# 2.7: Immigration


Labor-intensive agriculture such as fruit and vegetable production in high income nations employs immigrant workers and pays low wages. These workers offer an enormous contribution to the agricultural economy through hard work in the production of food and fiber. However, it is possible that immigration can have a negative impact on rural towns, since the provision of public services such as medical facilities, schools, and housing for low-wage workers is often costly.

Most farm workers in the USA are immigrants, in spite of the massive labor-saving technological change over many decades. Technological change has occurred in many crops through mechanization and the use of agricultural chemicals: over time, machines and chemicals have replaced farm workers in the USA and other high income nations. The number of persons employed on US farms has been stable for several decades, due to two offsetting forces: (1) a large increase in the production of hand-harvested fruits and vegetables, and (2) rapid labor-saving technological change. Most of these farm workers live in “farm work communities,” defined as cities with a population under 20,000 that are typically poor and growing rapidly.

In theory, the economic impact of immigration on rural communities could be either positive or negative. New immigrants can stimulate job and wage growth through induced economic activity from the increased demand for housing, food, clothing, and services. However, it is possible that immigration and growth in the local labor supply could result in lower wages and displaced employment opportunities for existing workers. The actual economic outcome is highly complex, dynamic, and difficult to measure. Immigration has resulted in the description of the USA as a “melting pot” of people and groups all nationalities, ethnicities, races, and religions. Immigration is often controversial, as existing groups may clash with more recent immigrants.

## Welfare Analysis of Immigration: Short Run

Welfare analysis can be usefully utilized to better understand the economic impact of immigration. Adjustments take time, so initial impacts can differ markedly from long run impacts. The economic impacts depend crucially on both the number of migrants and the skill level of new migrant workers. Economic theory suggests that the destination, or receiving nation has large economic benefits from immigration, but there are winners and losers. Who wins and who loses depends on the wage structure, and availability and mobility of capital, as explained below.

It is important to emphasize that if capital is mobile, and can adjust quickly, and technology can adapt to changing labor composition, then the economy with migrants is a larger version of the original economy before immigration. In this case, the native-born workers are neither winners nor losers. Economic adjustments to new immigrants require time, and it is during the transition to the new workers that winners and losers occur.

When immigration occurs, goods that are produced using migrant labor have an increase in production. In Figure $$\PageIndex{1}$$, the wage rate is the price of labor, the initial demand for labor is given by $$Q^d_0$$, and the labor supplied by native workers (original workers in the receiving nation) is $$Q^s_0$$, which is assumed to be perfectly inelastic at $$L_0$$ million workers. The real-world labor supply is not fixed, as it is shown in Figure $$\PageIndex{1}$$, as higher wages will result in more work supplied to the market. However, the inelastic model illustrated in Figure $$\PageIndex{1}$$ is good approximation of labor markets: the qualitative results of the model accurately depict the real world.

The initial, pre-immigration labor market equilibrium occurs at $$E_0$$, characterized by wage rate $$W_0$$ and labor supply $$L_0$$. The total social welfare in this market is the sum of producer surplus and consumer surplus $$(SW = PS + CS)$$. This is the area under the demand curve at $$L_0 (=ABD)$$. Recall that the workers are the suppliers of labor, thus producer surplus is the economic value of worker well-being. The consumer in this case is the firms, since the employers purchase (hire) labor. The consumer surplus in the labor market shown here is the economic value to the business firms, or employers.

Before immigration occurs, producer surplus is the entire rectangle $$(BD)$$. The supply curve is vertical in this case, causing the area under the supply curve to be nonexistent. The workers receive this amount of income, since area $$BD$$ is equal to the wage rate times the quantity of labor employed in the economy $$(W_0\cdot L_0)$$. Firms, or employers of workers, receive the consumer surplus, which before immigration occurs is equal to area $$A$$ in Figure $$\PageIndex{1}$$.

