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Weekly Economic Commentary | February 23, 2024

Immigration: An Economic Review

Immigration is a vital source of economic growth.

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By Vaibhav Tandon

Wall decorations sometimes bear the message that home is where the heart is.  But for millions across the globe, home is where the jobs are. 

About 281 million people, or 3.6% of the world’s population, live outside of their country of birth.  The number has increased over the past five decades.

Europe and Asia host the most international immigrants.  At the country level, about half of all immigrants reside in just 10 countries.  The United States leads the world with the highest number of settlers.  Canada and Australia are also among the most sought after immigration destinations.  About 30% of Australia’s population were born overseas, of which two-thirds are now residents.  India is the leading source of the world’s expatriates, accounting for 18 million persons living abroad, followed by countries like Mexico, Russia and China.

Cross-border mobility collapsed during the pandemic but has since recovered across major advanced economies.  Canada’s total population grew by a record 1.05 million in 2022, the largest spike since the post-World War II baby boom.  Immigration accounted for 96% of that increase.  Compared with the average annual increases in the 2010s, net immigration almost tripled last year to 3.3 million in the U.S. and to 670,000 in the U.K.  

 


 

Many immigrants are ambitiously seeking better opportunities, but some are also driven to escape wars, climate-related disasters and persecution.  The number of people forcibly displaced from their homelands rose to a new high of over 110 million in 2023, up from about 90 million in 2020.  As of mid-2023, about five million Ukrainians had fled from the war; Germany, Poland and the U.S. have been their leading destinations.

If managed effectively, immigration can benefit both the newcomers and their newfound homes.  Research shows immigration into developed economies boosts output and productivity.  Developed markets are aging rapidly and are facing labor shortages which have been aggravated by the consequences of COVID-19.  Developing nations, which are going to see their population increase and potentially leave a lot of young people without adequate opportunities, will help fill in this gap.  Caring for the elderly is a common job for recent immigrants.

Foreign workers already constitute a sizeable share of the labor force in many markets.  Employment of foreign-born employees now outpaces native-born workers in the U.S.  The share of employees working in the U.K. who were born in a foreign country has increased over the past two decades from 2.6 million or 9% of the employed workforce in 2004 to 6.2 million or 19%, helping ease labor shortages caused by Brexit and the pandemic. 

Immigrants are not only job seekers, but also job creators.  According to the National Foundation for American Policy, immigrants are founders of over half of the U.S.-based unicorns (startups that exceed a $1 billion valuation).  The American Immigration Council says that immigrants or their children have established 44% of Fortune 500 companies in the United States.  

Contrary to suspicions that foreign-born persons are a burden to public coffers, the Organization for Economic Co-operation and Development concludes that immigrants contribute more in taxes than administrations spend on their social security in many countries.

Immigration has also caught the attention of central bankers, as it eases labor shortages and slows inflation.  At their December meetings, both Fed Chair Jerome Powell and Bank of Canada Deputy Governor Toni Gravelle cited the pickup in immigration as a driver of improved labor supply.  The U.S. Congressional Budget Office estimates immigration will boost the nation’s overall gross domestic product by 2% in the decade ahead. 

The macroeconomic effects of immigration are largely positive.

 


 

While importing workers can be a silver bullet for aging advanced economies, curbing immigration has become a top priority for many governments across the globe.  Heavy migrant flows add to short-term strains on infrastructure, public services and housing.  Immigration can also depress wages in the recipient country as businesses gain access to a larger and a relatively inexpensive labor pool.  Balanced discussion of immigration’s costs and benefits is complicated by visceral feelings of being crowded out of one’s own country.

Countries known for their permissive immigration policies are moving to curb inflows of immigrants to ease their housing crunch.  Australia is aiming to halve its annual arrivals to 250,000 within two years, from a record 510,000 people in 2023.  Canada has announced a two-year cap on international student visas, following backlash over surging rents.  The U.K. launched a five-point plan to cut its net immigrant intake by 300,000 (from 672,000 in 2023).  Some Irish politicians are seeking a national referendum on the government’s relatively open immigration stance. 

But not all major economies are acting against immigration.  In June 2023, the German government approved the Skilled Immigration Act, which makes it easier for skilled non-European workers to take jobs in Germany amid labor shortages.  Berlin alone took over a million Ukrainian refugees and has proposed steps like easing German language requirements to integrate displaced Ukrainians into its labor market.  Similarly, Japan, the world’s most aged nation, is also making efforts to boost immigration to cope with its shrinking population.

Despite the benefits, immigration is likely to be one of the hotly contested topics in this busy year of elections.  Immigration should be seen as a tool of sustainable development, and not a crisis to be solved.  Only then nations will have an immigration policy with their heads and their hearts in the right place.  

Immigration is the clearest answer to growing demographic challenges.

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