Immigrants Can Unlock Productivity Growth
Immigration has been making economies demonstrably more productive ever since there have been accurate output statistics. It's not a straightforward effect, however: The immigrants need to be well-suited to the needs of the receiving country's labor market.
In 1685, Louis XIV issued an edict banning Protestantism in France. The "heretics" -- Huguenots -- moved on; they were welcomed by the rulers by then-backward Prussia, hit hard by the Thirty Years' War and plague outbreaks. Prussian rulers never regretted the inflow of up to 20,000 Huguenots, or about 1.3 percent of the country's population: The influx resulted in a lasting productivity boost.
Erik Hornung of the Ifo Institute of Economic Research in Munich used Prussia's meticulous records of immigration and production to determine that in factories established in the towns where the French Protestants settled, a 1 percent increase in the population share of Huguenots translated into 1.4 percent higher productivity in the textile industry, in which they were particularly skilled, and the increase held even 100 years later, after many Huguenot-founded manufactories had ceased to exist.
The influx of German Jewish emigres from Nazi Germany to the U.S. caused an enormous leap in American innovation, contributing to the fastest productivity growth in U.S. history in the 1930s and 1940s. As with the Huguenots in Prussia, this wave of immigration brought about a significant knowledge transfer. But blue-collar immigration could also have a beneficial effect. In the 1960s, when the industrial economies of Germany, Belgium and the Netherlands were recovering after the devastation of World War II, the influx of "guest workers" helped bring down costs by moderating the demands of labor unions; the highly motivated and other Turkish workers helped 1960s Germany take the biggest leap of any post-war decade in catching up to the U.S. in productivity terms.
More recently, in the years between 1990 and 2010, an influx of techies on H-1B visas has been found to increase productivity in the cities where they arrived.
One of the authors of the H-1B paper, Giovanni Peri, a University of California, Davis scholar who is originally from Italy, has done a lot of research on immigration's economic effect, including its implications for productivity. Working with datasets from different countries and types of firms, he has shown that adding immigrants to the workforce pushes locals into more communication-oriented jobs, which smooths business processes and helps increase productivity. It also helps companies to expand geographically, using the immigrants' knowledge of their home countries; the export growth also results in higher productivity.
Even low-skilled immigration can make the receiving country's economy more productive in unexpected ways. Rachel Anne Harris of the University of Toronto showed in a recent paper that the Mariel Boatlift -- the unexpected arrival in Florida of 125,000 Cubans, expelled by that country's Communist regime -- resulted in an increase in patenting in Florida. It wasn't the people off the boats who innovated; they were mostly blue-collar folks. But, Harris wrote, "individual inventors had access to a large supply of low-skilled laborers, and were able to hire them to do housework, child care, etc. This allowed these inventors to substitute away from housework and spend more time inventing, thus leading to an increase in patenting."
There is one key condition for immigrants to boost productivity in this way: The immigrant group must be a good match for the needs of the receiving country. The Mariel Boatlift had little effect on wages in the Miami area because there was a ready market for the kinds of skills they had. Prussia in the 18th century needed the Huguenots' weaving and dyeing skills, which far exceeded those of the locals. The U.S. after the Great Depression desperately needed the Jewish immigrants' expertise to build a more sophisticated economy. Germany in the 1960s couldn't have grown without the guest workers. The H-1B visa holders were soldiers of a tech boom the U.S. couldn't have sustained with local labor only.
When a receiving country doesn't really need the immigrants' qualifications, the effect of their influx on productivity is negligible. In the 1990's, Israel took in hundreds of thousands of former Soviet citizens, many of them highly skilled -- but the effect of that human capital windfall on productivity was negligible, Daniele Paserman wrote in a 2013 paper. The new immigrants arrived to find a highly competitive environment and lots of locals with the same skills but with a better understanding of how the system worked, as well as better language skills. They often ended up at smaller firms doing work for which they were overqualified. "The sheer magnitude of the migration wave made it more difficult for immigrants to find suitable jobs, and many immigrants fled the disintegrating Soviet Union in haste, and with little prior knowledge of their chances to integrate successfully in the host country," Paserman wrote.
The current wave of Middle Eastern immigrants in Europe is running into the same problems. Their qualifications, even when they're quite high, are rarely in demand, which results in longer paths to gainful employment. Even for low-level work, the required level of integration is quite high. It's difficult to expect productivity increases when newcomers are accepted for humanitarian reasons and faced with high barriers to entry into the job market.
Sometimes receiving whatever immigrants have landed on one's shores is a moral imperative. But the migrants don't have to be charity cases or a security problem. There's nothing wrong with showing more interest in the newcomers' skills and inclinations and then directing them to the areas where these may be in demand. A number of European countries have balked at attempts to establish a refugee quota system -- but they could benefit from a more intelligent distribution scheme that would sort people by skill or desire to acquire one.
Building such a skill-matching system, and the capability to train migrants in currently needed occupations, should be one of the priorities for Europe and -- once there's more reasonable government in Washington -- the U.S. Even something as basic as free language training (which exists in Germany but is not given in France until immigrants have been there for a while) can dramatically reduce the tension surrounding immigrants and speed their entry into the productive economy; vocational training geared to the economy's needs would be a major leap forward. Without skill-matching, language training and other integration measures, it's difficult to harness the cost-reduction and knowledge-transfer effects of immigration.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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