Immigration and the Labor Market Relations

Introduction

Background

Recently we have observed an influx of immigrant workers into the United States from several countries with a majority being from Latin America and Asia. Today the United States has one of the highest numbers of immigrants taking up an average of 14% of the total American population, out of the 14%, 11% are second-generation immigrants while 3% are first-generation immigrants (2007-2009 current population survey). Immigrants from developing countries are generally young individuals who have little or no education when they reach the United States they find employment at low wage rates compared to the natives and are concentrated in a few states.

Immigrants from developed countries such as Canada and Europe have mostly educated professionals who come to the United States searching for greener pastures leaving the less educated in their home countries (2007-2009 population survey). The immigrants from developed countries can enter the country easily compared to the immigrants from less developed countries using work visas. However, the immigrants from developing countries rely on temporary work permits such as H1-B and MA while others are illegal immigrants.

It is widely known that the determinants of economic growth are human capital, finance, and technological improvements. In most developed countries these factors of production are highly mobile and Human capital is affected by many factors, one of these factors is immigration. Immigration has had tremendous effects on the United States labor market by affecting the real wage rate and unemployment rate and has further led to economic growth. However, the knowledge on how the migration of qualified individuals into the United States will affect the labor market is an empirical issue.

Statement of the problem

Like many other developed countries the growing concern of the economists is brain drain, in the process of investing abroad, the investors send nationals to the foreign countries while other nationals expect better gains for their input abroad which in turn raises the gains on investing in education, this has led to massive brain drain which creates a shortage in skilled workers in the country. Therefore the In response to the shortage of highly skilled workers should the government implement policies that only favor the assimilation of highly skilled workers? This paper addresses the cost and benefits of hiring skilled immigrants in the United States labor market.

Objectives

With the influx of immigrant workers, the commonly asked questions are;

  • What is the impact of immigrant workers on the US labor market? Will the assimilation of immigrants bear adversely beneficial consequences?
  • How can we mitigate the negative effects of immigrant workers? If there are negative consequences, how can the government control this?
  • How can the United States economy capitalize on the influx of immigrant workers? How can the United States economy gain from the advent of these immigrants, how can it benefit from this?

Justification of the Study

In recent years skilled immigrants, as well as immigrant scholars, have dominated the United States labor scene, plenty of immigrants have been awarded doctorate degrees in American Universities (Finn p. 27), and this makes the study of the effect of skilled immigrants in the United States labor market very important. With the knowledge on how the acceptance of skilled immigrants in the country will affect the country’s human capital, the government can design policies that will ensure that the economy capitalizes on the ‘brain gain’ research on those areas proves to be very important in policy formation and implementation.

Literature Review

The influx of uneducated immigrant workers has brought about a rise in competition for unskilled and semi-skilled jobs between the immigrants and natives. Social unrest and crime brought about by the Mariel boatlift of 1980 in Miami were a result of the grievances by the African American community in response to competition with the Cubans for a niche in the limited labor market (Governor of Florida 1980 pp. 14-5).

Contrary to popular belief, an influx of immigrant workers has not caused a rise in the unemployment rate or the decline in real wage rate to other unskilled workers; this can be demonstrated by a study of the Mariel boatlift incident. Although there was a surplus in unskilled workers, research based on the population survey done in 1979-85 showed that there was no reduction in the Cuban wage rate relative to the wage rate of other minority groups in Miami and there was also no evidence or an increased unemployment rate.

It is important to determine the impact of the immigration of unskilled workers to the labor market, this effect can be measured using a theoretical framework that makes use of labor supply function for skilled and unskilled workers and the production function;

The economic model is represented by the cob Douglas production function

Y = f (L,K) = ƟLα K1-α

The total output Y is a function of capital and labor. Whenever there are two or more types of labor as in this case we have skilled labor from different sources which are perfect substitutes

L = a1 LI + a2 L2

The wage rates will be represented as follows

w1 =a1 ∂f/∂L, w2 =a2 ∂f/∂L

w1/w2 = a1 /a2

This implies that

MPL = ∂f/∂L = [K/L]1 – α And MPK = ∂f/∂K = Ɵ(1-α) [K/L] –α

We note that in the case when the capital cost is fixed, the interest rate r is also fixed which implies that K/L is constant. If we assume that capital K is a variable then we can deduce the labor demand curve is perfectly elastic (straight line) and the wages are constant. In the short run, the wages may fall if the labor supply is increased but eventually, it remains constant (Borjas p.1375). The short-run fall in wages may be as a result of the increased number of unemployed people who are willing to work at lower levels of wages and the limited number of job opportunities, however in the long run the excess supply of labor will be absorbed into the market with the creation of new employment opportunities.

