International Capital Mobility and the Impact of International Migration: Lessons from Historical Experience

International Capital Mobility and the Impact of International
Migration: Lessons from Historical Experience1


By
Timothy J Hatton
(University of Essex and Australian National University)

January 2006


Abstract

This paper was prepared for the conference on Labour and Capital Flows Following
Enlargementܢ to be held in Warsaw on 30-31 January 2006, and supported by the
International Monetary Fund, the Joint Vienna Institute and the National Bank of Poland.
This paper provides additional background and detail to support the conference
presentation. The paper outlines some historical evidence on the economic effects of
immigration and its links to policy. I first examine the relationship between migration and
capital flows in the age of mass transatlantic migration before 1914. I then assess the
effects of immigration on wages and employment with and without international capital
mobility in this and later historical periods. The paper then explores the links between
these economic effects and the evolut ion of immigration policy. It concludes with some
comparisons of the effect of immigration in the past and in the present.



Timothy J Hatton
Department of Economics
University of Essex
Wivenhoe Park
Colchester CO4 3SQ, UK
Phone: ++44 1206 873050
Fax:: ++44 1206 872724
Email: hatton@essex.ac.uk
Webpages:
http://ecocomm.anu.edu.au/people/info.asp?Surname=Hatton&Firstname=Tim


1 The paper draws heavily on my collaboration with Jeff Williamson, and particularly on material that
appeared in our two books (Hatton and Williamson, 1998 and 2005a).

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1. Introduction
Assessing the economic effects of immigration is an important issue. One reason
is that those effects are likely to feed into policy and hence it is important to know who is
affected, and by how much. In democratic countries, where holders of labour have most
of the votes, the focus of much research has been to identify the effects of immigration on
wage and employment outcomes for non-immigrants. While this has been an important
part of the research agenda on current and recent immigration, it has also occupied
economic historians interested in the age of mass migration before 1914. Indeed, this
period of large transatlantic migration, free of immigration policy barriers, may offer
insights for those interested in relaxing policy constraints in the present.
A central focus here is the effect of international capital flows. As is well known,
the late nineteenth century was not only a time of free movement of labour but also a
time of free capital movements. So it is natural to ask whether international capital flows
magnified or attenuated the wage and employment outcomes of international migration.
The rest of the paper is organised as follows. I first explore the correlations
between the international movements of labour and capital in what might be called the
Greater Atlantic Economy of the late nineteenth century. I then examine some
counterfactuals to quantify the effects of migration with and without international capital
mobility. This is followed by an overview of the effects of immigration on the labour
market, both in the nineteenth century and in some more recent contexts. The historical
evolution of immigration policy is then linked to the labour market outcomes of
immigration and to the presence or absence of international capital mobility. The paper
concludes with some comments about the similarities and differences in the effects of
immigration between the late nineteenth century and the present, and their possible
implications for immigration policy.

2. Did Capital and Labour Flow in the Same Direction or in Opposite Directions?
In the past, did capital chase labour internationally or did international capital
flows move in the opposite direction to international migrants? As we shall see, this has
important implications for the effects of migration on sending and receiving economies.
The simplest two-factor Heckscher-Ohlin model predicts that the two factors, capital and

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labour, should move in opposite directions: capital scarce countries attract capital and
labour scarce countries attract labour. The real world is more complicated of course, not
least because there may be more factors, specific factors, and differences in technology.
If we are interested in the wider consequences of mass migration then it is important to
know whether international capital flows mitigate or worsen the effects of migration on
key variables such as real wages.

So, did labour and capital flow in the same direction or in opposite directions in
the age of mass migration before the First World War? Table 1 compares decade average
rates of intercontinental emigration or immigration with the net capital flow from or to
the same country. The migration flows (per thousand of the source or receiving country
population) are measured gross and they ignore flows within continents. The capital flow
data is constructed from balance of payments statistics. As the Table shows, migration
inflows were typically accompanied by capital inflows in the economies of the New
World. In Europe, the principal sources of foreign investment, the UK and Germany also
had major outward flows of migrants, but elsewhere the picture is more mixed. In
countries like Sweden and Finland persistent outward flows of migrants were
accompanied by persistent inward flows of foreign capital.

