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What are the externalities of immigration?

An externality is a cost or a benefit of an economic activity experienced by an unrelated third party. In the context of immigration, the “economic activity” is the movement of a person to a new country, an agreement primarily between the immigrant and the host nation (and often an employer). The externalities are the subsequent effects—both positive and negative—on the host country’s population, who are the “third parties.”

The externalities of immigration are complex, widely debated, and depend heavily on the immigrants’ characteristics (e.g., skill level, legal status), the economic conditions of the host country, and the policies in place to manage the inflow and integration of new populations.

Positive Externalities

Positive externalities are the unintended benefits that accrue to the native-born population as a result of immigration.

  1. Economic Growth and Innovation: Immigrants contribute to economic growth by increasing both the labor supply and consumer demand. High-skilled immigrants, in particular, are associated with increased innovation. They have disproportionately high rates of patenting and starting new companies, especially in the technology and science sectors. This entrepreneurial activity creates jobs for the wider population and can lead to technological spillovers that increase overall productivity [1, 2]. Immigrants also fill critical labor shortages in both high-skilled fields (like medicine and engineering) and low-skilled sectors (like agriculture and hospitality) that native-born workers may be unwilling to fill [3].

  2. Labor Market Complementarity: Rather than simply competing for the same jobs, immigrants often have skills that complement those of native-born workers. For example, an influx of low-skilled immigrants into construction might allow similarly skilled natives to move into better-paying supervisory or communication-focused roles. This “push-up” effect can lead to wage gains for some native workers. Economist Giovanni Peri argues that this complementarity is a key reason why the negative wage effects of immigration are often found to be small or non-existent for the majority of the native population [4].

  3. Fiscal Contributions and Demographic Rebalancing: Immigrants, who are typically of working age, contribute to the tax base by paying income, property, and consumption taxes. In countries with aging populations and low birth rates, this influx of younger workers helps fund public services and social security systems like Medicare and Social Security, which would otherwise face demographic shortfalls. Over the long term, immigrants and their descendants are significant net fiscal contributors [1, 5].

  4. Cultural Richness and Diversity: Immigrants introduce new foods, music, traditions, and perspectives, enriching the cultural landscape of the host country. This diversity can foster creativity and strengthen international ties, both socially and economically. Exposure to different cultures can also enhance the tolerance and adaptability of the native population [6].

Negative Externalities

Negative externalities are the unintended costs imposed on the native-born population as a result of immigration.

  1. Wage Depression for Specific Groups: While the overall effect on native wages is generally found to be small, the most significant negative externality is the potential for wage depression among a specific segment of the native population: low-skilled workers who are in direct competition with low-skilled immigrants for jobs. Economist George Borjas argues that an increase in the supply of labor for this group drives down their wages, as employers have a larger pool of workers to choose from [7]. While other economists dispute the magnitude of this effect, it remains the most cited negative economic externality [1, 4].

  2. Strain on Public Services and Infrastructure: In the short term, and especially in areas with high concentrations of new arrivals, immigration can place a strain on public services. This includes increased demand for public schooling (particularly for programs for non-native English speakers), healthcare services, and social assistance programs. This burden is often felt most acutely at the state and local levels, which are primarily responsible for funding these services [1, 5]. Furthermore, rapid population growth can lead to congestion, pressure on the housing market (driving up prices), and strain on physical infrastructure like roads and public transit [3].

  3. Social Cohesion and Integration Challenges: Large-scale immigration can create challenges for social cohesion if integration is not managed well. Differences in language, culture, and social norms can lead to misunderstandings and social friction. In some cases, this can result in the formation of isolated ethnic enclaves and a perceived decline in social trust or national identity. These challenges are often temporary and diminish as immigrants and their children integrate into the broader society, but they represent a real short-term social cost [6, 8].

  4. Fiscal Costs of Specific Immigrant Groups: While immigrants on the whole are long-term fiscal contributors, certain groups may represent a net fiscal cost, particularly in the short run. For example, refugees and asylum seekers often require significant initial public support. Likewise, low-income immigrant families may consume more in public benefits (such as education and healthcare) than they contribute in taxes, at least initially [1].

Conclusion

The externalities of immigration are a mix of positive and negative effects that are not distributed evenly across the population. High-skilled native workers, business owners, and consumers tend to experience the positive externalities, such as lower prices, increased innovation, and higher returns on capital. In contrast, low-skilled native workers and communities with high immigrant concentrations are more likely to bear the negative externalities, such as wage competition and strained public services.

