ECONOMIST HULK on Immigration
ECONOMIST HULK @ECONOMISTHULK:
HULK HAVE QUESTION FOR MARKET MONETARISTS. HULK PREFACE QUESTION BY NOTING THAT MOST IN FACT ADVOCATE CENTRAL BANK TARGET NGDP PER CAPITA
HULK SEE MARKET MONETARISTS GENERALLY PRO-IMMIGRATION (AS IS HULK). W/ NGDP-PER-CAP TARGET, LOW SKILL IMMIGRATION SEEM INFLATIONARY TO HULK.
HULK WORRIED THIS CREATES VERY BAD POLITICAL DYNAMIC. BUT HULK NOT SURE. INQUIRING HULK WANT TO KNOW WHAT MARKET MONETARISTS THINK.
Is low skilled immigration inflationary under an NGDP per capita target?
Yes. If you peg down spending per person, high skilled immigrants will cause deflation and low skilled immigrants will cause inflation. Perhaps if there were massive immigration, the target could be nudged a bit to accommodate more stable prices, but let’s analyze it at face value. In recent history, America has added about 1.4 million immigrants per year. Initially, they have only earned on average about 40%-60% of native wages(!).
However, there is some wage conversion over time, which blunts the impact of immigrants on inflation. As new immigrants arrive causing inflation, older immigrants have faster productivity growth than natives causing deflation. The net impact would be based on the lifetime average difference between immigrants and native wages. Chiswick (1978) found that immigrant earnings fully catch up to native earnings within 10-15 years, although that study is pretty old. Immigrant earnings have declined quite substantially since 1978, and it seems like even after a decade or two, they still lag behind native wages by around 20%.
If you assume diminishing returns to all factors of production, immigration would increase not just native wages, but also the returns to capital. Let’s assume a large international capital market and hold those returns constant for simplicity, so the entire effect is on native wages. With a net wage discrepancy of 20% and an immigration rate of .5%, the impact of immigration on the native wage growth would raise the native nominal wage growth rate by 0.1% percentage points (from 5.0% say, to 5.1%). Doubling immigration would double the effect, etc. So if immigration suddenly jumped to 10 times the current rate, which some market monetarists, including myself would see as beneficial, the growth rate for native wages would be a whole percentage point higher, and higher still in the short run.
(Update: The “higher still in the short run” comment was cryptically alluding to the fact that the higher immigrant wage growth would only lower inflation slowly over time, so if immigration suddenly jumped, the impact on inflation would be higher than my long run analysis.)
Would the political dynamic be bad?
A steady flow of low skilled immigrants would have the same impact as a higher NGDP target. If the level of immigration were relatively stable, the target could be lowered to offset the effect. Stability and level targeting is more important than what the particular rate is. Sumner himself admits that the 5% was just picked as a simple round number and doesn’t have any particular significance.
The only time there would be trouble is when immigration was highly unstable. If natives were worried about inflation, they could tilt law toward favoring more skilled immigrants. I think that high skilled immigrants are more politically popular for other reasons anyway, such as lower crime rates, higher tax payments, more informed voting behavior, etc. If you are worried about maximizing total world utility, probably low skilled immigrants benefit more from immigrating than high skilled immigrants so, so that’s one for the “cons” column.
Consumer prices would increase faster than the baseline because immigrants are lower productivity than natives, but still, consumer prices wouldn’t outpace native wage growth. Most people wouldn’t even make the connection. I’m sure there’s the “blame immigrants for all bad things” camp, but I bet liberal bleeding heart economists would downplay the effect so as not to threaten their preferred policy, just as economists downplay the losses from increased trade and technology. It would be seen as a noble silence in pursuit of the greater good.
Of all the societal changes which would occur if immigration were increased overnight to ten times what it currently is, a 1% increase in inflation would not be the most disruptive. I don’t think people particularly worry about 3% vs. 4% inflation. They care if inflation goes to 10%-15% or higher. The 2008 crisis showed that people will wring their hands about inflation when deflation is 2%! It’s not the inflation, it’s the instability that makes people worry. Australia seems to do fine with a higher target, so I just don’t think it’s a big deal. If there is a political effect I’m not seeing, let me know! Hulk may be angry, but deep down he’s still Dr. Banner.