Immigration, investment, and real wages

Abstract

When a country is the recipient of large-scale, politically motivated immigration — as has been the case for Israel in recent years — the initial impact is to reduce real wages. Over the longer term, however, the endogenous response of investment, together with increasing returns, may well actually increase real earnings. If immigration itself is not wholly exogenous, but respond to real wages, they may be multiple equilibria, that is, optimism or pessimism about the success of the economy at absorbing immigrants may constitute a self-fulfilling prophecy. Since World War II, a number of countries have experienced surges of politically motivated immigration. Examples include West Germany during the early postwar years, which was the destination of millions of refugees from the East; Portugal, faced during the mid-1970s with the return of several hundred thousand citizens from its newly independent African colonies; and Israel, which absorbed a massive wave of immigrants in the years following independence and has recently received a new surge of immigration from the former Soviet Union. Such waves of immigration often present considerable short-run economic difficulties, leading to some mix of upward pressure on unemployment and downward pressure on real wages. Nonetheless, over the longer run it is arguable that immigration not only brings considerable benefits, it may well tend to raise real wages. The problem is one of getting through the transition. The purpose of this paper is to offer a simple model that is suggestive of the mix of difficulties and opportunity presented by large-scale immigration. It shows why immigration may well have a negative effect on real wages in the short run but a positive effect in the long run. It also suggests the possibility that the outcome of waves of immigration is not predetermined: the question of whether the immigrants are successfully absorbed may depend crucially on both policy and expectations.