Ultimately, the net balance of these externalities is shaped by policy. A country’s immigration policy (whom to admit) and integration policy (how to support newcomers) are critical in maximizing the positive externalities while mitigating the negative ones [1, 3].

Sources

  1. The National Academies of Sciences, Engineering, and Medicine (NASEM). (2017). The Economic and Fiscal Consequences of Immigration.
    • View: This comprehensive report, representing a consensus view of top U.S. scholars, finds that the long-run impact of immigration on the wages and employment of native-born workers is very small. It notes small negative impacts on the wages of prior immigrants and native-born high school dropouts. Fiscally, the report finds that while first-generation immigrants are more costly than the native-born (especially at state/local levels), their U.S.-born children are among the strongest economic and fiscal contributors in the population. The overall long-run fiscal impact is positive.
    • URL: https://www.nationalacademies.org/our-work/the-economic-and-fiscal-consequences-of-immigration
  2. Hunt, Jennifer, and Marjolaine Gauthier-Loiselle. (2010). “How Much Does Immigration Boost Innovation?”. American Economic Journal: Macroeconomics.
    • View: The authors provide evidence that high-skilled immigration significantly increases innovation. They find that a one percentage point increase in the population share of immigrant college graduates increases patents per capita by 9-18 percent, suggesting a strong positive externality in the form of technological progress.
    • URL: https://www.aeaweb.org/articles?id=10.1257/mac.2.2.31
  3. Organisation for Economic Co-operation and Development (OECD). (2014). Is migration good for the economy?
    • View: This report provides a cross-country perspective, concluding that migrations are “neither a major burden nor a major panacea for the public purse.” It emphasizes that immigrants fill important niches in the labor market, have a generally small but positive impact on public finance, and help moderate the effects of aging populations. It highlights the importance of effective integration policies.
    • URL: https://www.oecd.org/migration/is-migration-good-for-the-economy.htm
  4. Peri, Giovanni. (2014). “Do Immigrant Workers Depress the Wages of Native Workers?”. IZA World of Labor.
    • View: Peri argues that the negative wage effects of immigration are minimal for most native-born workers because immigrants and natives often have complementary skills and specialize in different tasks. He finds that immigration can push natives into higher-paying, communication-intensive jobs, and that any small negative wage effects are concentrated on previous immigrants or low-skilled natives with very similar skills.
    • URL: https://wol.iza.org/articles/do-immigrant-workers-depress-the-wages-of-native-workers/long
  5. Congressional Budget Office (CBO). (2013). The Economic Impact of S. 744, the Border Security, Economic Opportunity, and Immigration Modernization Act.
    • View: This U.S. government analysis of a comprehensive immigration reform bill found that legalizing unauthorized immigrants and increasing future immigration flows would increase economic growth (GDP) and have a net positive impact on the federal budget deficit over the long term, due to increased tax revenues from a larger, younger workforce.
    • URL: https://www.cbo.gov/publication/44346
  6. Pew Research Center. (2019). A changing world: Global views on diversity, gender equality, family life and the importance of religion.
  7. Borjas, George J. (2016). We Wanted Workers: Unraveling the Immigration Narrative.
    • View: Borjas is a leading economist who emphasizes the negative wage externalities of immigration. He argues that the laws of supply and demand apply to labor markets and that an influx of low-skilled immigrants inevitably harms the economic prospects of low-skilled natives who compete for the same jobs. He estimates these wage losses to be significant for this specific group.
    • URL: (This is a book, but a summary of his views can be found in many articles, such as this one from Politico): https://www.politico.com/magazine/story/2016/09/george-borjas-immigration-trump-cliinton-214216
  8. Putnam, Robert D. (2007). “E Pluribus Unum: Diversity and Community in the Twenty-first Century”. Scandinavian Political Studies.
    • View: Putnam’s research suggests that, in the short run, ethnic and social diversity can lead to a decrease in social trust and civic engagement, even within ethnic groups (people “hunker down”). He hypothesizes this is a temporary effect that can be overcome in the long run by forging new, more inclusive social identities. This work points to a significant, though potentially transient, negative social externality.
    • URL: https://onlinelibrary.wiley.com/doi/10.1111/j.1467-9477.2007.00176.x