It is more appropriate to measure migration net of return migration and to take
into account the substantial flows of migrants within Europe, but unfortunately the data is
more limited. However it is possible to make such adjustments for a more limited sample
for the 1890s and 1900s. The relationship between total net migration and net capital
flows is depicted in Figure 1. Again, apart from the New World countries and Britain and
Germany in the Old World, the pattern is somewhat mixed. Thus, on balance, the
evidence does not support the view that capital and labour flowed in opposite directions
across international borders. That might seem to imply that capital flows eased the effects
on real wages and other variables that would otherwise be induced by international
migration. However, we need to ask a counterfactual question: would immigration
countries have received less capital, or exported more capital, if they had also received
fewer immigrants?

3. How Much Difference Did Capital Mobility Make?

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What were the effects of large -scale immigration flows in the age of mass
migration before the First World War? It is important to establish these magnitudes,
especially the effects on the real wages of non-immigrant workers, because they relate
directly to policy. A question less often asked is what were the effects on the incomes and
wages of those who were left behind in the sending countries? Did mass migrations
reduce the real wage in receiving countries and increase the real wage in sending
countries and if so by how much? And did the process of international migration lead to
convergence across countries in wages and living standards? Such estimates are often
based on partial equilibrium analysis, but this seems inappropriate for such large
international flows that are likely to have had substantial economy-wide effects.

Over the last ten years a number of studies have examined the effects of mass
migration using computable general equilibrium models. The effects of migration on real
wages for the United States and Great Britain from one such study appear in Table 2 (see
Hatton and Williamson, 1998, p.Ch. 9, 10). The underlying structures are multi-sector
competitive general equilibrium open economy models that include three factors (labour
capital and land). A key characteristic of the models is that land is an input only to
agriculture. Agriculture and manufacturing produce tradable goods, with manufactures
imperfectly substitutable in international trade, while services are non-traded. These are
static models calibrated for a particular date, and the counterfactual exercise is to increase
(or reduce) the labour force by the amount contributed by international migration for a
period up to that date.

Our calculations indicate that, if there had been no immigration to the US from
1870 to 1910 (from all sources, not just Britain), the 1910 labour force would have been
about 27 percent smaller. Similarly, in the absence of emigration from the Britain
between 1870 and 1910 (to all destinations, not just the US), the British labour force
would have been 16 percent larger than it actually was in 1910. 2 The counterfactual
results are that the US real wage would have been 34.0 percent higher than it actually was

2 Here, Great Britain excludes Ireland, which was part of the UK at that time. The counterfactual labour
force calculations take account of the differences in participation rates between immigrants (or emigrants)
and the respective native populations, which result from the age and sex selectivity of migration. They also
take into account contribution to the labour force of the children of migrants. If the children of the migrants
are ignored, the US labour force would have been about 18 percent smaller in the absence of immigration
and the British labour force would have been about 10 percent larger in the absence of emigration.

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in 1910 and the British real wage would have been 12.2 percent lower (Table 2). These
results depend largely on the fact that land and labour are held at their actual values in
1910 and there are strong diminishing returns to labour. As a result, the rate of return on
capital falls by 23.8 percent in the US and rises by 12.7 percent in Britain.

