Immigrant STEM Workers Increase Everyone’s Wages

We’ve posted recently about how our current immigration policy is hurting Silicon Valley. But when the United States lets in more immigrants, what happens? Often it’s not what you would expect.

A new NBER paper by economists at the University of California Davis and Colgate University studies the effect of skilled H1-B immigrants in STEM occupations on more than 200 cities across the country. In cities with more STEM immigrants, wages for college-educated workers went up 7-8 percentage points, wages for non-college-educated workers went up about half as much, and there was no significant effect on employment.

Why this counterintuitive result? Economics 101 says that when the supply of something grows, the price should decrease, not increase. As is too often true, however, Economics 101 in this case tells us very little about the real world. Figuring out cause and effect in many types of markets, particularly labor markets, is tough because economies are not as simple as the textbook models might have you believe.

What actually happens is that when immigrants enter an economy, they do more than just offer their labor at a (potentially) lower price. They increase consumption demand, and also bring along skills, experience, and social networks. This extra human capital, as it is called, can have much more powerful effects on the market than the supply and demand effects because it is very valuable to businesses.

However, it can be tough to measure the effect of new immigrants on wages and employment. People move around for exactly those reasons, so you can't know if wages were high and then people immigrated, or people immigrated and then wages rose. Luckily, the H1-B visa program sent immigrants to cities for reasons that had little to do with supply and demand, and the authors use that fact tease out the effect of those immigrants who moved to cities independently of the cities’ economies.

As noted, the paper finds that more STEM immigration was basically an unalloyed good. Instead of lowering the incomes of the other high skilled workers that new immigrants would theoretically be competing against, they raised their incomes by 7-8 percentage points. Non-college-educated workers’ wages also rose, by 3-4 percentage points. Employment rates were basically unchanged for both categories. The only drawback to higher STEM immigration that they found was that rents in areas with more college-educated workers (but only those areas) rose in conjunction with their wages. In other words, property owners captured a significant amount of the higher wages that new STEM immigrants brought about in the local economy.

On the other hand, as the authors point out in a final section of their study, the effects of the STEM immigrants appear to be quite large in aggregate—large enough for everyone to share in. That is, they estimate (based on somewhat strong assumptions) that an enormous 30-50% of total factor productivity growth between 1990 and 2010 was due to these new STEM immigrants. That is an remarkable amount, and translates into a significant portion of average wage increases for workers.

Immigration, perhaps even more than many other political topics, is characterized by broad assumptions about the effects of different policies. Unfortunately, the intuitive assumptions about the economic effects of policies are frequently dead wrong. This makes a more nuanced understanding of policies, supported by careful research, imperative. Immigration is, and has long been, an important part of U.S. economic growth and we need to make sure our policies reflect that fact now and into the future.

(Thanks to Flickr user Nomadic Lass for the STEM photo!)