Could Increased Immigration Improve the U.S. Economy?

If you wanted to devise a solution to some worrisome trends on the horizon for the U.S. — threats to continued GDP and employment growth, an under-funded Social Security trust fund — you might consider a mechanism called immigration. Forecasters see challenges in the ability of a limited U.S. population expansion to support economic growth. An influx of immigrants is one obvious answer.

“In relative terms compared to other countries, if we care about our relative position vis-à-vis China, for instance, immigration is going to be a critical part of maintaining that position,” said Alexander Arnon, senior analyst with the Penn Wharton Budget Model (PWBM), on a recent Knowledge@Wharton SiriusXM radio segment.

U.S. immigration policy is extremely important to the future of the economy over the next few decades, notes Arnon, due to the country’s aging population and relatively low native fertility. “If we hold things constant, we’re looking at a population that is roughly stabilizing after a few decades from now. If we want to continue growing, if we want to maintain our relative position in the world population, really the only way we’re going to accomplish that is if we bring in more immigrants.”

But how many more immigrants, what kinds of immigrants and from where? And how should the U.S. structure its policies accordingly? Real data is critical to developing appropriate public policy, and the PWBM has built an online immigration policy simulator demonstrating the impact potential reforms to immigration policy would have on the GDP, population, employment, and the old-age dependency ratio.

The essential findings: Shifting the mix of legal immigrants toward college graduates would have little impact on employment and slightly increase GDP; legalization of undocumented workers would slightly reduce employment and have a negligible impact on GDP; increasing deportations would substantially reduce both employment and GDP; and the largest positive impact on employment and GDP would come from increasing the net flow of immigrants.

The PWBM immigration policy simulator shows users the results of three policy options and combinations of those options for a total of 125 policy combinations — findings that its creators hope will inform policy makers, the media and others. “It’s an important topic, and it’s certainly not going away,” said Kent Smetters, PWBM faculty director and Wharton professor of business economics and public policy.

More Immigration, More Growth

“One of the things that we found is if we increase immigration, legal immigration in particular, the entire population as a whole of the United States becomes younger, there are more working-age people who are contributing to economic growth, and also — given current trends in immigration — the population becomes more educated. And so we wind up with more productivity,” said Kimberly Burham, managing director of legislation and special projects for the PWBM, on the Knowledge@Wharton radio show. “We wind up with a larger tax base that helps tax burdens on ordinary Americans. And it also helps financing for these entitlement programs like Social Security. So increasing immigration can have a lot of positive impacts on the budget.”

“If we increase immigration, legal immigration in particular, the entire population as a whole of the United States becomes younger, there are more working-age people who are contributing to economic growth….”–Kimberly Burham

The need to undergird Social Security is no small matter. The program is currently threatened by a shortfall expected to exceed $14 trillion in the next 75 years, with its trust fund projected to be depleted by 2034. Population growth in the U.S. is also hardly booming. In 2017 and 2018, birthrates declined and death rates rose, with immigration accounting for nearly half of the population growth in the U.S., according to the Census Bureau.

The characteristic of immigrants in the U.S. has undergone significant changes in recent years. For most years since 2010, Asian immigrants have outnumbered Hispanic ones, according to the Pew Research Center. In 2017, India ranked first as country of origin for new immigrants coming into the U.S. with 126,000 people, followed by Mexico (124,000), China (121,000) and Cuba (41,000). The roughly 800,000 legal immigrants coming into the U.S. represent a tiny sliver of the U.S. population of 321 million — about a quarter of 1%.

People arriving now are different from the types of immigrants coming in the 1990s, said Arnon. “Roughly half of new immigrants in the last few years have been college-educated, which is a really stark change. The typical U.S. immigrant in the 1990s would have been a 20-something or early 30s Mexican male with a high school education.”

When the PWBM runs the numbers on a hypothetical additional 800,000 immigrants per year, assuming that future immigrants would be similar to current ones, “that means they are highly educated and generally more educated than the U.S. population average,” points out Arnon. “So increasing that legal immigration number would tend to push up the share of the U.S. population that has a college degree — which has all sorts of positive effects. They typically earn more. They’re healthier. So that’s good for tax base, good for the population in general.”

Burham say that of all of the possible PWBM immigration policy simulator options, “the one that gets the most positive bang for your buck is really doubling immigration, and then also increasing the share of immigrants that have a college degree. And that actually doesn’t increase just GDP. It increases GDP per capita. So that’s sort of more for everyone.”

