Research & Policy Briefs From the World Bank Malaysia Hub No. 6, March 2017 Threat or Help? The Effects of Unskilled Immigrant Workers on National Productivity Growth Sharmila Devadas While unskilled immigrant workers have relatively low formal human capital, theory suggests that they can still contribute to productivity improvements by helping to increase efficiency and upgrading the skills of the native labor force. Empirical studies indicate that positive productivity effects do occur. This body of evidence does not provide a compelling argument for the closing of national borders to unskilled foreigners on economic grounds. A world in motion of immigrant workers on productivity suggests that the effects are slightly positive. Individual country outcomes, however, vary. Conse- The number of migrants—foreign-born residents in countries across quently, countries need to fully understand their own immigrant the globe—reached 244 million in 2015 (United Nations 2015), about experience within the broader context of developments in the 3 percent of the world’s population. Over the past 50 or so years, the economy and policies aimed at productivity growth. growth in migrants has been largely driven by people migrating from relatively less developed countries to relatively more developed nations (Ozden et al. 2011; Abel and Sander 2014). Figure 1 illustrates Channels through which unskilled immigrant labor affects the pattern of migration to countries with higher education levels productivity in labor-receiving countries among key sending and receiving countries from 2005 to 2010. In general, higher labor productivity is driven by capital deepening Theoretical and empirical studies on the impact of immigrant (higher physical capital per worker); the skills intensity of workers labor on host countries have focused extensively on employment and (higher human capital per worker); and changes in TFP. These three wages (for instance, Nijkamp, Poot and Sahin (2012) and Peri (2014) factors and their interrelationships are shown in the center panel note, on average, very small economic effects), but less so on wider of figure 2. Physical capital (such as buildings, machinery, and implications, including for growth of total factor productivity (TFP). equipment) and workers with knowledge and experience contribute TFP growth, which measures how effectively inputs come together to to productivity increases, especially when both move together. Skilled produce output, reflects technological progress (creating new or workers without sufficient physical capital, or the accumulation of better things) and improvements in efficiency (doing existing things physical capital without capable operators, result in diminishing better). TFP is key to sustaining per capita income growth over time. A returns to the respective inputs. TFP growth is spurred by inventions country’s per capita income can be decomposed into labor productiv- or the adoption of new technology, as well as shifts in production ity (how much a worker can produce in an hour worked), which is management and organizational capabilities. TFP changes can be influenced by TFP; the employment rate; and the share of working-age facilitated by skilled workers and physical capital via spillover effects people in the general population. (shown as dashed arrows in panel b). For instance, skilled workers involved in research and development may create new knowledge This policy brief discusses the channels through which unskilled that is used across firms (this line of thinking is based on endogenous immigrant labor (typically defined as workers with, at most, secondary growth theory (Romer 1986, 1990)). education) affects labor productivity and its components in countries that receive migrants. It also summarizes available empirical evidence. Panel a illustrates the immediate (mechanical) effects of an influx Empirical work specifically relating to unskilled immigrant workers is of unskilled immigrant workers. The labor productivity level declines if scarce. Nevertheless, evidence on the impact of the total population the influx of immigrants increases the proportion of unskilled workers. Meanwhile, capital is diluted because the supply of physical capital is fixed in the short term. However, this is only one part of the story. As Figure 1. The 20 Largest Country-to-Country Migration Flows, firms and workers adjust, other resultant dynamic channels of effects 2005–10 come into play. In particular, unskilled immigrant workers can help upgrade the skills of the native labor force and increase the efficiency of production (see panel c). These dynamic channels for productivity effects are discussed next. An influx of immigrant labor, if it has heterogeneity in skills with respect to natives, changes the relative distribution of skills in the labor force. High-skilled immigrant workers can directly facilitate technological progress through invention and innovation. For example, research suggests that high-skilled immigrants are positively associated with patenting and business start-ups (see, for instance, Nathan (2014)). In addition, foreign direct investment, regarded as a source of capital and technology transfer, appears to be positively related to immigrant stocks, with “networks” of investors more likely attributable to skilled immigrants than unskilled labor (for further discussion, see Grossman (2016) and Nathan (2014)). Although unskilled immigrant workers are not inventors and innovators, they can still enhance efficiency and indirectly contribute to technological progress through complementarity with natives which enables task reallocation and specialization, and promotes skills diversity (Peri and Sparber 2009; Peri 2010, 2012). The increase in the supply of workers for manual jobs (and the ensuing opportunities for expansion) boosts demand for more complex tasks. These are filled by natives, some of whom move out from the manual jobs. Natives have a comparative advantage in