But what if we allow capital to be perfectly mobile internationally? That amounts
to assuming that capital chased labour across the Atlantic, responding to the immigration-
induced incipient increase in returns in the US and the emigration-induced incipient fall
in returns in Great Britain. If, instead, we hold the rate of return on capital constant then
capital flows mitigate the effects of diminishing returns on real wages. As Table 2 shows,
this dramatically reduces the effect of migration on real wages. In the absence of
immigration the US real wage would be 9.2 percent higher (in an economy that would
now have much less capital), and in the absence of emigration the British real wage
would be only 6.6 percent lower than it actually was. Although these effects are much
smaller, they are still substantial. This is mainly because land, which was a very
important factor of production, remains fixed. 3

Similar results have been obtained for other countries, notably Ireland. Post-
famine Ireland was a poor and largely agricultural country, which experienced massive
emigration. Even after the immediate effects of the famine of the 1840s the population
continued to fall—from 6.5 million in 1951 to 4.4 million in 1911. At the same time the
share of the Irish labour force in agriculture declined, while real wages (both rural and
urban) grew more rapidly than almost anywhere else in Europe. On a conservative
estimate, the Irish labour force would have been 49 percent higher in 1911 had it not been
for the emigration that took place from 1851. 4 In the absence of emigration, urban real
wages would have been 19 percent lower and agricultural wages 16 percent lower (Boyer
et al., 1994, p. 235).5 But if capital were allowed to flow into Ireland in response to the
now larger labour force, the effects on the real wage would be much smaller—a 6 percent

3 For the effects on land rents and the wage rental ratio see O’Rourke et al. (1994). For a wider analysis of
wage rental ratios in the Atlantic economy, see O’Rourke and Williamson, (1999).
4 This counterfactual estimate of the Irish population in 1911 is described as conservative because it allows
for some of the emigrants to be ‘replaced’ through a higher birth rate (hence less emigration would imply
fewer births). If this effect is not allowed to operate then the counterfactual population would be 123
percent higher than the actual level in 1911.
5 It is also worth noting that in this counterfactual scenario GNP increases by 42 percent while GDP per
capita falls by 5 percent; land rents still rise by as much as 39 percent.

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fall in both rural and urban real wages. Again the effects of migration on wages are
greatly attenuated in the presence of capital mobility.

In 1870 the average real wage in five New World countries was 108 percent
higher than the average wage in 12 Old World countries, but by 1910 that gap had fallen
to ‘only’ 85 percent.6 There was also some convergence within Europe so that, overall, a
17-country index of dispersion fell by 28 percent between 1870 and 1910. The effects of
international migration on real wage dispersion across the 17 Atlantic Economy countries
can be seen in Table 3. These counterfactuals are obtained from factor demands derived
from a three-factor production function (see Taylor and Williamson, 1997). As Table 3
shows, in the absence of international migration between 1870 and 1910, there would
have been divergence rather than convergence: dispersion would have increased by 7
percent rather than decreasing by 28 percent. And most of that fall was due to the gap
between the New World and the Old World which would have risen from 108 percent to
128 percent rather than falling from 108 percent to 85 percent.

As in the general equilibrium calculations, these effects are sharply attenuated
when capital is allowed to be mobile. In the absence of capital mobility 119 percent of
the real wage convergence is ‘explained’ by migration (i.e. migration more than explains
the convergence); in the presence of capital mobility only 41 percent is explained by
migration. Similar results are observed for the more modest convergence that occurred in
GDP per capita and GDP per worker. Migration explains 50 percent of the convergence
in GDP per capita with capital immobile but only 19 percent with capital mobile. Thus
(not surprisingly) international capital mobility makes an enormous difference to the
effect of migration on real wages and GDP per capita.

4. Why the Effects of Immigration are so difficult to Observe
The results outlined above all indicate that immigration reduces real wages in the
host country and emigration raises real wages in the origin country. But these estimates
depend on the assumptions built into the models. They are not an independent test of the
effects of migration on wage rates. In the contemporary literature there has been a long

6 The countries are: New World: Argentina, Australia, Brazil, Canada, United States; Old World: Belgium,
Denmark, France, Germany, Great Britain, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden.