Increasing legal immigration to 1.6 million people per year would be salutary to the GDP, the number of jobs, the fortunes of Social Security, and would increase the size of the U.S. economy, the PWBM immigration policy simulator finds. Such an increase would, over the next 35 years, put the GDP at 2% growth per year on average rather than 1.7%. By 2050, GDP per capita would be 3% higher if immigration is increased by 50% than if immigration stayed the same as it is now. And it would lead to employment growth and an improvement to the old-age dependency ratio.

Granting legal status to the 11.3 million unauthorized immigrants in the U.S. (as of 2014) would not have much of a ripple effect, according to the PWBM model. Enacting a policy that provides legal status for up to 10% of unauthorized immigrants per year would give nearly all unauthorized immigrants legal status within about a decade. This policy change would have no discernible impact on the size of the U.S. population, the old-age dependency ratio, or GDP, the PWBM immigration policy simulator showed. Such a policy would have a small downward impact on employment.

“Once they obtain legal status, currently unauthorized immigrants may be able to access government benefits such as unemployment insurance and other safety net programs that allow them to leave the workforce, possibly to care for children, or spend more time searching for a job,” says a PWBM brief. “Although legal immigrants are less likely to be employed, they find better jobs to match their skills, which leads them to be more productive and earn higher wages once they attain legal status.”

One of the frequently heard arguments against more immigration is the claim that they are taking jobs from U.S. citizens. Immigration can create problems for labor markets when loaded heavily in a couple of occupations, said Peter Cappelli, Wharton management professor and director of the school’s Center for Human Resources. “Foreign workers on H-1B visas offer employers many advantages: they cannot typically quit the employer who hires them without losing their status, their opportunities in their home country often are substantially worse than these U.S. opportunities, and so forth.”

“Increasing that legal immigration number would tend to push up the share of the U.S. population that has a college degree — which has all sorts of positive effects.”–Alexander Arnon

As a result, said Cappelli, the U.S. labor market does not adjust. “Wages do not rise to reflect the shortfall, U.S. employees do not pursue these fields because of that, and employers then become completely dependent on H-1B workers to fill them. We have seen this play out in earlier periods where nurses and mid-level programming jobs were almost completely filled by foreign workers on these visas.”

The bigger picture, however, is that immigrants are not just labor. They are also consumers.

“Increasing the inflow of immigrants means a bigger consumer market, growing demand for housing, for food, and not only do more people increase demand for existing products, but you also have new markets that get created because immigrants bring new tastes and needs and mix their tastes and needs with local people,” said Wharton management professor Exequiel (Zeke) Hernandez. “Part of the concern with reducing immigration is that it reduces the dynamism of the market. Demand not only declines, but it also does not renew itself. You don’t get as many new categories of products and services.”

This is most obvious if you walk up and down the supermarket aisles, Hernandez said. “Look at all the categories of foods brought by immigrants like Greek yogurt, Mexican tortillas, etc. Less obvious are things like acupuncture, capoeira or zumba. And even less obvious are technologies that come from the ideas and expertise of foreign scientists and inventors. That’s another reason why we want more migration that includes both high-skilled and low-skilled labor. We want more workers, but also as consumers. That is often under-estimated, even in very good economic models.”

Immigrants also play an important role in increasing capital investments, Hernandez said, especially from foreign markets, and attract foreign investments into areas where they live.

“Immigrants bring new ideas and have a higher than average propensity towards entrepreneurship, and we know that results in a whole host of new products and new companies. But they also attract companies from their home countries that make capital investments to serve the needs of immigrant markets or that learn about investment opportunities from the immigrant community,” says Hernandez.

He points to the Central American fast food chain Pollo Campero, which followed its customers to the U.S. — obviously beneficial for the company, because it found a new market that is profitable. “But it is also good for the U.S., because the company bought real estate, hired people in the U.S. and created jobs, and made other kinds of direct investments. That capital is used productively in the U.S. instead of somewhere else.

“From an economic standpoint, the research evidence is pretty clear in showing that what’s best for the U.S. economy is to have more immigration,” Hernandez continued. “Immigrants help the economy because they bring capital, new ideas and innovation, and fill jobs in crucial sectors of the labor market. We need more of that in the economy.”

“Wages do not rise to reflect the shortfall, U.S. employees do not pursue these fields because of that, and employers then become completely dependent on H-1B workers to fill them.”–Peter Cappelli

Economic Considerations — Moral Ones, Too

Hernandez says that looked at purely from a financial perspective, immigrants represent a positive for government, pointing to a 2017 report from National Academies of Sciences, Engineering, and Medicine. The total fiscal impact of a new immigrant who most resembles recent immigrants in terms of average age and education creates a positive fiscal balance flow to all levels of government with a net present value of $259,000, according to “The Economic and Fiscal Consequences of Immigration.” Under the same assumptions, the projection attributes $173,000 of this total impact to the immigrant as an individual and $85,000 to that immigrant’s descendants.

