- A recent study examined the effects that immigrants to the U.S. have on the economy, specifically in terms of their effects on labor demand and supply.
- The results show that immigrants are 80% more likely to start firms than the native born.
- Immigrant-founded firms may also pay slightly more.
For a nation founded by immigrants, the U.S. has always harbored a considerable amount of anxiety toward them. Many anti-immigration movements, some of which endure to this day, suggest that immigrants compete with native-born citizens for work, drive down wages, and have a generally negative effect on the economy.
But are these claims true? A new study soon to be published in American Economic Review: Insights suggests that immigrants fill a number of important economic roles and are more likely to start businesses, making them “job makers” more often than “job takers.”
Immigrants get the job done
Like many other questions in economics, whether immigrants are “taking jobs” from the native born is a question of supply and demand. As more people move into an area, the labor supply rises. This means that each individual worker has more people to compete with when applying for a given job. In principle, this could drive down wages as people lower their salary expectations to improve the likelihood that they get hired.
Of course, people that move into an area can also increase the labor demand — colloquially referred to as “creating jobs.” If a person moves into an area and then starts a business that requires employees to operate, they increase the demand for labor in that area without expanding the supply. In principle, this would raise wages because workers have more options to choose from when looking for work.
Additionally, immigration into a community typically raises demand for goods, which in turn increases the demand for labor; if 100 more individuals suddenly need to visit the same convenience store, we might expect another clerk to be hired.
Despite common narratives claiming that immigrants exclusively increase competition among workers, some studies suggest that areas that see more immigrants enjoy persistent increases in per-capita income. This suggests that a more complex interplay between supply and demand exists, and that it must be understood if we are to know the effects of immigration on the economy.
To help make sense of the interplay between supply and demand at work, the authors behind the recent study created a simple model that estimates the economic effects of immigrantion into the economy using the dynamics described above. By comparing the outcomes the model creates when certain assumptions change, they could get a sense of what might be happening in the real world.
The model attempts to determine how a tendency toward entrepreneurship in a population that consists of both immigrants and the native born will affect an economy. Each person in the model is able to decide to either get a job or start a business as they will, though how much they want to start a business can be altered by changing the expected earnings — people will only start a firm if it pays better than a job — or by making immigrants more or less likely to start a firm in any situation. The model then allows for estimates of what the effects of tinkering with different values will be.
If immigrants are predicted to be exactly as entrepreneurial as the native born, then they have no net effect on the labor supply of where they move to. They increase the size of the economy, but they also create jobs at the same rate as they apply for them, having no effect on wages or unemployment.If they are less entrepreneurial than the native born, then they would increase the labor supply. This would lower wages.
The opposite scenario — that immigrants are more entrepreneurial than the native born — would cause the labor demand to rise as immigrants move to an area, boosting wages, GDP per capita, and profits per capita. In general, the results suggest that it is this scenario that’s playing out across the U.S.
To help confirm the findings of their model, the authors also turned to three large datasets on firms created in the U.S. The first set was created from the U.S. Census Bureau’s Longitudinal Business Database, population-wide W-2 tax records, and the U.S. Census demographic files. This allowed the researchers to consider every non-farm, private-sector firm in the U.S. created between 2005 and 2010 that had at least one employee and determine whether their founders were immigrants or native born.
The second set was from the 2012 Survey of Business Owners, which provides information on the founders of 200,000 firms in the United States. The final set was from the 2017 Fortune 500, which included the names of the founders, where they were from, and what year the company was created.
A review of the data showed that, no matter how you define immigrant or non-immigrant founded firms, immigrants tend to start more businesses of every size on a per-person basis. The first two data sets suggested that an immigrant is 80% more likely to become an entrepreneur than a native-born individual in the same workforce. While the data does shift a bit with changes in the definition of “immigrant founded,” the general finding remains true.
Additionally, as immigrants to the U.S. are more likely to hold degrees in STEM fields, it may come as no surprise that businesses that immigrants create are 35% more likely to have a patent than those founded exclusively by the native born.There was also some evidence that immigrant-founded firms pay more, but this difference was minor after controlling for a number of variables.
What explains the findings?
The authors offered multiple potential explanations for their main findings. In the U.S., many visa programs select for high-achieving individuals and often favor those who have skills deemed desirable. It is also possible that migration is something that only those with an entrepreneurial bent would undertake in any case.
After all, the decision to move thousands of miles across the planet to a strange land on the chance that it might improve your standard of living seems to invoke the same spirit associated with quitting your job and going into business for yourself. This lines up with existing studies showing that migrants tend to be less risk-averse.
In general, immigrants tend to be more entrepreneurial than those who remain in the land of their birth. This finding has implications not only for economics, but for policy, popular political discussion, and our understanding of what makes a person migrate in the first place, shedding new light on how they build lives and work in their new homeland.