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debate about the effects of immigration on the wages and /or employment rates of non-
immigrant workers. Most of the econometric results suggest that the effects of
immigration on wages are negligible—in sharp contrast to the effects described above.
These studies have been based on the so-called spatial correlations approach, which seeks
to find the effects of immigration by correlating wage (or employment rate) changes with
immigrant inflows across local areas within the receiving country. The debate about the
validity of this method is well rehearsed and will only be treated briefly here.7

One important critique is that, if there is a national labour market in which non-
immigrant workers are mobile across localities, the effect of immigration will not be
restricted to the cities or regions where immigrants locate. If in response to immigrant
inflows, native workers flow out to other regions (or fewer flow in than otherwise would)
then the wage and employment effects will be spread across the entire economy and will
not be identified by measuring the relationship between immigration and economic
outcomes observed across localities as in the spatial correlations approach. This debate
was originally stimulated by the apparent absence of wage and employment effects in
Miami following the Mariel boatlift that brought 125,000 Cubans to the city in 1980,
adding about 7 percent to its labour force (Card 1990).
Since then there has been a long empirical debate about the possible
compensating effects of internal migration. The current state of play is best summarised
by two papers, both on the US, that take opposing views. In his analysis of census data,
Card (2001) finds little evidence that immigration into major cities caused onward
migration. Immigration caused changes in the skill mix but these in turn had little effect
on relative wages. By contrast Borjas (2003) estimates the outcomes of immigration for
the native born by skill/experience groups at the national level (hence avoiding spatial
mobility effects). He finds that immigration reduces the earnings for the same native-born
skill/experience group, and hence that the labour demand curve does indeed slope down.

Some additional evidence on the relationship between immigration and onward
mobility is offered for panel data on British regions in Table 4. The result indicates that a
net immigration 100 foreign citizens into a region reduced net immigration from regions

7 For summaries of the relevant literature, see Borjas (1994, 1999) and Hatton and Williamson (2005a),
Ch. 14.

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elsewhere in Britain by 43. Two lessons may be drawn from this. One is that it is useful
to control the for demand side variables that determine internal migration. But more
importantly, the Table 4 result is just for the six southern regions: those where
immigrants make a significant mark on the labour market. When all regions are included
the displacement effect becomes much weaker. This is not surprising. For the northern
regions immigration flows are very small in comparison with the other shocks to labour
supply and labour demand. The greater the size of the immigration shock the clearer is its
effect on the labour market.

Did the same internal mobility response apply in the past? Our evidence for the
United States suggests that it did. Table 5 gives an estimate of the effects, by decade, of
immigration to the Eastern and Midwestern states of the United States. This estimate has
a striking correspondence to the contemporary estimate for the UK. It suggests that every
100 immigrants arriving in an Eastern state displaced 40 native-born into to other states.
An important feature of that era was the great westward migration within the US, which
became a mass movement in the late nineteenth century. While most historians see it as a
pull from the West, we see it partly as an immigration-induced push from the East. As in
the more recent context, it is important to focus on regions and localities where there are
large immigration shocks; otherwise the displacement effects will be lost in a myriad of
other influences.

If the displacement effect had been one-for-one we would observe no relative
labour market effects of immigration in gateway cities and states—even though there
may be substantial effects at the national level. But these two studies suggest a
displacement coefficient of around 0.4—an effect that is far from fully offsetting. We
should still observe some imprint of immigration on local wage or employment
outcomes. Hence other mechanisms are needed to explain the modest (or zero) effects
found in so many studies. Those effects could come from trade in goods or they could
come through internal capital mobility. Unfortunately there is little evidence on the latter.
However, it seems reasonable to suppose that if capital is fairly mobile between
countries, then it would be at least as mobile within countries. If capital mobility
attenuates wage effects at the national level then it should be an even more powerful
source of adjustment at the local level.