Immigrants are responsible for creating an outsized percentage of the largest U.S. corporations. Among Fortune 500 companies, 43% were founded or co-founded by an immigrant or the child of an immigrant, according to a 2017 study by the Center for American Entrepreneurship. The occurrence of first- or second-generation immigrant founders was even higher among the largest Fortune 500 companies: 52% of the top 25 firms and 57% of the top 35 firms.

Fortune 500 companies springing from immigrants and the successive generation employed 12.8 million people worldwide and accounted for $5.3 trillion in global revenue in 2016, the study found. The wealth was spread across the U.S., with immigrant-founded Fortune 500 firms headquartered in 33 of the 50 states.

Most Americans register a positive view of immigrants, according to a Pew survey. “As in recent years, a majority (62%) say immigrants strengthen the country because of their hard work and talents. Just 28% say immigrants are a burden on the country because they take jobs, housing and health care,” stated the survey, which was released in January.

Public opinion, though, is notably riven by political party affiliation. The share of Democrats and Democratic-leaning respondents who believe immigrants to be a strength to the nation came in at 83%, with just 11% calling immigrants a burden. Their Republicans counterparts weighed in with 38% saying immigrants strengthen the country, and 49% classifying immigrants as a burden.

The Trump administration has pursued anti-immigration policies on numerous fronts, including fighting to end the Deferred Action for Childhood Arrivals program and proposing to drastically reduce the number of refugees fleeing war, famine and persecution allowed to enter the U.S. “Our country is full,” said President Trump in the spring. “We can’t take anymore.”

Many of the Democratic presidential hopefuls, on the other hand, share with each other similar views on immigration, noted a PWBM brief, including accepting more refugees, creating a pathway to citizenship for unauthorized immigrants and eliminating or limiting detention of families.

“From an economic standpoint, the research evidence is pretty clear in showing that what’s best for the U.S. economy is to have more immigration.”–Zeke Hernandez

Deportation has been a highly visible aspect of messaging from the Trump administration, with 295,000 deportations in 2017, according to Pew, and yet those numbers are far below their high of 435,000 in 2013 during the Obama administration. But increasing deportations would lead to lower economic growth, the PWBM simulator found. Increasing it by an additional 10% of unauthorized immigrants each year would reduce the size of the U.S. population by 13 million people by 2050, with about six million fewer jobs. More deportations would improve the old-age dependency ratio in the long run, since immigrants would fail to reach retirement age in the U.S. Still, under current law, unauthorized workers don’t generally qualify for federal benefits like Social Security anyway. An increase in deportations of 10% would lead to less economic growth, with GDP by 2050 4% lower relative to no additional deportations.

So if the U.S. needs more immigration, how much more? “I don’t know the answer,” said Hernandez. “The PWBM shows that doubling it would be beneficial. I don’t think tripling it would be disruptive to the economy. We can handle more than double than what we handle already. The economic case is actually compelling. There is little evidence that it would be a bad thing for the U.S., and a lot of evidence to suggest it would be a good thing.”

President Trump proposed in May a plan that would scale back the long-standing family-based immigration system in favor of one increasing the educational and skill levels required for people coming to the U.S. But setting up immigrants for success is also an important factor, and part of that is recognizing the value of allowing immigrants to join other family members already in the U.S., said Sarah Paoletti, practice professor at the University of Pennsylvania Law School and founder and director of the school’s Transnational Legal Clinic.

“When you have immigrants join another family member, there is a support network, and when you provide the family with some degree of security you are creating a greater likelihood that that family is going to thrive. That is an important values-driven argument and an economic argument,” said Paoletti.

But beyond the economics of immigration, one cannot overlook the other benefits, she said. “What is the value of diversity, what is the value of welcoming new people, new perspectives, new experiences? There are other benefits we get from a just and human rights-driven immigration policy that makes this country so vibrant, and one that we can be proud of.”

Added Hernandez: “In terms of refugees and other involuntary migrants, I think that there is a moral argument that even if we had to incur a cost there are situations in which we should be allowing more immigrants in. It’s a moral blot on the U.S. that in the 1930s it rejected thousands of refugees from Europe attacked by the Nazi regime. Even if it had cost the U.S., it would have been the right thing to do.”

But now the evidence on the economic benefits of migration is increasingly clear that there are few trade-offs between accepting more immigrants and economic growth, Hernandez said. “Now we have much more evidence showing that it’s a win-win — an economic win and a moral one.”