In the cases where the types of labor are imperfect substitutes such as skilled workers and nonskilled workers, their wages will be a function of the total supply of labor, in cases where there is a surplus of skilled labor then the wage rates will be low while in cases where there is a surplus of unskilled workers then their wages will below.

W1/w2 = 1/L1L2

The level of human capital affects investment because both local and foreign firms determine the location for their businesses by looking at the availability of quality Human Capital. Therefore a country’s economy must be well endowed with high-quality Human capital so that they are favored by the investors. Investors seek education and skills about their businesses; they are interested In areas that will increase the productivity of their businesses.

We, therefore, seek to develop an equation that aims to model the dynamics of physical capital accumulation through the domestic inflow of foreign capital. The impact of migration on the labor market depends on two main things; first, it depends on the ability of the labor market to absorb such additions and the degree of the heterogeneous nature of the market. Economies with a labor market that can absorb additional demand (economies that have a deficiency in the supply of labor) benefit more by immigration than the economies with a surplus in the supply of labor.

Economies that are diversified are in a better position to absorb additional supply in the labor market because they provide areas where the immigrant can work and these economies need diverse ideas and innovation to keep up with the growing competition. In an economy such as the United States economy, the economy is diverse and there is room for more supply in labor. The long-run wages and levels of employment levels are not sensitive to immigration effects of migration can be felt in the output mix but not on the level of employment or the wages received (Leamer and Levinsohn pp. 1339-1394).

Assimilation of Immigrants

A national survey on the labor market completion revealed that natives are not likely to be opposed to assimilating immigrants who have the same level of skill or are more skilled than they are, instead they prefer high skilled immigrants to low skilled immigrants this shows that Americans are concerned about the general welfare of the labor market.

The immigrant wage rate is currently lower than that of native workers, his difference in wages can be attributed o the difference in the levels of education, while policies that allow for the assimilation of skilled workers into the labor force should be put in places we should note that the differences in the wages are attributed to the low quality of education in the developing countries compared to the United States. (Bratsberg and Terrell pp. 171- 86), the first-generation immigrants come into the country without any assistance from friends, they lack networking skills that would help them secure viable job opportunities hence they end up doing menial jobs, and also many immigrants cannot communicate well in English.

Following Chiswick, there are questions as to whether the difference in earnings between the natives and the immigrants will narrow with time (pp. 897-921). The wage difference is a result of the lack of entrepreneurial abilities and networking. Borjas also agreed with Chirswick’s claim that the earnings of recent immigrants are less than that of established immigrants. There is limited proof to imply that the earnings immigrants get in the United States will rise with time but will not reach the level of earnings by the natives (Lubotsky p. 62)

Theory of Human Capital

This theory states that investing in human capital will provide returns to the individual and the economy as a whole in the form of high production. Human capital theory measures human capital and the rate of returns on investing in human capital. Human capital refers to the labor input by the workers, on-the-job training, and the education invested in the training of these workers to improve the quality of the labor force. The quality of the labor force is measured using two methods;

  • Expenditure incurred on training
  • The occupational composition

The expenditure on training is incurred by the government as well as some other formal organizations. The government makes decisions regarding the investment in human capital based on the gains in the long run and the total cost of such an investment. The knowledge on whether the employment of highly skilled immigrants as opposed to incurring the costs investing highly in the training of the natives becomes paramount.

The percentage of unskilled immigrants in the United States has decreased over time according to the 2007-2009 population survey this is because the entire globe is becoming investing in education because the economic scene has become very competitive. The occupational composition has become more complex and impossible without investing in education. Investing in human capital eventually leads to a sustainable level of growth in the economy.

The theory of human Capital is parallel to the law of diminishing marginal returns. The latter is incapacitated in explaining the benefits of investing in human capital because it suggests that like any other factor of production, investing in human capital leads to reduced productivity in the long run. This law fails to explain why many developed countries such as Europe, Japan, and the United States have sustained economic growth by investing in human capital for so many years. From this theory, we deduce that Investing in the training of workers increases the per capita income.

However, it has not been proven whether the higher earnings are a result of the level of education or the inherent abilities that the individual possesses, for example, hard work, motivation, and discipline. Another critique of this theory is that the more education one posses does not necessarily make people more productive but merely provides them with the credentials necessary to receive a higher graded job.

The growth of internet businesses has also discredited the human capital theory. the advent of business processing offshoring to the decline in the business’ need to invest in human capital to increase their labor productivity because they can hire professionals abroad at a cheaper rate. However, this has adverse effects on the net national product (NNP) because the businesses have to make payments abroad.

