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March 07, 2016

The immigration jump: Are more immigrants good for the economy?

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Improving the integration of immigrants into the labor market is beneficial to the immigrants themselves, but also to the immigrant-receiving nation as a whole, due to the generally positive impact that immigrants have on nations’ economies.

In immigrant-receiving countries—such as Australia, the US, and Canada—it is not surprising that there is considerable interest in how immigrants fare in the labor market, and their impact on the economy in general. However, despite the interest and importance of the topic, empirical evidence is scarce.

I recently published a study on the macroeconomic impacts of Canadian immigration, almost 20 years since the last comprehensive analysis was undertaken. The results of my study show that adding 100,000 more immigrants per year would boost Canada’s GDP by 2.3% over 10 years while increasing the population cumulatively by 2.6%, without having any adverse effect on employment figures.

These results are very positive: The boost in population creates an increased demand for goods and services, especially housing, which would spur investment in housing projects. There would also be a nice $14 billion addition to government coffers, helping with government balance sheets, as taxes paid by immigrants exceed their impact on government spending.

The results of this study are in-keeping with similar projections conducted for other countries, so it is evident that immigrant workers have long-term positive effects on the countries they migrate to. Increased immigration should therefore be encouraged to boost tax revenues, demand for goods, and GDP. However, immigrants appear to be finding it increasingly difficult to assimilate—as was evident from my study into the Canadian labor market—and more and more are falling into poverty. There is also a knock-on negative effect of increased immigration on existing immigrants within Canada’s labor market, as the new immigrant workers are seen as substitutes for them and may replace some of them in the workplace.

It is therefore necessary for policymakers at all levels of government to have information about the costs and benefits of large-scale immigration to better inform their decisions in this area. Improving the integration of immigrants needs to be a key policy focus for governments, so that both the immigrant workers and host economies can start reaping the rewards of an enlarged population and labor force. There are a number of policies governments can introduce to assist in such integration of immigrants.

Encouraging migrants to become proficient in the host country language is a key policy tool for assisting their integration and assimilation. My fellow IZA World of Labor author Ingo Isphording writes that, “Immigrants who fail to achieve adequate proficiency in the host country language generally fail to achieve economic and social integration.” Language skills are a key driver of immigrant integration as this ability improves access to higher-paying jobs, and facilitates interactions with the native-born population.

However, large number of immigrants only achieve basic language skills, which can prevent them from social and economic success. One way to assist in the acquisition of a host language is to subsidize language classes, another is to incentivize migrants by offering citizenship for those who contribute most to the country’s economy and have the best knowledge of the country’s language.

This citizenship factor is another key driver of immigrant integration. As another of my fellow IZA WoL authors writes, “Liberalizing access to citizenship has labor market benefits for immigrants and can improve their assimilation.” Allowing immigrants to work towards achieving citizenship in the host country improves their integration, and increases their labor market success—access to better-paid jobs and employment stability greatly improves. As Christina Gathmann’s work shows, “A better assimilation of immigrants in the labor market in turn also benefits destination countries through fiscal gains and better social cohesion.”

So, to conclude, more immigrants are good for the economy. Larger numbers of tax payers boost demand for goods, and a larger population boosts demand for housing, perpetuating the increase to national employment. However, it is crucial that governments encourage the social and economic integration of immigrants so that both the nation and the immigrants would benefit. Language skills, citizenship, and even intermarriage are all key drivers of this assimilation, which can assist in improving immigrants’ labor market success in their new country.

Related articles:
What drives the language proficiency of immigrants? by Ingo E. Isphording
Naturalization and citizenship: Who benefits? by Christina Gathmann

Read Tony Fang's article Profit sharing: Consequences for workers.
Read more articles about migration.

Please note:
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.