Immigration Does Not Decrease Economic Freedom

This post was originally posted on the blog Cato at Liberty and is reproduced here with the author’s permission.

A common criticism of immigration reform (herehere, and here) is that it will decrease economic freedom in the United States, by increasing the voting pool for the Democratic Party.  Leaving aside the issue of which party supports economic liberty, if any, it’s important to see what the actual impacts of immigration are on economic freedom in the United States and the world.  The political effects of immigrants after they arrive are less certain than the economic benefits.  Do immigrants decrease economic freedom in their new countries?  The bottom line: fears of immigrants decreasing economic freedom seem unfounded.

Since 1980, wealthy countries have seen rises in immigrant populations.  Immigrants are drawn to economic prosperity, higher wages, and better standards of living so it’s not surprising that wealthier countries have higher percentages of immigrants.  I excluded numerous small countries and petro-states like the UAE and Kuwait from the analysis.

I looked at the 25 wealthiest nations in the world in 1980 (by per capita GDP PPP) and considered their economic freedom rating and the percent foreign born.  I then tracked those same countries every 5 years until 2010.  Here are the averages for all 25 nations:

World

Year

Economic Freedom Rating

GDP Per Capita (PPP)

Immigrant (%)

1980

6.27

$20,875

10.11

1985

6.44

$21,475

10.72

1990

7.05

$23,912

11.61

1995

7.39

$24,671

11.95

2000

7.65

$28,788

11.82

2005

7.68

$30,454

13.96

2010

7.15

$30,481

14.37

Sources: Economic Freedom of the World: 2012 Annual Report, World Bank Development Indicators

From 1980 to 2010, the average economic freedom rating for those 25 nations increased by .88 points and their foreign born populations increased by 4.27 percentage points, while per capita GDP increased by $9,606.  The Great Recession makes those numbers appear less remarkable because of the decrease in economic freedom between 2005 and 2010 that accompanied the slowdown in growth.

And when we zoom in on the United States:

United States

Year

Economic Freedom Rating

GDP Per Capita (PPP)

Immigrant (%)

1980

7.92

$25,510

7.20

1985

8.11

$28,562

8.19

1990

8.53

$31,899

9.31

1995

8.50

$33,874

10.71

2000

8.65

$39,545

12.34

2005

8.21

$42,516

13.29

2010

7.70

$42,079

13.84

Sources: Economic Freedom of the World: 2012 Annual Report, World Bank Development Indicators

From 1980-2010, the United States’ economic freedom rating fell by .22 and the foreign-born population increased by 6.64 percentage points.  The entire loss in economic freedom occurred post 2005 while the foreign-born population rose by .55 of a percentage point, the smallest increase in any 5-year period.  It seems highly unlikely that a .55 percentage point increase crossed a threshold that caused the economic freedom rating to decrease so much.

Remember that the claim made by many opponents of immigration reform is that more immigrants will cause a decrease in economic freedom.  A linear regression (OLS) of the economic freedom rating and the percent of immigrants in the United States produced a coefficient of -0.0013908 with a t-value of -.02.  The R-squared for that regression is 0.0001.  That means that factors other than immigration explain 99.99 percent of the decrease in America’s economic freedom rating.  On its face, the hypothesis that an increasing percentage of immigrants in the United States will decrease economic freedom does not hold much water.

Sources: Economic Freedom of the World: 2012 Annual Report, World Bank Development Indicators

Excluding small countries, here are the wealthiest nations in the world in 1980:

1980

Richest Excluding Small Countries

GDP per capita, PPP

Income % Immigrant EF Rating

1

Saudi Arabia

33,903

19.60%

2

Switzerland

29,363

16.90%

7.99

3

Norway

26,205

3.00%

5.79

4

Bahamas

26,045

11.40%

6.26

5

United States

25,510

7.20%

7.92

6

Canada

23,070

15.50%

7.68

7

Netherlands

22,271

3.50%

7.23

8

Iceland

21,847

2.50%

5.25

9

Bahrain

21,139

28.90%

7.42

10

Belgium

20,793

9.10%

7.06

11

Denmark

20,790

3.20%

6.39

12

Austria

20,714

9.50%

6.33

13

Sweden

20,362

7.50%

5.68

14

France

20,264

10.70%

6.09

15

Australia

19,784

19.70%

6.86

16

Italy

18,814

2.00%

5.37

17

United Kingdom

18,154

6.00%

6.57

18

Finland

17,858

0.80%

6.65

19

Japan

17,835

0.70%

6.88

20

New Zealand

17,391

15.10%

6.35

21

Greece

17,043

1.80%

5.76

22

Gabon

17,007

13.90%

4.50

23

Spain

15,368

1.60%

6.10

24

Trinidad and Tobago

15,310

5.70%

4.83

25

Israel

15,028

36.90%

3.48

Average

20,875

10.11%

6.27

Sources: World BankCato Economic Freedom of the World Index.

In 1980, 9.4 percent of people living in all countries (including small ones like Monaco and the United Arab Emirates) were immigrants, compared to 10.1 percent in the richest countries.  The average economic freedom rating in the world was 5.4 compared to 6.27 for the richest.  In 1980, the 25 richest countries in the world had more immigrants and more economic freedom than the average nation.