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5. The Labour Market Effects of Effects of Big Immigration Shocks
The preceding discussion suggests that we should be looking for big migration
shocks in order to clearly discern the effects of immigration (or possibly emigration) on
real wages and other variables of interest. And in order to avoid confounding the effects
of migration with the causes of migration, they need to be exogenous shocks or ‘natural
experiments’. Unfortunately, the age of mass migration before 1914 offers few useful
cases to examine. Although migrations were very large they were also very persistent and
they were driven largely by economic incentives.8

A number of more recent natural experiments have been examined, and these
have sometimes been interpreted as supporting the modest-immigration-effects-on-wages
school of thought. Yet closer inspection suggests that these widely cited cases illustrate
quite large wage effects, especially if we focus on the economy-wide effects rather than
on the results of using the spatial correlations approach. The first case is the inflow into
metropolitan France from Algeria following the latter’s independence. These immigrants
were largely French-born expatriates fleeing the regime change and about 900,000 of
them flooded into France during the year 1962, adding 1.9 percent to the population and
1.6 percent to the labour force. Hunt (1992) found that the overall effect was to reduce
the real wage by 1.3 percent and to increase the unemployment rate by 0.3 percentage
points. Thus, the Algerian immigration shock was sufficiently large to have a clear effect
on the French labour market.

Larger still was the influx of Portuguese retornados when independence struggles
in Angola and Mozambique came to a climax in 1974-6. This caused a spike in net
immigration to Portugal that peaked at 40 per thousand in 1975. 9 The 600,000 Portuguese
retornados added 7 percent to the Portuguese population over these few years. Carrington
and di Lima (1996, p. 344) found that the influx of retornados reduced the Portuguese
real wage by 5-9 percent for every 10 percent addition to the labour force. The aggregate

8 The Great Irish famine might seem like a good natural experiment However, it was not exogenous to the
Irish economy and hence the effects of emigration on Ireland would be hard to distinguish from other
effects of the famine. While it might be possible to look at the effect of famine migration on the US
economy, data constraints would make this a difficult task.
9 It is also worth noting the persistent net out-migration during the guestworker era and the reversal of that
trend after the arbeitstopp that ended the era in 1973/4.

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effect can be seen in Figure 2 where Portuguese real wages and employment are plotted
as ratios to her two closest neighbours, Spain and France. This comparison is complicated
by the recession of the mid-1970s, which was particularly severe in Spain, and so the
comparison with France may be more informative. The retornados were absorbed slowly
into employment; in 1981 their unemployment rate was 14 percent compared with 6
percent for other workers. But that difference diminished and, as Figure 2 shows, relative
employment rose and the relative real wage fell as the immigrants were gradually
absorbed.

Perhaps an even clearer example is the case of Russian Jews moving to Israel
when the Soviet Union lifted its restriction on emigration late in 1989. In the decade
before 1990 Israel’s immigration rate averaged 3.7 per thousand of the Israeli population.
In 1990-1 it surged to 35 per thousand and then continued at 10-15 per thousand for the
rest of the decade. This immigration shock added 610,000, equivalent to 7 percent of the
population, in the first two years, and by the mid-1990s the influx amounted to a million
or about 12 percent of the population. The effects on the labour market were equally
dramatic: the working age population increased by 8 percent up to 1992 and by 16
percent up to 1997. The aggregate data suggests that this influx left a clear mark on the
labour market.10 Figure 3 plots percentage deviations from logarithmic trends, calculated
for the pre-shock period 1980-1989. The labour force was more than 15 percent above
trend by the mid-1990s. Employment rose more slowly at first, as the immigrants were
absorbed gradually into employment, but by the mid 1990s it was more than 20 percent
above trend. 11 Relative to its trend, the real wage plunged in the early 1990s and then
hovered at about 10 percent below trend for the rest of the decade.

These cases provide clear and decisive evidence that immigration shocks have
negative effects on real wages. But what about international capital flows? Did these
serve to mitigate the effects on wages that we have observed? For Israel the sudden
increase in labour supply reduced the capital to labour ratio and increased the return on
capital. As a result, gross investment in machinery and equipment increased from 12

10 For studies of the economic outcomes of this immigration shock see Friedberg (2001) Cohen and Hsieh
(2000) and Eckstein and Cohen (2003)
11 In 1991 the unemployment rate was 37.3percent among immigrants, compared with 9 percent among
non-immigrants. The difference evaporated over the 1990s and by 2000 it was just two percentage points —
10.4 percent for immigrants and 8.4 percent for non-immigrants.

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