On Immigration

How to model immigration like a marketplace optimization problem

The US administration recently suspended entry of skilled immigrants on the premise that immigration poses a threat to the domestic labor market.

This proclamation was met with dramatic support and criticism, that did nothing to elevate the conversation, given the already polarized environment.

Perhaps, instead of the emotional nativist rhetoric, this should be treated objectively as a marketplace management problem. After all every village-square, town, city, or country is a marketplace, and the State’s role is (or should be) to manage the growth, efficiency, and sustainability of this marketplace, including the happiness of it’s participants.

Here’s a list of factors that I think should go into building the model that should inform policies for a complex system like immigration:

1. Labor Supply: The amount of unmet demand in the labor market in the said geography, that can be fulfilled by skilled labor brought from other geographies.
2. Resource Expenditure: The amount of resources like water, agriculture output, infrastructure, funds for health, education, defense etc. available in a geography to support a population. History provides plenty of evidence of overpopulation leading to societal collapse [Read: Collapse by Jared Diamond], but also how innovation has averted the much feared Malthusian trap [Read: The Rational Optimist by Matt Ridley], and how there may be a cap to this growth [Read: The Limits to Growth by Donnella Meadows]. The values used here cannot be static.
3. Fertility Rate: The rate at which the incumbents (natives) and immigrants reproduce. Data shows societies have a healthy fertility rate when people are better off [Watch or Read: Factfulness by Hans Rosling].
4. Wages: The change in wages with change in labor supply. There is evidence that with increase in supply of labor in a locality, employers can depress worker wages and increase their return on capital [Read: Ages of Discord by Peter Turchin]. However, since each country has multiple labor markets for different skill-sets, it is important to treat them differently and not put all job categories under a blanket term. For example, in the case of the recent H1B ban, early marketplace wage signals do not support the premise behind placing the ban that immigrants are eating up specialist roles from locals.
5. Scaling Effects: The sub-linearity in resource consumption (i.e. a unit increase in population using up less than a unit’s worth of resources) due to efficiencies of scale [Read or Watch: Scale by Geoff West].
6. Network Effects: The super-linearity (i.e. a unit increase in labor generating more than a unit’s worth of output) caused by ideas proliferating when they interact with other ideas, which is typical of knowledge economies [Read of Watch: How Ideas Emerge by Matt Ridley].
7. Diversity Bonus: The additional super-linearity caused by a reduction in overlap of ideas, when holders of these ideas have different life experiences [Read or Watch: Diversity by Scott Page].
8. Competition: Improvement in quality of labor from a wider talent pool competing for limited positions [Read: Saving Capitalism from the Capitalists by Raghuram Rajan].
9. Consumer Demand — Local, General: The incremental transactions of existing product categories in the local marketplace. Added immigrant population buys cars, clothes, groceries, eat out etc. all of which is incremental to the local economy.
10. Consumer Demand — Local, Special: The incremental transactions of novel (alien) products in the local marketplace. When people move to the said locality, they also create demand for products that they consume. A visible example is the Chinese, Ethiopian, Greek, Indian, and Korean grocery stores and restaurants that adorn the strip malls and high streets of many cities in the US and UK. Not only do they add to the local economy but also provide consumers with more choices they would have otherwise not been exposed to.
11. Consumer Demand — Global: The incremental transactions of products in the marketplace from non-local demand. Immigrants are brand ambassadors of products sold by their host countries in their home countries. If these countries are highly populated, they organically open up a huge market for their host countries to sell to. This can already be seen for a range of products from vanity (Louis Vittion, Benz) to utility (IKEA, Watsapp, Spotify, Kindle) to cultural (Hollywood movies, HBO shows).
12. Tax Revenues: The incremental labor force pay income tax to the government of the locality they immigrate into. If immigrants fill specialist (and hence high wage) jobs the tax revenues collected is also high. This is the case for H1B jobs. In addition to income tax, transactions mentioned in 9–11 also contribute to sales tax revenues. It is tempting to mention two things here: (i) Immigrants on H1B don’t enjoy the benefits of the funds they contribute to like social security. For the sake of model cleanliness, this should go under resource allocation (2); (ii) Immigrants enjoy infrastructure built by forefathers of incumbents. This factor doesn’t help with modeling for the future.
13. Supply with lag: Supply created in the future from current investment. The incremental monies in tax revenue contributed by immigrants funds (or should fund) education and skills development for the next generation of workers who meet the unfulfilled demand of the labor market at a future time without having to get this supply from elsewhere.
14. Demand with lag: Demand created in the future by a better-off future population. When the next generation of workers (in #13) who are now better skilled from the funds provided by incremental tax revenues brought by immigrants, and thus earn more, they are able to participate more deeply in the economy by buying more.
15. Capital: Incremental monies brought to private funds. Immigrants participate in the financial markets of the host country by passively (US examples: 401K, Wealthfront etc.) or actively (US examples: RobinHood, KickStarter, angel investing) providing fuel to the economic engine. Even when they remit to their home countries, these funds are often used to buy products made by their host country, indirectly contributing to the economy of the host.
16. Ecological Footprint: Impact to environment from increased growth, demand, increase in lifestyle. Many of the factors listed above (9–11, 14) may be seen in a positive light, but brings along a heavy environmental cost [Read or Watch: Donut Economics by Kate Raworth]. Avg consumption of resources in developed countries is >30x of those in developing ones [Read: Upheaval by Jared Diamond]. When people from developing countries move to developed ones, they may adopt this high-energy-consuming lifestyle.