Is Immigration Good or Bad for the Economy? Analysis of Attitudinal Responses

Discussion Paper Series




CDP No 06/04








Is Immigration Good or Bad for the
Economy?
Analysis of Attitudinal Responses
Christian Dustmann and Ian Preston














Centre for Research and Analysis of Migration
Department of Economics, University College London
Drayton House, 30 Gordon Street, London WC1H 0AX

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CReAM Discussion Paper No 06/04


Is Immigration Good or Bad for the Economy?
Analysis of Attitudinal Responses



Christian Dustmann and Ian Preston
Department of Economics and Centre for Research and Analysis of Migration,
University College London



Non-Technical Abstract
In this paper we study attitudinal responses of host country residents towards
further immigration that are triggered by economic considerations. We develop an
economic model motivating the empirical work that takes a broader view on these
issues than previous papers. We provide empirical analysis that is based on data
more specific and better suited to pick up the many channels of economic interest
through which benefits and costs of immigration may be felt. Results support
previous literature in establishing strong associations between individual
characteristics and a wide range of responses to questions relating to perceived
impact of immigrants on economic outcomes. Our analysis points to the importance
of a wider view on channels of economic interest and the way these affect
assessment of immigration.

Centre for Research and Analysis of Migration
Department of Economics, Drayton House, 30 Gordon Street, London WC1H 0AX
Telephone Number: +44 (0)20 7679 5888
Facsimile Number: +44 (0)20 7916 2775