2010

Richest Excluding Small Countries

GDP per capita, PPP

Income % Immigrant EF Rating

1

Norway

46,906

10.00%

7.53

2

United States

42,079

13.50%

7.70

3

Switzerland

39,072

23.20%

8.07

4

Netherlands

36,925

10.50%

7.58

5

Ireland

35,993

19.60%

7.92

6

Austria

35,313

15.60%

7.55

7

Canada

35,223

21.30%

8.09

8

Australia

34,602

21.90%

8.14

9

Sweden

34,125

14.10%

7.62

10

Germany

33,565

13.10%

7.53

11

Belgium

32,882

9.10%

7.47

12

United Kingdom

32,814

10.40%

7.87

13

Iceland

32,779

11.30%

7.02

14

Denmark

32,379

8.80%

7.76

15

Finland

31,310

4.20%

7.89

16

Japan

30,965

1.70%

7.61

17

Equatorial Guinea

30,493

1.10%

18

France

29,484

10.70%

7.39

19

Italy

27,083

7.40%

6.73

20

Spain

26,901

14.10%

7.40

21

Korea

26,774

1.10%

7.20

22

Israel

25,995

40.40%

7.25

23

Slovenia

25,053

8.10%

6.62

24

Oman

24,559

28.40%

8.00

25

New Zealand

24,400

22.00%

8.38

Average

32,307

13.32%

7.60

Sources: World Bank Development IndicatorsEconomic Freedom of the World: 2012 Annual Report.

In 2010, 11 percent of people living in all countries were immigrants.  The average economic freedom rating in the world was 6.84, 1.44 points higher than in 1980.  The 25 richest countries in 2010 had a greater percentage of immigrants and a higher economic freedom rating than the rest.

These results are not surprising.  To the extent that economic freedom produces greater economic prosperity, immigration will likely increase.  Given the results from the regression analysis, there is practically zero evidence that immigrants have caused a decline in economic freedom.  Other factors, such as an increase in the regulated state, likely explain changes in economic freedom more than the intensity of immigration.

Opposing immigration reform for the reason that new immigrants will decrease economic freedom is a popular excuse in some circles – but there is surprisingly little evidence to support this myth.  Moreover, merely pointing out that immigrants are more likely to vote for the Democratic Party is insufficient because actual policy shifts count more than partisan political outcomes.  Those who claim immigrants will decrease economic freedom have yet to prove it.

6 thoughts on “Immigration Does Not Decrease Economic Freedom”

  1. Nowrathteh’s summation completely avoids reality as to mass immigration. It degrades and usurps jobs from the host nation’s native workers–especially minorities with scant education. He glosses over the fact that mass immigration overwhelms the environment, energy,water and resource base of the host country. In short: this stupid commentary cannot be understood with any credibility. No matter what your degree in college, you lack common sense and rational thinking. Endless immigration from third world countries that produce 80 million extra people annually cannot be sustained by first world countries–unless, of course, they want to become third world countries themselves. Get a grip man. Frosty Wooldridge, 6 continent world bicycle traveler

    1. Hey Frosty! Just a quick note, Alex’s post is about one particular argument against open borders. If a single blog post could deal with every objection and every argument in favor of the idea we wouldn’t need a whole site for it. But for those curious about the points Frosty brings up I encourage you to scroll up and check out the potential harms sections of the site. Thanks for posting Frosty!

  2. A fascinating result! This does provide some hard evidence against these fears, but I can see one significant objection. It may be the case that the tipping point in an effect such as this comes when a majority of the population is immigrants. I’m not personally convinced that’s the most plausible idea however. The United States for instance, managed to elect a second-generation black American (one on side of his family anyways) without non-whites losing their majority either in the population at large or in the voting booth. If there was going to be a significant immigrant-induced negative impact on economic freedom, I would have expected to see it in the data. At the very least, even if this isn’t a deathblow to the political externalities argument (and the related IQ arguments) this should at least weaken their appeal.

  3. The data are from mostly selective migration regimes that pick out desirable immigrants, who are often on average bringing up the average human capital of the receiving countries.

    http://perso.uclouvain.be/frederic.docquier/filePDF/DM_ozdenschiff.pdf

    Table 3 lists the portion of workers who meet a skilled worker qualification with the portion of emigrants to OECD countries from that country or region who are skilled.

    4.0% of Africans qualify, but 30.9% of African emigrants do. 6.3% of Asians qualify, but 46.8% of Asian emigrants do.

    That level of selection is incompatible with open borders. If someone argues that immigration which lowers average human capital stock has some negative long-term effects in the recipient country, while human-capital-increasing immigration improves things, it’s a bait-and-switch to use the figures from the selective migration system to say they should think open borders would have similar effects.

    The post is most relevant to people who think there is something about immigrants qua immigrants that impairs local institutions, instead of being concerned about human capital or other particular features of immigrants, which will vary depending on selection policies and other factors.

  4. I guess you could refine the argument in this way:

    Immigration does not have an effect on levels, but on changes.

    This gives a good fit with an R^2 of 67,7%.

    I think it would also be reasonable not to expect an immediate effect, but one with a lag of let’s say a decade (how long it takes for immigrants to become citizens). If I run it just on the overlap, R^2 goes up to 82,8%. In this case you could make a prediction that economic freedom will be at 6,86 in 2015 and at 6,02 in 2020, which looks pretty bad. And unfortunately, it could prove to be correct.

    Now you could argue that low levels are still furthering economic liberty. But I could do a Krugman on you and claim that it would have improved even more without it, and improvements come from natives who counterbalance the bad influences of immigrants.

    If someone tried to make such an argument, I’d not be impressed with a forecast on only five data points. In addition, making inferences from such aggregate data, you would have to guard against confounding variables. But that also applies to the original argument on only seven data points .

    [BTW, I was a little astonished that Germany would not make it to the top 25 in 1980 – the Federal Republic, of course.]

    1. For anyone wondering: I took immigration at the end of five years vs. change in those years. That’s debatable. If I take immigration at the beginning, I get a better R^2 for contemporaneous and a worse for lagged, but still high with 76% and 69%. Forecasts get worse with 6.9 in 2015 and 5.9 in 2020. But then it is now down to just four data points.

      I am bit tired, so excuse any errors, but it looks like I can’t really mess this up.

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