Romer Model

The Romer model was developed by Paul Romer as an extension of the Solow Model. The model asserts that total productivity is important in determining the cross-country income and explaining the differences in growth, total productivity is a function of innovation and technological improvements. The Romer model assumes;

  • 1 Constant returns to rival inputs (Lyt , Lat ).
  • Constant returns to ideas: double At – double DAt.
  • A fixed supply of labor

Rival inputs: this means that an investment yields constant returns from replication. This means that a firm that has employed a group of skilled workers produces more output compared to the sum of skilled workers working individually

The production function for the Romer Model is

Yi = AiKia Li1-a

Yt = AtLyt

The total output produced Yt is a function of technological innovation At and investment in human capital Lyt. Improvement in innovation and technology is subject to resource constraint. This means that countries which do not have adequate resources to invest in technology will have low output as in the case of third world countries.

DAt = At+1 where At = ¯zAtLat

Resource constraint is represented in the equaton:

¯N= Lyt + Lat

And the allocation of labor is represented as:

Lat = ¯N (8)

Lyt = (1 ???? ) ¯N (9)

In the Romer model, the endogenous variables are:

Yt , Lyt , Lat ,At.

While the Exogenous variables:

A0, ¯N , ¯z,

It is important to show how the Romer model differs from the Solow model; the differences between these two models are as follows

The Solow model has diminishing returns in the accumulated factor

DKt = ¯AKa

This means that as K grows, MPK falls, and growth starts to slow down. Unlike the Solow model, The Romer model has constant returns in the accumulated factor (A):

DAt = ¯zAtLat

As A grows, the marginal product of A remains constant. As economic growth continues over time, economic growth will be caused by an increase in labor supply (Borjas 1423). The Romer model emphasizes the importance of investing in human capital through adequate training to improve technology in the economy and further increase output. It is also built on the premise that technology is free-flowing across borders, other less developed countries can adopt technology from more developed countries by training their labor force abroad and that is why some governments grant their citizens scholarships abroad. The Romer Model is very effective in explaining countries that have well-developed economies such as the United States where labor supply and technological improvements are of prime importance.

Empirical literature

In studying the effects of skilled immigrants on the labor market, I will employ data from the Survey of earned doctorates and doctoral recipients. the National science foundation defines an immigrant as an individual who is not a national of the country during the awarding of the degree. The Survey collects data at a ninety-two percent rate of response regarding the doctorate degrees that are awarded by well-known institutions.

In my study, I have used the Survey of Earned Doctorates to determine the labor supply of immigrant workers adjustment by the field studied and year of the awarded degree. The Survey of Doctorates Received provides a sample of doctorates granted by United States institutions in various fields (table 1), the sample totals 7 percent and contains information on the worker’s earnings (table 2). I restrict the study to doctoral degrees which were granted between 1960 and 1999.

Table 1.

The population provided in table 1 is restricted to foreign-born doctorates who intend to stay in the United States after graduation, we note that a large number of intellectuals in fields such as engineering and agricultural sciences intend to stay in the United States. A major reason for this is because the immigrants do not feel that they will improve their native countries’ economies if they return. Unlike the economic environment in most developing countries, the American economy supports the nurturing of talents that are necessary for innovation and growth. Accesses to capital, freedom of expression, availability of infrastructure among others, are things that make the American economy suitable for talented individuals.

Table 2.

Information on the worker’s earnings

It is of paramount importance to notes that Standard errors are reported in the parentheses. The instrument used is the log of the number of doctorates awarded to foreign students in a particular field-cohort cell. The regressions have 240 observations in the native and in all doctorates’ sample; and 235 observations in the foreign doctorates sample. All regressions are weighted by the total sampling weight for the field-cohort cell. The standard errors are adjusted for heteroscedasticity by using the Huber-White correction.

Empirical Analysis

The labor demand function will be given by the equation:

log wx(t) = η log sm + xifc(t) + r + R + πt + (r × πt) + εifc(t),

where ;

  • wx(t)- yearly earnings by an individual x observed at a given period t.
  • s- Field of specialization
  • m- Year of awarding of the doctorate
  • L- Total doctorate degrees awarded
  • y- Years worked in the labor market
  • r- vector showing the effect of the field of individual’s doctorate
  • R- Vector showing effect of the year of graduation
  • xifc(t)- vector exhibits many effects
  • Η- Factor price elasticity.