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Is Immigration Good or Bad for the Economy?
Analysis of Attitudinal Responses∗
Christian Dustmann†and Ian Preston‡
December 2004
Abstract
In this paper we study attitudinal responses of host country residents towards further immi-
gration that are triggered by economic considerations. We develop an economic model motivating
the empirical work that takes a broader view on these issues than previous papers. We provide
empirical analysis that is based on data more specific and better suited to pick up the many chan-
nels of economic interest through which benefits and costs of immigration may be felt. Results
support previous literature in establishing strong associations between individual characteristics
and a wide range of responses to questions relating to perceived impact of immigrants on eco-
nomic outcomes. Our analysis points to the importance of a wider view on channels of economic
interest and the way these affect assessment of immigration.
JEL: J2, J3, F2
Keywords: Migration, Effects of Immigration, Attitudes
∗We are grateful to Maria Demousis for research assistance, to David Card for discussion and to the Nuffield
Foundation for financial support. Parts of this paper were written while Dustmann visited the Research School
of Social Sciences at the Australian National University. He is grateful for the hospitality.
†Department of Economics and Centre for Research and Analysis of Migration (CReAM), University Col-
lege London
‡Department of Economics and Centre for Research and Analysis of Migration (CReAM), University Col-
lege London and Institute for Fiscal Studies
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1
Introduction
A large empirical literature in economics is concerned with identifying the effects of immi-
gration on the economy. A particularly strong focus has been on the effect on wages and
employment (see Borjas 1994, 1999b, and Friedberg and Hunt 1995 for overviews). Many
of the papers in this literature fail to find large effects, although there is controversy about
this (see recent papers by Borjas 2004 and Card 2004). In any case, effects of labour market
competition are frequently perceived to be one of the main driving forces determining public
attitudes towards immigration. Those for whose skills immigrant labour is likely to be a
substitute may oppose immigration whereas those for whose skills it is complementary may
view immigration more sympatheticly.
Of course, immigration also has other economic aspects. Individuals may fear that im-
migrants burden public finances - either through using public services intensively or by con-
tributing to costly social problems such as unemployment - or they may by contrast welcome
the contributions made by immigrants to the public exchequer1. Furthermore, immigrant
inflows are frequently suggested as a solution to specific sorts of skill shortages. In political
debate this is often used as an argument in support of more liberal migration policies (see
for instance the debate in European member states on allowing for free movement of labour
after EU enlargement as of May 1st 2004). Individuals taking a wider view may in addition
appreciate the efficiency gains to be expected from free international movement of labour.
Economic enquiry can contribute to arguments on all of these issues by attempting to extend
knowledge of the nature and extent of any such economic gains and losses.
Recently, a literature has evolved that addresses the formation of opinion and attitudes
towards immigrants and immigration in a more direct way than papers that attempt to
quantify the economic impact of immigration itself. These papers are based on empirical
analysis of attitudinal responses towards immigration and immigrants (see, for example,
1 Research for the British Home Office (Gott and Johnston 2002) recently suggested, for example, that
immigrants to the UK make a positive net contribution to British public finances.
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recent papers by Scheve and Slaughter 2001, Gang, Rivera-Batiz and Yun 2002, Mayda 2002,
Schmidt and Fertig 2002, O’Rourke and Sinnott 2003, Dustmann and Preston 2004 and
Bauer, Lofstrom and Zimmermann 2001 among others)2.
Typically such papers relate responses about individual attitudes to further immigra-
tion to individual specific characteristics. Interpretation of the coefficient estimates in the
economic part of this literature often relies on well established economic theory, most promi-
nently the Hecksher-Ohlin model (see, for example, Scheve and Slaughter 2001), assigning
particular interpretation to variables such as education and skills. Other researchers em-
phasise the importance of non-economic determinants of attitudes to immigration (see, for
example, Espenshade and Hempstead 1996). Dustmann and Preston (2004) develop a model
which allows for three factors in determining anti-immigrant feelings: labour market consid-
erations, welfare considerations, and racial attitudes. They find all three determinants to be
important in affecting attitudes, but identify a dominant role for the race factor, in particular
for the lower educated.
The plausibility of the conclusions reached in these papers about the nature and role of
economic considerations is not helped by the need to rely on secondary analysis of responses to
questionnaires which are rarely explicit about economic issues. Most of the papers mentioned
above rely on attitudes to further immigration as a measure for individual perception of
harmful or beneficial effects of immigration in the host economy. The association of this
response with skill or education of the respondent is then interpreted within a Heckscher-
Ohlin type framework, where differential responses across skill groups are compatible with
differently perceived labour market competition from new immigrants.
In this paper, we add to this literature in several ways. Firstly, we broaden the economic
argument, by allowing for consideration not only of factors relating to labour market competi-
tion, but also to factors relating to public burden, and efficiency considerations. Secondly, we
2 Related issues come up also in the literature on preferences on trade policies - see for instance papers by
Mayda and Rodrik (2001), Scheve and Slaughter (2001) and O’Rourke and Sinnot (2001).
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discuss the way such consideration may affect welfare of residents of different skill background
in a simple general equilibrium framework. Thirdly, our empirical investigation is based on
more specific survey responses than have been used previously. In particular, we not only
study the association between economic opinion and demographic characteristics, but also,
having conditioned on such effects, seek to structure the interrelation between overall opin-
ions on whether immigration is good or bad for the economy and opinions on more specific
economic effects. In our analysis we allow this overall response to be related to three more
specific concerns: labour market competition, public burden, and efficiency considerations.
We identify these three response sets from specific survey questions that are directly related
to each of these factors.
We draw on new and informative data from the European Social Survey (ESS). This
survey includes attitudinal information for some 22 European and associated countries, and
has a specific module on migration and minority related issues. This module provides in-
formation on the overall attitudinal response of individuals to further immigration, but also
direct responses to a battery of questions concerning the effect on the economy.
Our interpretation of the data follows structure imposed by economic theory. We first
present a simplified theoretical model which describes the manner and the circumstances
under which immigration may benefit or harm different groups in the population. This model
