences in non-traded
sectors (the so-called Balassa-Samuelson effect). It is straightforward to
write down models in which the essential features of our approach are
preserved and in which substantial employment of immigrants in non-traded
sectors arises. Similar adjustments could be made that would allow for
differences in factor quality between natives and immigrants, yet which would
preserve the substantive conclusions of the study.
The conventional approach to studying the economic consequences of immigration
suggests that immigration is like trade—there are benefits for natives of both
countries. We have amended this framework to take account of the idea that in
the modern world, the wage differences that are the proximate cause of
immigration are ultimately the consequence of cross-country productivity
differentials. In this new, more realistic framework, the conclusions of the
analysis are quite different. Just as in the conventional analysis,
cross-country flows of factors raise world income. However, not everyone
shares in this rise in world income. Indeed, natives of the country receiving
the factor inflows lose in real terms. We have calculated the cost of this to
U.S. natives in 2002 as $136 billion, or 1.3 percent of U.S. GDP.
There may be economic consequences of factor inflows to the United States
beyond those considered in this study. The challenge to economists is to
quantify these other influences and to see whether they may offset the direct
costs we have calculated. Further research is clearly desirable. At the same
time, it is important to be clear that even a conclusion that there are
economic costs to U.S. natives need not imply that immigration is bad. That
should be reckoned on a wider range of questions, including the large benefits
to the immigrants themselves, other measurable economic benefits that may
arise from their presence, and any non-economic benefits that come from a
society enriched by immigrants.
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1. See, for example, the seminal study of
2. Davis and Weinstein (2002).
3. We wish to thank Steve Camarota for providing us
with the immigrant share data.
4. See Davis and Weinstein (2002) for details on the
About The Author
Donald R. Davis and David E. Weinstein are both professors of economics at Columbia University and Research Associates at the National Bureau of Economic Research (NBER).
Both authors are recognized as among the nation’s leading experts in
international economics. This paper updates a June 2002 National Bureau of
Economic Research (NBER) working paper entitled “Technological Superiority and
the Losses from Migration.” NBER is one of the nation’s leading economic
research institutions. For those wishing a much more detailed and technical
explanation than the one presented here please see the NBER paper at:
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.
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