occupations that are complex and Source: Global Migration Data Sheet 2005–10, Wittgenstein Centre. communication-intensive. This shift from physical-skill to language- Note: Tick marks indicate size of the migration flow in 100,000 increments. skill intensity has been observed in the occupations of native workers Flows have the same color as the origin country. in various U.S. states that have received large inflows of less-educated Affiliation: Development Research Group, the World Bank. Acknowledgment: Norman Loayza and Nancy Morrison contributed to this brief. Objective and disclaimer: Research & Policy Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Global Knowledge & Research Hub in Malaysia Threat or Help? The Effects of Unskilled Immigrant Workers on National Productivity Growth Figure 2. Effects of Unskilled Immigrant Labor on Productivity b. Components of labor a. Mechanical (immediate) channels c. Dynamic channels productivity • Specialization • Scale/agglomeration Total factor economies productivity • Directed technological change • Social cohesion barriers Increase in the proportion Skills intensity • Task complementarity of unskilled labor of workers • Competition • Physical capital-skill complementarity Increase in the number of Physical capital • Physical capital-labor workers deepening complementarity (no substitution of labor for capital) Effects of unskilled immigrant labor on components of labor productivity: Increase Decrease No change immigrants (Peri and Sparber 2009). There is also evidence of a unskilled foreign workers enter the labor force, what are the opportu- positive link between changes in the task specialization of nities for continuous upgrading of the skills of natives and existing less-educated natives and TFP growth in the United States (Peri 2012). immigrants? What are the effects of a deterioration in the In Malaysia, unskilled immigrant workers fill gaps in low-to-middle- skills-intensity of the labor force on TFP growth through changes in skilled occupations (such as cleaners, laborers, and plant and machin- physical capital? If the skills-intensity of the labor force deteriorates, ery operators/assemblers) in labor-intensive sectors (construction, and if physical capital is more complementary to skilled labor than agriculture, and some types of manufacturing). This benefits natives unskilled labor (physical capital-skill complementarity), physical capital with middle-level skills (those with at least secondary-level education), deepening would be reduced in favor of unskilled labor, which could with whom they have some overlap of tasks (Munoz Moreno et al. lower TFP growth. On the other hand, if there is no substitution 2015). It also benefits tertiary-educated women, to some extent, who between physical capital and labor (they are complements regardless are able to join the labor force when low-cost domestic household of skill—physical capital–labor complementarity), flexible capital over services become available (World Bank 2013). the medium to long term will allow firms to bring the capital-labor ratio to the same level as before the influx of unskilled migrant Even if unskilled immigrant workers are homogenous in skills workers, with no net change in TFP growth (figure 2, panel c). relative to natives, the effects on TFP can still be positive. For one thing, the availability of immigrant labor may promote scale and agglomeration economies. An increase in labor supply can lower the What does the empirical evidence suggest about the net cost structure by allowing for higher output levels to be spread over impact on productivity of an influx of unskilled immigrant given fixed costs amid lower variable costs. This effect is particularly potent when there are labor shortages and when there are opportuni- workers? ties to expand to new markets. A study of the case of the impact of The discussion that follows analyses the econometric results for immigration on employment of Malaysia’s native workers finds that immigrant effects on labor productivity and its components. The scale effects outweigh substitution effects (Ozden and Wagner 2014). results are drawn from 22 primary studies (12 peer-reviewed journal In the United States, the effects on employment, investment, and articles, 6 reports/conference proceedings, and 4 reputable recent income are more positive in economic expansions than recessions, working papers) covering the world, Europe/the European Union (EU), Peri (2010) finds. Moreover, the pooling of skill- and task-specific labor member-countries of the Organisation for Economic Co-operation and supports learning and the generation of ideas, which can lead to Development (OECD), and several individual countries (France, simple process improvements. For another thing, increased competi- Germany, Israel, Malaysia, Spain, Thailand, the United Kingdom, and tion among similar workers may incentivize natives to perform tasks the United States). The studies are listed in the reference list in the more efficiently and upgrade their skills. Empirical Results section. The extent of these benefits may be somewhat impaired by poor Unfortunately, explicit analysis on skilled versus unskilled foreign interaction between native and immigrant workers (social cohesion) workers is scarce. Thus most of the results pertain to the effects of because of trust and communication barriers. Nevertheless, these total immigrants. Nevertheless, the results remain instructive, given barriers may dissolve over time as immigrants adapt to their host countries. The variety within the immigrant stock (the diversity of the overwhelming direction of flows from less educated to more immigrant birthplaces) may have some costs in terms of cohesion, educated countries (as seen in figure 1). Moreover, for many notwithstanding an overall beneficial effect on per capita income from countries, the proportion of tertiary-educated immigrants is relatively skill complementarities, Alesina, Harnoss, and Rapoport (2016) small: for example, slightly less than 30 percent of immigrants to the suggest. In a large cross-section of countries, they find positive effects OECD member-countries as of 2010/11 (UN-DESA and OECD 2013). from diversity to be largest for immigrants originating from richer The risk of relying on total immigrants as a gauge for unskilled workers countries (potentially a proxy for higher skills) and from countries at is, of course, the misattribution of the effects of skilled workers to intermediate levels of cultural proximity. unskilled workers. The results for total immigrant effects are summa- rized in figure 3. Another possible channel of effect on firm behavior from unskilled immigrant workers is when firms adopt technologies and physical The results suggest that on balance, total immigrant effects on capital that are more suited to the efficient and intensive use of labor productivity are statistically insignificant to positive (figure 3, unskilled workers, and which nevertheless may contribute to panel a). Broken down to the three components of labor productivity, increases in TFP in traditional sectors (Peri 2010, 2012). This process, statistically significant positive effects are especially apparent through based on the relative supply of skills, is known as directed technologi- TFP (panel b). There is no statistically significant impact of total cal change (for further discussion of this concept, see Acemoglu immigrants on capital per worker (panel c), suggesting that capital (1998, 2002)). accumulation need not be adversely affected. This might be because immigrant flows are fairly predictable, for the most part, and generally Do all these channels support continued labor productivity growth account for only a small percentage of the labor force, Ortega and Peri over the long term (amidst continued inflows of unskilled immigrants) (2009) suggest, in a study of OECD countries over the 1980–2005 or do they provide mainly one-off level effects? For instance, as new period. The intensity of formal skills (panel d) is somewhat negatively 2 Research & Policy Brief No.6 Figure 3. Effects of Total Immigrants on Labor Productivity and Its Components a. Labor productivitya b. Total factor productivity Number of results Number of results Total (88) Total (67) of which: OECD (19) of which: OECD (20) EU/Europe (12) Worldwide (2) EU/Europe (8) United Kingdom (13) Worldwide (3) United States (12) Germany (9) United States (20) Israel (8) Malaysia (12) Thailand (8) Israel (2) Spain (3) Malaysia (2) France (2) 0 25 50 75 100 0 25 50 75 100 Share of results (percent) Share of results (percent) c. Physical capital per workerb d. Human capital per worker Number of results Number of results Total (23) Total (14) of which: of which: OECD (10) OECD (3) Europe (2) Worldwide (1) Worldwide (1) United States (10) United States (10) 0 25 50 75 100 0 25 50 75 100 Share of results (percent) Share of results (percent) Positive, statistically significant Positive, not statistically significant Negative, statistically significant Negative, not statistically significant Source: Author’s calculations based on results from 22 primary studies. Note: Most of the studies surveyed contain several main regression results involving different specifications (in terms of controls and sample coverage). Where a study contains both ordinary least squares (OLS) and instrumental variable (IV) regressions, only the IV regression results are tabulated. Results are also only drawn from regressions with the most fixed effects, when there is no variation in specification. Shares reflect total immigrant effects according to regression coefficient signs and degrees of statistical significance across various units of aggregation (country, state/region, sector or firm). Statistical significance is at minimum 5% level. EU = European Union; OECD = Organisation for Economic Co-operation and Development. a. Labor productivity comprises a mix of output per worker (which includes the effect of hours worked) and output per hour. b. Physical capital per worker comprises a mix of capital per worker and the capital-to-output ratio. affected by total immigrants, which suggests that immigrants’ compo- Although nearly all immigrant workers in Malaysia and Thailand sitional effect on skills tends to outweigh the effect on the upgrading are almost completely unskilled, the results for these two countries do of natives’ skills. Nevertheless, it is worth highlighting that in the not indicate unequivocal negative productivity effects. Studies of studies that analyze labor productivity alongside all three compo- Malaysia tend to focus mainly on the manufacturing sector. The only nents, positive immigrant effects on TFP are found to more than offset study on Malaysia (in this survey) that takes a cross-sectoral approach the effects on physical capital per worker and human capital per (World Bank 2013) notes different TFP effects on different sectors in worker (see Aleksynska and Tritah (2015) on OECD countries; Peri the 2005–10 period: positive for large manufacturing and construction (2010, 2012) on the United States; and Ortega and Peri (2014) on a firms, but negative for small-to-medium plantation firms. This large cross-section of countries). suggests the possibility of varying implications of immigrants in terms of complementarity with natives, adoption of appropriate technolo- Outcomes are nevertheless quite varied across individual gies and scale economies across different sectors and firm sizes. countries. For example, the proportion of positive total immigrant effects are particularly obvious for the United Kingdom and the United Results for Thailand (from Pholphirul, Rukumnuaykit, and Kamlai States, but less so for Malaysia and Thailand (figure 3, panels a and b). 