After immigration occurs, the labor force is increased by the number of migrants $$(M)$$: $$L_1 = L_0 + M$$. In the short run, no adjustments in the labor and capital market take place, and the result of an increase in the quantity of labor is a decrease in the price of labor: the wage rate falls from $$W_0$$ to $$W_1$$. Native workers lose area B in producer surplus, with a new level of economic surplus equal to $$D (W_1\cdot L_0)$$. Migrants receive wage rate $$W_1$$, and migrant earnings are equal to area $$E (W_1\cdot M)$$. Presumably, the wage rate earned in the receiving nation is larger than the wage rate available in the immigrants’ nation of origin. The wage rate is also likely to be large enough to induce workers to change locations, which can be a costly transition. Employers in the receiving nation are the winners, as consumer surplus (economic value of the firms who hire either native workers or migrants) increases from area $$A$$ before immigration to area $$ABC$$ after immigration.

The welfare analysis of immigration can be summarized in the usual way:

\begin{align*}ΔCS &= \text{ employer gains } = + B + C\\[4pt] ΔPS_L &= \text{ native worker gains } = − B\\[4pt] ΔPS_M &= \text{ migrant worker gains } = + E\\[4pt] ΔSW &= \text{ net gain to entire economy } = + C + E \end{align*}

Notice that there is a net gain in total economic activity due to immigration: the magnitude of economic activity in the receiving nation is larger after immigration occurs. This is due to the influx of new resources, bringing economic value and spending. This differs from government interventions in the free market economy. This is because government programs and policies all result in a loss of voluntary exchange between buyers and sellers, and dead weight loss. In the case of labor immigration into a nation, more voluntary exchange takes place, with large overall economic benefits to the receiving nation. The controversy surrounding immigration is the distributional effects: in the short run, native workers lose, due to decreasing wages. As the economy adjusts to the new workers, the benefits become larger and the negative impacts are diminished, as will be explained in the next section.

## Welfare Analysis of Immigration: Long Run

Workers and firms can make many adjustments once the new migrants join the economy. In an economy with many types of skilled and unskilled workers, native workers can take jobs in areas of their comparative advantage, and invest in human capital (education and training) to allow them to increase wages by moving out of low paying jobs and into high paying jobs. Given sufficient time, migrants can do this too, and will move into higher paying jobs as new waves of immigration occur.

Migrants who bring capital or work skills with them can enter growing sectors, such as technology, medicine, and services. The demand for labor in these areas is large and growing, so wages continue to increase together with new workers entering the economy.

In the long run, this type of adjustment in capital and labor markets, together with technological change, will result in economic growth, and broad-based wage and income growth in the receiving economy. The USA has had high levels of immigration simultaneous with high and growing levels of income for most of its history: immigration has catalyzed economic growth in the high income nations of the world. This desirable outcome does require change, adjustment, and in many cases labor migration, both occupational and locational. Growth mandates change, and change is often difficult. This is one of the major features of free markets and free trade. When economic agents are free to make decisions in their own interest, great things can happen. But improvement requires change. When workers and their families are free to locate where they desire to live and work, economic growth is likely to occur, but the transition can be challenging, and when cultures and values differ, controversy can occur.

The long run effects of immigration can be seen in Figure $$\PageIndex{2}$$. New workers joining the economy cause an increase in the aggregate demand for goods in the economy, and this economic growth entices firms to produce more goods. More production requires more workers, and the demand for labor increases from $$Q^d_0$$ to $$Q^d_1$$. The long run equilibrium is found at $$E_1$$. The increase in labor demand offsets the downward pressure on wage rates, resulting in wages returning to their original level, $$W_0$$. The economy grows, so consumer surplus (economic value of employers, or business firms) increases to include the area under the demand curve and above the new price line: $$AFG$$. Native worker earnings are restored to their initial level $$(BD)$$, and migrant worker surplus is increased to $$CHE$$.

The overall economy gains significantly once these adjustments have occurred. Adding more resources to an economy in the long run, given sufficient time for the transition to occur, will yield large economic growth, as the economy is growing by the size of the new migrant labor force.

\begin{align*}ΔCS &= \text{ employer gains } = + F + G\\[4pt] ΔPS_L &= \text{ native worker gains } = 0\\[4pt] ΔPS_M &= \text{ migrant worker gains } = + C + H + E \\[4pt] ΔSW &= \text{ net gain to entire economy } = + C + E + F + G + H \end{align*}

The potential gains from immigration can be thwarted during periods of economic recession, when the overall demand for goods increases at a decreasing rate. This economic stagnation can lead to a decrease in the demand for labor. When native workers face poor economic conditions, they are less likely to favor new migrants.

