In discussions about immigration, there is a crucial aspect about its economic viability that is often left unsaid: Immigrants create their own demand.
When somebody immigrates to a new country, most things about him remain the same. His set of skills stays the same, so do his traditions, norms and culture. But more importantly, since he is still a human being, there is a long list of services and commodities that he demands: groceries, cloths, a home, a barber, entertainment to name a few of them.
Just by entering another country, he does not suddenly become a one-dimensional economic agent who can take a job but who never consumes anything. Quite the contrary: As he adapts to a new culture, his demand will eventually match that of the native population.
Why is this important? Because for the job that he takes away from the economy, he compensates by increasing aggregate demand. This eventually leads to more jobs. For example, since there is a rise in demand for produce, the supermarket is forced to create a new position. Since the immigrants want to enjoy their native cuisine, a nifty business man starts a restaurant, creating multiple jobs as a result. To get to work, they may commute via bus, which may eventually lead to the opening of an entirely new bus connection. So, just by being a human being, an immigrant creates jobs.
At this point, it is important to note that immigration poses a wide range of challenges: from different social norms to xenophobia to language barriers. But for clarity, we will restrict ourselves to its economic side.
Short and long term
Imagine that there is a town A with 10 people and a town B with 1000 people. Both of them have functional economies.
In one scenario, the political leaders of the two towns decide to unite the two towns. Nothing except the name will change. So, there is now a town C that has 1010 inhabitants. Will town C have a functional economy? Of course! After all, all that was done was subsuming two already functional economies.
In another scenario, a catastrophic event makes town B uninhabitable and forces everyone to leave for town A. In the beginning, it is completely overwhelmed by the foreigners. If there were any open jobs, there will be massive competition for them. If you disregard that the people from town B have demand, this is where the simulation ends: a community unable to deal with a giant influx of immigrants. But, in reality, this is not what happens. To meet what is mostly their own demand, they will rebuild the companies and factories that they used to have. This will create jobs that they will be happy to take, which ultimately will lead to an economic equilibrium.
After the initial shock, the economy of town A had to be restructured to account for the newcomers. This took time and patience, but it was not impossible. Once this was done, a healthy economy was the result. After all: They managed to have a functional economy in their own town, why would they not be able to replicate it somewhere else?
So, in this case, town A now again has a functional economy of 1010 people. But this is exactly the first scenario! Even though the second scenario looked dismal in the short run, in the long run, it produced the same result as the innocuous first scenario.
This means that your views on the economic consequences of immigration entirely depend on which perspective you take. If you consider the short term and disregard the immigrant’s own demand, you will see the economy in dire straits. If you consider the long run and take into account the extra demand, there is no problem at all.
There are three common narratives of immigration.
The first is the most bleak: the lazy immigrant who is unemployed and is living on social security. From a perspective of fairness, this is certainly unacceptable and typically frowned upon. But from an economic perspective, this kind of welfare immigration amounts to a stimulus package! His government checks turn into demand for the local economy, creating new jobs without taking existing ones1.
The second type is the low-skilled immigrant. The fear is that he will compete with low-skilled labour, taking their jobs and depressing wages. In the short run, this may be the case! And if you narrow your view only on his own field, this may be permanently true: If there is one factory in town and the amount of people applying for a job there doubles, then wages go down. But it does not hold true for the entire economy. There may not be more factory jobs, but jobs in other areas will emerge as consequence of higher demand. A large chunk of this demand will be demand for low-skilled work, as all people require basic necessities. So, the solution may be to retrain factory workers to work in some of these areas instead, therefore curbing oversupply.
The third type is the high-skilled immigrant. The usual argument in favor of it is this: If a company cannot fill high-skilled positions with locals, they should look for employees abroad. This has very immediate and clear benefits. By filling the position, more and better products and services can be provided, thus increasing revenue. Since the goal was to meet demand that the local population was unable to satisfy for a long time, there is no oversupply and nobody’s job is taken.
The allure of this type of immigration is the safe knowledge that the locals can only gain from it. Again, this implies that they would lose if the immigrant was low-skilled. This is not the case in the long run.
If you extend this argument by considering demand, the benefits are even more striking. Since high-skilled positions are usually well-paid, the immigrant will have a significantly higher demand than a low-skilled immigrant. In addition, a large part of it will be demand for low-skilled work. Since he is not taking any of these jobs, this even creates a net increase in this kind of job, as opposed to the low-skilled worker where you come out even. By this reasoning, a high-skilled immigrants is a golden goose for any economy2.
In these discussions, people often cite that immigrants are more likely to start a business on average. This is a misleading statement: It implies that those who don’t start a company are robbing the economy of jobs. But this is only temporarily true. In the long run, their demand creates jobs elsewhere.
It is instructive to consider robots in this context. They replace local human workers like immigrants, but unlike immigrants, they do not have the same demand profile as humans. In return for their work, they ask for energy, machinery and engineering. This type of demand undoubtedly creates fewer jobs for humans compared to an immigrant worker. So, when it comes to the health of the economy, you should fear robots much more than immigrants.
Fear of immigrants is still widespread. But more often than not, people are generally willing to accept foreigners, but have a queasy feeling about the effect they will have on their job market. They believe that their economy cannot handle them. But the truth is that once people have immigrated, they become the economy, which then merely grows in total size. Hopefully, getting rid of this misconception will allay some of these fears and pave the way for cultural integration and acceptance.
- The tacit assumption is that we talk about modern economies which tend to be limited by demand and not supply. For example, if there is already not enough food for everyone, immigration would only exacerbate the problem. Also, this kind of stimulus is not without its own problems. ↩
- This does not come without a price. But this price is paid by the immigrant’s home country, which suffers a terrible economic blow as a result. ↩