2010) are statistically insignificant (for the aggregate economy and This does not mean that the TFP benefits accruing to the United agriculture sector) to negative (for the manufacturing and services Kingdom and the United States are solely due to skilled foreigners or sectors) for the 1990–98 period, but may suffer from reverse that Malaysia and Thailand are severely disadvantaged by unskilled causation. While the authors find immigrants and natives to be substi- immigrants. For the United States, evidence from instrumental tutes, they also suggest that immigrants may help push natives toward variable (IV) estimations that span the period from 1960 to the 2000s high-technology sectors over the longer term, noting that their results and utilize changes of up to 10 years in state-level data indicate can be viewed as reflecting short-term responses. Further, for both positive productivity growth over the long term. As discussed, these Malaysia and Thailand, while there is some indication that skilled effects are strongly associated with the efficient allocation of skills to immigrants have more positive effects than unskilled immigrants in tasks induced by unskilled immigrant inflows (Peri 2012). In the case of the manufacturing sector, the statistical significance of these results is the United Kindgom, a study over a 10-year period (1997–2007) finds not particularly strong (figure 4) (these are the only results from this positive results for labor productivity, which are robust to controlling survey that explicitly account for unskilled immigrant effects). for the education level of immigrants across regions (Rolfe et al. 2013). Notwithstanding the questionable direction of causality—given the The cross-country empirical evidence suggests that underlying the use of ordinary least squares (OLS) regressions—the results may still likelihood of positive net productivity effects from foreign workers is suggest indirect productivity effects, which are consistent with qualita- the link of immigrants—regardless of skill level—to specific needs in tive findings of employers recruiting on the basis of shortages and host countries (for example, granting of visas through employment- complementarities with natives. based entry), and host countries’ response to shocks. The results for 3 Threat or Help? The Effects of Unskilled Immigrant Workers on National Productivity Growth Productivity effects are also likely to differ between the short term Figure 4. Effects of Skilled Versus Unskilled Immigrants and long term. Some studies explicitly point to stronger positive on Productivity: Selected Results for Malaysia and Thailand effects from total immigrants over the long run, which reinforces the importance of understanding dynamic adjustments, as discussed. For Malaysia instance, long-term gains to U.S. productivity become more significant Skilled immigrants after 7 to 10 years, Peri (2010) finds. Older immigrants (age 25–54), who likely have resided longer and have more experience in their host countries, have a positive effect on productivity, while younger Unskilled immigrants immigrants (age 15–24) have a negative effect, a study of OECD countries suggests (Aleksynska and Tritah 2014). Thailand Skilled immigrants Conclusion Unskilled immigrants The limited existing empirical evidence does not provide a clear indication that unskilled immigrants are detrimental to productivity. In 0 25 50 75 100 fact, efficiency gains are quite possible, as observed for the United Share of results (percent) States, through task specialization, competition, and the adoption of appropriate techniques. Further empirical research is needed to better understand the channels through which unskilled immigrants Positive, statistically significant Positive, not statistically significant affect productivity, and how these vary for different countries across different time spans. Negative, statistically significant Negative, not statistically significant Indeed, a key methodological improvement required for individual Source: Author’s calculations based on Tham and Liew (2014) and Woo, Ismail, and country analysis is clarity in defining and measuring short-term and Yussof (2014) for Malaysia; and Pholphirul, Rukumnuaykit, and Kamlai (2010) for long-term effects. Richer data are critical. A number of sources exist, Thailand. but remain inadequate (Carletto, Larrison, and Ozden 2014). More Note: The 16 results for Malaysia are for labor productivity and TFP, and examine how different occupational groupings affect productivity in the manufacturing sector. firm-level analysis would be beneficial to better understand employer Tham and Liew (2014) do not categorize the six occupational groupings according to behavior and the mechanisms of immigrant effects within organiza- skill groups. This analysis maintains the groupings and categorizes their skill type tions (Nathan 2014). based on an interpretation of the manager and technician groups as skilled, and the rest as unskilled. The 20 results for Thailand are for labor productivity only, for the As it stands, it is hard to make an economic case for a ban on overall manufacturing sector and eight subindustries. unskilled immigrant workers as a way to enhance productivity. This is Statistical significance is at minimum 5% level. especially so when coupled with the welfare-enhancing effects for immigrants, as reflected by the “place premium” (workers earn more Israel provide an interesting counter-example to the Malaysia and simply by working in the United States rather than in their own Thailand cases as recipients of mainly unskilled foreign workers. countries (Clemens, Montenegro, and Pritchett 2009)). Beyond the Focusing only on the Israeli manufacturing sector in the 1990s, special case of humanitarian crises, countries should focus on improv- Paserman (2013) highlights the unique situation of a large influx of ing their immigration systems to reap mutually reinforcing benefits for skilled immigrants (fleeing the collapse of the Soviet Union) that did natives and immigrant labor. Related steps include quantifying not have positive effects on productivity. 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