The topic of immigration has never garnered as much attention as it has in the last few years. The heightened attention given the topic of immigration has opened the door to new, and somewhat bolder, policies to select the “best” immigrants.
This idea of selecting better immigrants is a response to a relatively consistent finding in the economics of immigration literature: the vast majority of native workers seem to gain from immigration. While immigrants increase the supply of labor (thus lowering wages), they also increase the demand for goods and services which causes a counterbalancing effect on wages because of the demand for labor to produce these goods. This effect is compounded by the fact that a greater population increases the size of the market which means that there is more room for specialization.
Because specialization makes us more productive, there is an additional positive effect on wages. However, this finding comes with a point of contention. While acknowledging that most subgroups of the native population gain from immigration, some economists like George Borjas point out that other subgroups are harmed – namely high-school dropouts and other unskilled workers.
This point of contention has pushed some to argue that we need to “pick” the right immigrants. In other words, there are workers from other countries that are “better suited to our needs.” To select these better-suited immigrants, many proposals have been advanced. A quite popular one is the idea of a points-based system (something that my home country of Canada uses).
Points-based systems establish a set of criteria that are deemed relevant. If a potential immigrant meets a given criteria, he receives points that go towards admission. For example, French fluency earns you points for entry into Canada given that French is one of the country’s two official languages. As way of another example, highly-skilled (and highly-demanded) workers received extra points. The idea is that a French-speaking atomic engineer will earn more points because he is a better fit for Canada.
For the sake of argument, let us assume that some subgroups of native workers are harmed. Does that mean that we should try to pick the immigrants? More precisely, are we actually able to determine the “right” criteria for admission? To answer in the affirmative requires the belief that bureaucrats and policy-makers can identify economically desirable traits among immigrants.
The problem is that immigrants have a large number of unobservable features. If policy-makers cannot observe features that could increase living standards for all, then they are hurting the immigrants (who are deprived of the gains from migration) and the native workers themselves.
A recent example of this has been provided by two professors from the University of Southern Denmark, Nina Boberg-Fazlic and Paul Sharp, who studied Danish migration to the United States in the late 19th century.
They make a simple, and cogent, point. During the era of mass migration of the 19th century, many of the people who came to the United States were from poor countries like Italy, Denmark, Spain, Norway, Poland, Japan, Canada and China. However, by the start of the Great War in 1914, these economies had grown rapidly. At the beginning of the large waves of migration of the 19th century, these immigrants would have been deemed less desirable.
Had a points-based system existed then, few of them would have been able to earn enough points to enter even if it turned out later that they were heavily desirable. This would only be reinforced if these migrants created channels for exchanging knowledge and allowing the introduction of new technologies.
To illustrate this insight, Boberg-Fazlic and Sharp point out the case of the Danes who migrated to America. Around 1880, Denmark was a relatively poor country. The average per capita income in Denmark was equal to 60% of the income earned by the average American. At that time, Denmark was also beginning a rapid period of specialization in dairy farming.
New technologies and farming practices were gradually being developed in Denmark during the late 19th century which, eventually, turned the country into one of the largest exporters of dairy products. It even managed to compete with Canadian dairy producers from Quebec in the British market (who had long enjoyed a privileged connection with Britain). As a result, it was a strong contributor to the country’s economic growth.
While this was happening, there was a steady trickle of Danes to the United States. As they immigrated to the United States, they brought with them the knowledge of the techniques and technologies of the rapidly booming Danish dairying industry. Using census data between 1870 and 1920 at the county-level, Boberg-Fazlic and Sharp show that the counties where the Danes went experienced faster increases in dairy production and specialization. Because the number of Danes was so small – Denmark is a relatively small country – these effects cannot be attributed to the mere addition of more bodies to the production of milk, cheese and butter.
The role of immigration as a channel (even among relatively poor immigrants) for the transmission of technical knowledge is the main explanation for the effects they find.
There is irony in the fact that many of the defenders of points-based systems are conservatives. These are the same conservatives who are skeptical of the state’s ability to plan economic activity. Why stop short at the topic of immigration? Why believe that the state can pick the right immigrants but not the right industries to subsidize?
It would have been impossible (ex-ante) to identify the important economic contribution the Danes would make to the American economy. Had policy-makers tried to pick the right immigrants, it is likely the Danes would not have made the cut. As a result, America would be poorer for it. This is a strong cautionary tale for those who hold the pretense of knowledge.