In agriculture, re cent immigrants perform many tasks that native workers would not do at the low wages offered to migrants. These tasks can include meatpacking, chemical application, and harvesting fruit and vegetables. The USA currently allows millions of workers to enter the country and work in farm jobs. If this supply of workers were to be eliminated, the cost of labor would rise enormously and the cost of food would increase. To examine the gains and benefits of migration of agricultural workers, the next section broadens the welfare analysis to include a model of two nations: the receiving nation and the nation of migrant origin.

## Welfare Analysis of Labor Immigration into the USA from Mexico

To demonstrate the effects of the movement of labor from one nation to another, the three panel diagram of Section 1.6.3 can be usefully employed. The welfare analysis of agricultural labor migration from Mexico to the USA provides a summary of who wins, who loses,, and by how much. The analysis demonstrates that both Mexico and the USA have net gains from labor migration. However, as in all economic changes, there are winners and losers. Figure $$\PageIndex{3}$$ shows labor movements for the receiving nation (USA) in the left panel, and the source nation (Mexico) in the right panel. The trade sector is represented in the middle panel.

If the two nations have isolated labor markets, wages in the USA $$(W_{USA})$$ are higher than wages in Mexico $$(W_{MEX})$$. This wage differential $$(W_{USA} > W_{MEX})$$ provides the motivation for workers to leave Mexican jobs and migrate to the United States. When the movement of labor is possible, the number of migrants is shown in the middle panel, equal to $$Q_T$$ million hours of work. If $$Q_T$$ hours of work are transferred from Mexico to the USA, the wage rates are equalized at $$W^*$$ in both nations. Note that this model ignores exchange rates and transportation costs of migration.

The graphical model demonstrated in Figure $$\PageIndex{3}$$ also assumes freedom of movement between the two nations. In agriculture, there is considerable freedom for farm workers to enter the USA from Mexico to supply labor to farms. The H-2A Temporary Agricultural Program allows foreign-born workers to legally enter the United States to perform seasonal farm labor on a temporary basis for up to 10 months. The seasonal needs of crop farmers (fruit, vegetables, and grains) can be met with this program, but most livestock producers, (ranches, dairies, and hog and poultry operations) are not able to use the program. An exception is made for livestock producers on the range, (sheep and goat producers), who can use H-2A workers year-round.

The welfare analysis in Figure $$\PageIndex{3}$$ shows the same results for labor as were obtained for commodities such as wheat in Section 1.6.3. Winners include consumers (employers) in the importing (receiving) nation, and producers (workers) in the exporting (source) nation. In this case, US farmers who employ migrant workers are made better off by area $$(A + B)$$, but native workers (USA workers employed prior to immigration) are made worse off by area $$A$$. The gains and losses are due to the decrease in wages from $$W_{USA}$$ to $$W^*$$. The movement of workers out of Mexico results in gains for Mexican workers (area $$C + D$$), but losses for employers of workers in Mexico (area $$C$$). This is due to the wage increase in Mexico from $$W_{MEX}$$ to $$W^*$$.

Both origin and receiving nations have net benefits: area $$B$$ in the USA and area $$D$$ in Mexico. This result explains why immigration has been a large, significant feature in US history (the United States is often referred to as a “Nation of Immigrants”). The gains and losses in each nation demonstrate why immigration continue to be controversial issue: large economic gains and losses in each nation.

In the long run, the gains to immigration are large for the recipient nation. This is for two reasons: (1) migrant workers are most often complementary to native workers: low-skill immigrants combine with high-skill native workers to enhance productivity for all workers in the receiving nation, and (2) increased population generates increased demand for all goods and services in the USA, resulting in enhanced economic conditions for all workers in the receiving nation.

This page titled 2.7: Immigration is shared under a CC BY-NC license and was authored, remixed, and/or curated by Andrew Barkley (New Prairie Press/Kansas State University Libraries) .