Each issue of The Regional Economist, published by the Federal Reserve Bank of St. Louis, features the section “Ask an Economist,” in which one of the bank’s economists answers a question. The answer below was provided by Subhayu Bandyopadhyay, research officer.
Immigration is the use of imported labor as a factor of production. While international trade in goods and services ships goods across international borders, immigration allows labor to be imported. In principle, international trade can perform the same function as immigration because nations that have cheap labor can make goods that are intensive in labor and export them to labor-scarce nations. This should help alleviate the labor scarcity problem for richer nations, while reducing the labor glut in the poorer ones, benefiting both. In practice, however, barriers to trade, as well as the fact that services are often not easily traded, may require nations to allow immigration.
While movement of labor, capital and goods across international borders is generally considered a good thing in the context of overall economic efficiency of a nation, such openness may hurt some groups within an economy. In particular, there is a lot of concern that immigration may hurt native U.S. labor. To the extent that the skill level of the immigrant is a close substitute for that of the native worker, this seems plausible. However, at least three points are worth noting in this context:
A paper by Gianmarco I.P. Ottaviano and Giovanni Peri focused on these issues.1 The authors found that immigration during the 1990-2006 period had a small negative effect (negative 0.7 percent) on wages of native workers with no high school degree. In the longer run, this effect was actually a positive 0.3 percent for the same group. Average wages also showed a similar pattern in the researchers’ analysis.
We know from Depression-era history that greater protectionism in the face of an economic downturn is likely to only accentuate the problem of high unemployment. It is generally recognized that the Smoot-Hawley Tariff Act in 1930—along with retaliatory tariffs imposed by other countries—exacerbated the onset of the worldwide Great Depression.
Times of economic slowdown might increase pressures to "protect" jobs, but ill-conceived plans to limit employment opportunities for some does not necessarily provide opportunities to others. Rather, the law of unintended consequences can lead to outcomes that are detrimental to all.
1 Ottaviano, Gianmarco I.P.; and Peri, Giovanni. "Immigration and National Wages: Clarifying the Theory and the Empirics." National Bureau of Economic Research Working Paper No. 14188, July 2008.