is in its nature similar to standard equilibrium models in the literature, but, besides allowing
analysis of labour market effects of immigration, allows in addition analysis of welfare effects
of immigration through taxation and welfare payments. According to Borjas (1999) these
are the two main concerns people have when forming attitudes about migration. We also
discuss generalisations to capture other possible dimensions of economic concern. It is not so
important in the current context whether this model accurately reflects the workings of the
economy as whether it captures the way individuals might sensibly think about the gains or
losses they will incur as a consequence of immigration.
We then discuss the empirical implications of this model, and the way these may be re-
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flected in the data we have available. Our empirical analysis has a descriptive part where
we relate responses to the overall evaluation of immigration, as well as to demographic in-
formation of respondents. We then proceed to a more structural analysis, where we impose
a factor structure on the responses concerning particular issues, and where seek to distin-
guish between labour market concerns, public burden, and efficiency considerations. Each of
these factors is related to a set of responses regarding particular implications of immigration,
and we determine the way these factors, in turn, relate to the overall evaluation of whether
immigration is good or bad for the economy.
The structure of the paper is as follows. In the next section, we present the background
theoretical model(section 2). We then discuss briefly implications for empirical analysis
(section 3). We describe the data set we use for our analysis in section 4), and provide
descriptive information (section 5). We then explain our estimation method (section 6) for
the factor model and discuss results in section 7. Finally, section 8 concludes.
2
Immigration: wages, taxes and general welfare effects
Our prime interest in this paper it to understand the considerations lying behind individuals’
general opinions on whether immigration is harmful or beneficial for the economy. As we
explain in the introduction, these drivers of opinion may relate to labour market competition,
to the welfare and tax system, as well as to distributional aspects of migration and general
welfare considerations reaching beyond national borders.
Economic theory is well suited to investigate all these aspects in simple equilibrium mod-
els. Even though it would be silly to believe individuals form judgements by working explicitly
through models of this sort, individuals observe outcomes in the economies which they in-
habit and it is not unreasonable to look to the basic mechanisms of such models for guidance
as to the sort of beliefs it would be sensible to imagine people might form on the workings of
the relevant economic processes.
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As a motivation for our empirical analysis below, to impose an economically motivated
structure on these processes, and to help derive well founded empirical implications, we there-
fore commence by presenting a simple equilibrium model which helps to structure the way
individuals might think about the effect of immigration on the labour market and the welfare
system. Although the model allows relatively straightforward derivation of the basic welfare
and labour market effects of immigration, the complexity of extending it to general welfare
considerations forbids formal development in this paper. While we use formal argumentation
to cover wage, employment and tax effects, we use intuitive argumentation to develop ideas
about extensions to other aspects.
A simple equilibrium model
Our model distinguishes between two types of workers (skilled and unskilled) to emphasise
the differences in opinion that may result from the different ways immigration can affect
current residents in various skill categories.
Suppose there are two labour types, skilled (S) and unskilled (U ), earning wages wS and
wU . The numbers of workers of the two types are given by
xi = φiN + ψiM,
i ∈ I ≡ {S, U } ,
where N is the total current population, M is total immigrant population and φi and ψi are
skill group shares in the two groups.
We consider below the marginal effects of immigration at the current position where the
ratio of immigrants to the current population is π = M/N = 1. Changes in skill group shares
follow from
d ln xi/ dπ
βi
i ∈ I
where βi = (ψi/φi) is the relative skill share of immigrants, assumed constant. Capital is
assumed elastically supplied at a return to capital, r, which is fixed on world markets.
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We consider two cases differing in the number of goods produced by the economy. Either
the economy produces one good in quantity y0 or two goods in quantities y0 and y1. We
denote the set of goods by J which therefore equals {0} or {0, 1}. These goods are assumed
traded and the economy small so that their prices p0 and p1 are set on world markets.
This distinction allows us to differentiate between the case where the economy adjusts to
immigration through the output mix, and where the only channel of adjustment is through
factor prices.
Assuming constant returns to scale and excluding the possibility of joint production, we
write the unit cost function for the jth output as cj(wS, wU , r), j ∈ J. Letting cj(w
i
S , wU , r)
denote the derivative ∂cj/∂wi, demand for the ith type of labour is therefore
y
by
j∈J
j cji
Shephard’s lemma.
Wages and outputs are determined by two equilibrium conditions. Firstly, labour market
equilibrium requires equality of demand and supply of labour, i.e.
yjcj(w
i
S , wU , r) − xi = 0
i ∈ I ,
(1)
j∈J
and secondly, firms earn zero profits and therefore
ln cj(wS, wU , r) − ln pj = 0
j ∈ J .
(2)
The Government budget constraint
Both immigrants and those currently resident consume government services. To allow, for
instance, for demographic differences between immigrants and the current population we
permit immigrants to consume different amounts than residents. We assume that each current
resident consumes G and each immigrant Γ of public services. Government spending is
financed by a proportional tax on labour income at a rate t which is determined to secure
government budget balance:
t
xiwi = GN + ΓM
(3)
i∈I
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The welfare of currently resident workers depends on their after tax wages Wi = (1 −
t)wi, i ∈ I so that
d ln Wi
d ln w
t
d ln t
=
i −
i ∈ I.
(4)
dπ
dπ
1 − t dπ
In other words, the effect of migration on after-tax wages works through two channels: by
affecting before-tax wages and the tax rate.
Two output goods
Consider first the case with two types of output. Reasoning only from (2), we have
θ0S d ln wS + θ0U d ln wU = 0
θ1S d ln wS + θ1U d ln wU = 0
where θ0 = ∂ ln c0/∂ ln w
i
i denotes a factor share.
From this it follows immediately that
d ln wU / dπ = d ln wU / dπ = 0. This result, essentially similar to the factor price equal-
isation theorem (Samuelson 1953), is what Leamer and Levinsohn (1995) call factor price
insensitivity. Wages are determined solely by prices through the zero profit condition (2).
Insensitivity extends to nonmarginal changes ∆π provided that immigration is not so large
as to take factor endowments out of the economy’s cone of diversification, in which case the
economy would stop producing one of the two goods.
Rather than impacting on wages, long run effects of immigration are felt in the output
mix. These responses can also be deduced and follow from (1) given unchanged factor prices:
ρ0S d ln y0 + (1 − ρ0S) d ln y1 = βS dπ
ρ0U d ln y0 + (1 − ρ0U ) d ln y1 = βU dπ
where ρj = y
/
y
denotes a sectoral share in a factor market. Therefore
i
j cji
k∈J
kck
i
d ln(y0/y1)
β
=
S − βU
dπ
ρ0 − ρ0
S
U
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