The regression will not accommodate more vectors because it would result in a collinear relationship and further complicate the prospect of identifying the factor price elasticity. Applying OLS to the first original equation will result in incorrect standard errors and a biased result. Ordinary Least Squares leads to a biased estimate of the value of η because the supply of labor in the various fiels occur endogenously

log wx(t) = if + xifc(t) + πt + (df × πt) + εifc(t)

Represents a regression model

Where; if- individual fixed effect.

fc v- an individual’s estimated mean value

The second-stage regression model will be represented as follows:

vˆfc = η logLfc +df +yc + ξ fc

I have used the total sampling weights that are assigned to each person in SDR to calculate the average fc v. To account for the differing variances that are brought by the dependent variable’s sampling error the standard error of the second stage regression is adjusted. In the table, we note that there is an influx of immigrant students into some doctoral fields at specific times. To demonstrate this I have summed up the data into intervals.

These intervals indicate when the individual earned his doctorate. The data is then divided into subgroups to represent the fields of specialization, in total there are 11 three-year sub-group data for each field. In my study, I used to use two methods of measuring the earnings to also act as dependent variables. The first measure provides an adjusted salary for each individual every year; this measure is constructed by the NSF from the information on each individual’s yearly salary. The second measure is the total income that is earned by an individual in the previous year.

In the table that shows the factor price elasticity, we note that the elasticity income is 0.37 this means that a ten percent increase in skilled labor that is brought about by immigration will lower the wage by three percent. This is the index higher than those in the study of the engineering labor market by Richard Freeman (1976). In my study, I have used the sample of immigrant workers to determine whether the influx of student immigrants will hurt the income of immigrant doctorates.

The difference between the groups of data is not significantly different, although factor price elasticities possess a negative relationship; the factor price elasticities are negative compares to the natives who have a doctorate. This is because the natives and the immigrants share very similar incomes, this is because both groups of people have received similar training and therefore are very close substitutes of each other. If there was a prohibition in the supply of foreign students there would have been an equal number of doctorates either way. If there was a surplus in doctorate immigrants then the native students would respond to the influx by moving on to specialize in other fields for example they would go into by going to law studies or business studies.

The movement of the students across different areas of specialization will help to reduce the effect of surplus in the supply of skilled labor. From this empirical analysis, we can conclude that t there is weak evidence supporting the theory that immigration has adverse consequences on wages or employment of the people employed in the economy at that particular time, although there is evidence of short term adjustments to the unemployment rate and small effects on the wage rate in some groups of the total population these differences are not fundamental as in general. These results can be proven from the study of other economies and not just the United States economy.

Conclusions

This paper dealt with the analysis of the effect of immigration of skilled workers on the labor market. This theoretical study is based on the human capital theory and the Romer model, however, these theories have proved inadequate in explaining the impact of high skilled immigrants in the labor market.

The empirical analysis is built on the foundation that a shift in the supply of labor of highly skilled workers will cause a disturbance in the level of employment and the wage rate as compared to the supply of low skilled labor which has no considerable effect on the labor force in the long run. Immigration of students studying for a doctoral degree has been employed to study the effects of immigration on their earnings.

Increase in immigrants through the foreign student program has reduced the earnings of other competing workers regardless of their nationality because a lot of immigrant students do intent to live and work in the United States after they have been awarded their doctoral degree, however, the government stands to gain from this brain gain because it will be able to expand the economic resources through research and increase in human capital, this may lead to investment prospects and further economic growth.

Works Cited

Borjas, George. “The Labor Demand Curve is Downward Sloping: Reexamining the Impacts of Immigration on the Labor Market.” Quarterly Journal of Economics volume 118 (November 2003): 1335-1374. Print.

Bratsberg, Bernt, and Dek Terrell. “School Quality and Returns to Education of U.S. Immigrants.”Economic Inquiry 40 (2002): 177-198. Web.

Chiswick, Barry R. “The Effects of Americanization on the Earnings of Foreign-Born Men.”Journal of Political Economy 86 (1978): 897-92. Web.

Finn, Michael G. Stay Rates of Foreign Doctorate Recipients from U.S. Universities. Oak Ridge, Tennessee: Oak Ridge Institute for Science and Education, 2003. Print.

Governor of Florida. Report of the Governors Dade County Citizen’s committee. Miami, 1980.

Leamer, E. E. and Levinsohn, J. International Trade Theory: The Evidence, in Handbook of International Economics. Amsterdam: North Holland Press, 1999. Print.

Lubotsky, Darren. Chutes or Ladders? A Longitudinal Analysis of Immigrant Earnings. New York: Princeton University Industrial Relations Section Working Paper No. 445, 2000. Print.

United States of Department of Commerce, Bureau of the Census. Web.