In my previous blog post, I explained why I personally don’t have many unanswered questions that concern immigration. However, that fact has changed once I explored the historic problematic of immigration in the U.S. in class. I was mostly intrigued – of course – by the question of whether immigration helps economic development. This is because my previous knowledge of how standard economic models apply to structural economic changes that happen during waves of immigration was challenged.
To further explain what exact part of what I knew was challenged, there are a few terms we need to make sure everyone understands. First, financial incentive. Now, we are all familiar with the definition of an incentive. It is something that gives a person motivation to act. A financial incentive is more or less the same, except it only concerns acts of financial nature and includes not only individuals as actors, but also larger institutional structures, like governments. The second important term to define is the multiplier effect. This economic phenomenon basically describes an increase in profit from new government spending. The final effects of this process are what I was familiar with before discussing the unit in depth.
In context, when a large immigration wave occurs in a nation state there is a rise of demand in the job market. In accordance with the ‘Supply and demand’ model, a rise of demand results in a shortage – in this case, the shortage of job places. When there is such a shortage in a country, the government of that country has financial incentive to support its industries to create space in the job market, because otherwise many unproductive inhabitants create economic stagnation. This financial incentive usually materialized into the multiplier effect. Injections of spending into a country’s companies to create more incentive for those companies to scale up, maximizing their profit, as they could produce and sell more product. By scaling up, companies create a bigger supply of job places for incoming flows of immigrants to fill up, without jeopardizing the native population’s need to be employed. This scenario creates a win-win situation for the state, which prevents economic stagnation and creates growth in the long run, since the economic equilibrium is moved upward, as demonstrated in the image below.
(The image provides the example of energy supplies, instead of job places)
That means the nation can profit off of a bigger number of collected company income taxes, effectively paying back the amount it gave to the industries to scale up.
The way this was challenged by looking into the information about US immigration is when I read an article in our primary sources assignment that said that economic growth from immigration is virtually non-existent. The only visible differences in growth were 0.1% increases. Why? Well, I don’t know. It may be because the US has a larger job market that not even government spending injections can widen it. It may be because of the sheer mass of the population, which just too big in comparison with countries like Germany, who can experience growth of up to around 4-5% because of immigration. Because of that, there may be a lack of financial incentive in the government so the multiplier effect can’t even occur.
Without looking even more into the specific macroeconomic policies of the US government, there is only so much we can do – speculate.