The Economics of Immigration and Roxham Road, Part 1: Theoretical Underpinnings
Immigration can benefit everyone in traditional immigrant countries like Canada, the U.S. and Australia.
In recent years, there has been a debate in Canada about allowing asylum seekers to cross the U.S. border into Canada at unofficial crossings such as Roxham Road in Quebec. The debate goes back to the Safe Third Country Agreement, in effect since December 2004, under which the governments of Canada and the U.S. each declare the other country safe for refugees, so they do not accept refugee claimants crossing the borders between the two countries.
However, this rule only applies at official border crossings, so asylum seekers have used unofficial border crossings such as Roxham Road to avoid being turned away. Recently, however, Prime Minister Justin Trudeau and President Joe Biden came to an agreement to apply the rules at all border crossings as of March 25, 2023, with certain exceptions. But as reported for CBC News by Verity Stevenson and Kwabena Oduro:
Immigration experts and advocates have condemned the new rules, saying it will push people to go underground, take dangerous risks and put pressure on front-line responders to surveil and rescue migrants attempting to cross along Canada's nearly 9,000-km long border. Two men have died in recent months attempting to cross the Canadian border into the U.S.
Therefore, I will be focusing my attention over the coming weeks on issues around immigration generally, and the Roxham Road controversy specifically. But first, it is important that I explain the basic economic theory behind immigration to show why economists are generally in favour of it, and why it can benefit everyone in countries like Canada that accept new immigrants.
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The Basic Economic Theory of Immigration
The basic theory assumes (for simplicity) a two-country world where the demand for labour is identical across countries, so they only differ in how much labour workers supply. Furthermore, we also assume no trade in goods or services — again to keep things simple while also leading to reliable predictions we can use.
This is also a long-run model, which is an important fact to remember as it means all transition costs of immigration have been incurred. So it does not imply we should allow completely open borders — we still need to worry about helping immigrants assimilate into Canadian society as seemlessly as possible in the short run.
Furtherrmore, we do recognize it is not realistic to assume people can move freely around the world, even if all governments have completely open borders, for such reasons as language barriers, cultural differences, and family ties in their countries of origin. However, this model is still valuable as a starting point for discussing immigration, as it helps us to understand how it will affect each country generally — for example, the direction in which real wages will change and which countries can expect either immigration or emigration.
On that note, there are two primary factors affecting the direction in which labour moves around the world:
“Push” factors: factors that push people from one country to another, such as poverty and unemployment. In other words, people will emigrate from their home countries because they expect better lives in their destinations. These emigrants might also be refugees who want to escape religious persecution in their home countries, for example, or who want to escape violent dictatorships.
“Pull” factors: factors that pull people into their destination country. Basically, these are the same as the push factors, only in the opposite direction: traditional immigrant countries like Canada, the U.S., and Australia admit many of the world’s immigrants because we are seen as higher-income countries with better social welfare systems, more employment opportunities, and more political and religious freedoms.
So given the assumptions of the long-run model described above, we expect developed countries like Canada to have fewer labourers than countries like China, India, and Mexico which have much higher populations. This lower supply of labour (i.e., more labour scarcity) means Canada has relatively high real wages, which “pulls” new immigrants into Canada.
As more immigrants come to Canada in search of better lives, our total supply of labour will rise, which pushes down our real wages. These potentially lower real wages for pre-existing Canadians is indeed an argument opponents of immigration often use — but notice I say potentially, and I will return to that clarification later in this post.
As for the Canadian employers of these labourers, we expect them to be better off from immigration because they now can pay lower real wages for more labour. To some people, that is also an argument against immigration, but again, I will return to that point later in this post because it is not as simple as it seems.
Overall, Canada’s economy as a whole benefits from the immigration because the gains to the employers outweigh the losses to Canadian labour. This is true because the additional labour produces more goods and services in Canada than would exist without immigration, which benefits everyone who buys these goods and services.
As for the country where the immigrants originated, the above results are flipped: labour benefits because it is more scarce, so the remaining labourers can command higher real wages; while employers are worse off because they have to pay higher real wages for less labour. Overall, output falls because there is less labour to produce goods and services.
As for the world as a whole, the gains in output in one country outweigh the losses in output in the other country because labour is now used where it is most productive. For this reason, if we had to choose between free trade in goods and services vs. immigration, we would prefer immigration.
Making the Basic Model More Realistic
Recall what I wrote earlier: the simple model is a bit too simple. Specifically, it is not necessarily true pre-existing Canadian labourers will be worse off from immigration, because the model has the unintended implication that new immigrants do not eat! Of course, they do eat so the increased demand for food is likely to lead to an increased demand for labour in Canada to produce this extra food; more labour demand means higher real wages for Canadians.
Similarly, new immigrants demand housing and other essentials, which further puts upward pressure on labour demand and real wages. Not only that, but immigrants are often entrepreneurial so they will not settle for working for someone else; they will start their own businesses, which means they will hire new employees of their own, and this job creation will also raise labour demand and real wages.
So in the end, it is possible that immigration to Canada will lead to higher wages than would have existed without immigration.
And these are just the economic justifications for allowing immigration, when there are also the humanitarian reasons to allow immigrants who want better lives, and might even be seeking refugee status.
Summary Remarks
So this is the basic theory behind immigration with some extentions to make it more realistic. Next week, I will dive into the empirical evidence on the subject for both source countries and destinations such as Canada, the U.S. and Australia. I will also focus quite a bit on the debate over immigration via Roxham Road in Quebec.
Thanks again for reading this post, and I look forward to seeing you again next week.